There are no longer any imported gourmet food products in Argentine supermarkets, no appliances “made in China” and no cheap Brazilian shoes. The government of Cristina Fernández de Kirchner is throwing its support behind an approach of “buy local,” committing the country to a closed economy in which there are clear winners and losers, experts note.

In reaction to the bursting of the mortgage bubble (and accompanying recession) in the U.S., and the economic morass that is plaguing Greece, Spain and other parts of Europe, global trade growth has entered another period of decline. After peaking at an increase of 13.8% in 2010, the rate of global trade growth dropped to only 5% in 2011, according to the World Trade Organization (WTO).

A key reason for that decline has been the eruption of trade protectionist measures by the member states of the WTO, which now number 157. From the end of 2008, when the crisis erupted, through the first quarter of 2011, the member states of the WTO adopted 1,243 different protectionist trade measures. In June 2012, the Directorate General for Trade of the European Commission said in a report: “The EU confirms a dizzying increase in protectionism throughout the world, reflected in the 123 new restrictions on trade introduced over the last eight months.”

Both industrialized and developing countries have resorted to protectionist measures in reaction to the global crisis in order “to save themselves” and give priority to their domestic economies, says Lourdes Casanova, professor of strategy at INSEAD business school and at Cornell University’s Johnson School of Business.

The Risks in Argentina

In Argentina, this reality is reflected in a long list of measures imposed over the past year, notes Ernesto O’Connor, a professor of economics at Argentine Catholic University (ACA). These include quotas; non-automatic import licensing, which control imports by linking them to compliance with specific criteria; applications for compensation for tariffs paid by importers who also export other goods with a value that at least equals the value of their imports, and increases in the common external tariffs imposed on 100 industrial products covered by the rules of Mercosur, the economic and political agreement that includes full members Argentina, Brazil, Paraguay, Uruguay and, as of July 31, Venezuela. Beyond this, there are some restrictions on exports of meat, dairy products, wheat and corn that have been in force for five years, aimed at increasing their supply in the domestic market.

Beginning this year, the Argentine government has also imposed what some call a “foreign exchange trap”, a restriction that makes it impossible for Argentines to buy foreign currency. This policy is also a mechanism for closing the Argentine economy, experts say, because, as a result, it has become more and more expensive for Argentines to travel to foreign countries and for Argentine students to save money in dollars, a practice that has long been common in the country. During the final week of August, the government also imposed on its citizens a 15% tax on their use of credit cards in foreign countries, which makes consumption overseas more expensive for Argentines and encourages them to spend in their own country.

“All of these measures show that Argentina has completely reversed its [earlier] policy of moving into international markets. Instead, it is moving toward a more closed economy and looking to be self-sufficient,” notes Sebastian Auguste, director of the MBA programs at Torcuato Di Tella University in Buenos Aires.

According to Marcelo Pedro Dabos, director of the Research Center for Applied Economics and Finance at the University of Belgrano in Buenos Aires, the goal of this change in Argentina’s economic policy is not to seek protection against the international crisis. Instead, the intention is to maintain “production, consumption and employment of the population at a high level, to finance the government and to preserve and expand as much as possible the country’s international reserves in order to fulfill its international debt and payment obligations.” Dabos adds that these goals “are functional for the well-being of the population” and are designed to help “politicians win the elections.” In fact, experts say that the “foreign exchange trap” came as a response to capital flight, which had reached a monthly average of US$600 million, according to the Central Bank.

Argentina’s middle and upper classes have been the most resistant to the new policies. They suffer the most direct hit from the prohibitions on foreign exchange. Meanwhile, those Argentine companies that require inputs from abroad in order to produce goods locally are having trouble meeting their production levels because of the shutdown of imports, experts note.

Nevertheless, Argentine industry can benefit from the fact that the government provides incentives for domestic business development, especially in the case of local replacements for commonly imported goods, says Carolina Hollige, a professor of marketing at Austral University. However, Hollige adds that protectionist measures must be accompanied by efforts to “reach the levels of technology, quality and benefit standards [that are common] in the global market. If the only result [of such measures] is protectionism, per se, then the results can be harmful.”

