I. COMMERCIAL OVERVIEW For the first time in more than a generation, the environment for American business in Argentina is positive. This is a result of a political decision by the Menem government to embark on a course of free market reform that included fiscal responsibility, an open market, privatization and deregulation. The Menem government has reversed statist, isolationist, import substitution-at-any-cost economic policies of the past half century. In only a few years, high growth and confidence in the future have been established. Argentina is now a firm commercial ally of the United States. American products are well received, though many world famous brand names remain unknown. As of mid- 1994, much has been accomplished and the commitment to reform remains strong. On the agenda are labor reform, privatization, modernization of the provinces and further improving transparency and the rules of the game. Tariffs were reduced substantially in the early days of the Menem presidency, but it was not until Domingo Cavallo took the helm as Minister of Economy in 1991 and shepherded the Law of Convertibility through Congress that the basis for economic stability was set in place. The Convertibility Law pegged the peso at par with the dollar and made budget deficits virtually impossible for the Federal Government. (Critics claim this has also resulted in an overvalued peso which makes imports even more attractive). With convertability, inflation fell dramatically and the economy is now experiencing deflation. (Argentina remains one of the most expensive countries in the world, given prior inflationary buildup). Between 1991 and mid 1994, industrial production increased by some 35 percent, though not uniformly throughout the country. As part of the drive to efficiency, regional and sector incentives were eliminated, seriously prejudicing some provinces and industrial sectors (which constitute some of the centers of opposition to the Menem government). The federal government has embarked on a revenue sharing arrangement with the provinces to improve economic efficiency and lower the costs of producing in the interior. However, the provinces, for the most part, remain wedded to the past and dependent on the central government for subsidies and economic incentives. As of mid 1994, economic stability was three years old, but Argentines with long memories of previous about-faces remain cautious. In spite of this caution, political stability seems a given and no longer an issue. The political issues have moved on to such questions as the "social agenda", which had been very much on the back burner until stability was achieved. The Ministry of Economy which dominates Argentine economic policy, is a super Ministry. It includes such expected secretariats as Finance, Trade and Investment, Economic Programming, and Public Receipts as well as portfolios which are normally ministries in other countries, such as Agriculture, Mining, Industry, Energy, Transportation, Public Works and Communications. This gives the Minister great power over the financial and productive sectors of the economy which the current incumbent Domingo Cavallo used very effectively in opening the Argentine economy. The completion of the regional trade bloc - Mercosur - planned for January 1, 1995, will profoundly affect Argentina's trade relations with the rest of the world. The member countries, Brazil, Paraguay, Uruguay and Argentina are, at mid-1994, working on the details of a customs union with a common external tariff. There are profound differences with Brazil which not only wants to dominate the organization, but is insisting on protecting its capital goods, informatics and chemical industries (among others) from external competition, particularly from the United States. The outcome of the negotiations on Mercosur tariff policy bear close watching. Argentina's position has been to keep tariffs minimal to facilitate the renovation of its obsolete industrial plant. Brazil wants the lion's share of this business and there lies the dilemma: how to maintain Brazilian competitiveness in the Argentine market without prejudicing the Argentine buyer. The outcome will almost certainly be higher tariffs for many non- Mercosur imports into Argentina. Capital goods, informatics and some others will fall outside the Mercosur external tariff at least until the turn of the century. The Argentine agricultural sector has never recovered its former glory days of enormous profits with little effort which were largely due to wars and other economic dislocations abroad as well as to the natural richness of the Argentine Pampas. Argentine agricultural exports have suffered misguided export tariffs, both because they were easily collectible and because the agricultural sector was in political disfavor under populist regimes. These disadvantages are slowly being corrected and should eventually revive the market for U.S. agricultural and dairy machinery and services. Non-tariff and high tariff barriers to Argentine agricultural based exports are among the few points of friction with the United States. Some will be dealt with through the recent GATT agreement and its regulations but others will have to be negotiated either directly or within the framework of a bilateral trade agreement or NAFTA accession. NAFTA accession or a bilateral trade agreement are currently being debated in Argentina which has stated its desire for some sort of trade arrangement with the U.S. The Brazilians claim that Mercosur must take precedence; the Argentines think that simultaneous membership in both is possible. The Menem government has largely completed the privatization of the large public sector firms it inherited when it took office. Only a few sectors such as the airports and a few energy projects remain. The provinces, however, have hardly begun to privatize their government-owned companies, nor do they have much will to do so. Only in new projects, principally in the management of water resources have the provinces turned to the private sector with any enthusiasm. Argentina is in the midst of an effort to rationalize jurisdictional problems in the field of environmental regulation which should be in place by the end of 1994. Argentina is now a world leader in privatization. The Argentine challenge lies now in perfecting the regulatory bodies and regulations to govern the behavior of the privatized companies which are largely engaged in the provision of essential services: electrical power and gas generation, transportation and distribution; telecommunications; road, rail and river transportation; steel production; the insurance and pension administration sectors and, lastly, the vast state oil company, YPF. The privatizations in which U.S. companies have participated as lead partners or as operators have been extraordinarily productive for U.S. exports. These companies not only buy equipment in their major production areas, but also buy U.S. computers, office equipment, trucks, and other peripherals as well as such services as banking, insurance, advertising, accounting, and other consulting services, (even as esoteric as ESOP organizers, as the employees are cut-in for a small percentage of the privatizations). These are permanent contracts which last for years, not merely one shot acquisitions. There are also opportunities for American companies in such areas as hospital management; health facility procurement management; pre-fab housing; mortgage