Along the same lines, Di Tella notes that although protectionist measures often result in investment in local production, “the risk of this policy is that, when there are signs of scarcity in the local market because of a lack of imports, this investment could be channeled into those industries that are not competitive for the country, either in the short or long run.” He is against such an approach because “there isn’t a strategy for development.”

At the moment, critics suggest that the most negative result of the new Argentine policies has been the price increases that have resulted from uncertainty and a lack of access to credit markets. Argentina’s annual inflation rate exceeds 25%, according to forecasters at private sector institutions.

Looking Inward

To some extent, the protectionist measures being enacted in Argentina reflect a trend that is taking place throughout Mercosur.

Brazil, which is positioning itself as a new global power, has applied a different sort of recipe, pursuing the goal of devaluing its currency as compared to the dollar by 19%. The approach was spurred by the arrival of speculative capital. According to INSEAD’s Casanova, the Brazilian government has restricted the investments of non-residents since 2010 by imposing a 6% tax on their foreign purchases imported into Brazil. Brazil has also lowered its interest rates and intervened in foreign exchange markets in order to lower the value of the Brazilian real.

This trend toward protectionism in Mercosur has deepened now that Venezuela has been incorporated into the trade bloc. “In Argentina and Venezuela, governments have an interventionist character, exerting influence on companies that operate in the private sector,” says Auguste. “And at the same time, the governments there do not invest enough in the [two countries’] basic infrastructure.”

As international trade began to move toward protectionism, more and more trade disputes have been brought to the WTO. For its part, Argentina has fielded complaints from at least 40 foreign countries regarding its practice of non-automatic licensing, as well as the other measures that Argentina imposes on imports in a wide range of sectors, such as tires, tractors, appliances, chemicals, automobiles, machinery, medication, textiles and stationery.

Without going into detail, Pepe Mújica, president of neighboring Uruguay has complained in the media that “Argentina enacts crudely protectionist measures that reflect its fundamental sovereign rights but which can be harmful to us.” Argentina’s “foreign exchange trap” and its 15% tax on credit-card purchases are expected have an impact during the upcoming summer vacation season, which begins in December. Uruguay is a destination for thousands of Argentine tourists who adore its beaches. Uruguay is also a center for real estate investments by Argentines, but that activity has now come to a stop, experts note.

A Further Closing of the Ranks?

Dabos suggests that protectionist policies are here to stay over the long term. First of all, he notes, economically beleaguered developed countries are not prepared to denounce it, especially in the agricultural sector. “Nor are those developing countries that are achieving relatively high growth rates from the crisis in the developed countries [prepared to denounce protectionism],” he adds. “Another important reason is that it makes no sense for those countries whose economies are more developed to force developing countries to comply with international trade norms that they themselves are not complying with.” In the particular cases of Argentina and Brazil, he continues, trade protectionism “tends to deepen the development of their domestic industrial sectors, which makes it possible for them to employ their populations outside their rural areas.”

Nevertheless, Auguste would prefer if Argentina’s import substitution model were only a temporary approach aimed at promoting high value-added exports for the time being. Nowadays, he notes, “[Argentina] can export [not only] commodities but also manufactured goods; as well as quality services such as software, textile designs, advertising and so forth. [Argentina] is an exporter of genetics and it has a very good potential in biotechnology. To support this, it needs a competitive exchange rate; a government that accompanies all that with the necessary infrastructure, [a system of] education, and [public] policies that open up markets, while supporting the diffusion of technologies.”

Casanova suggests that over the medium term, everything should wind up balancing out, since “global competition is a great incentive to improve productivity and promote innovation. You can’t lose sight of this if you want to achieve sustainable economic improvements over the long term.”

According to Hollige, the new era of protectionism is just getting started. “I see this situation prolonging itself beyond this government, but I can’t venture to say for how long.”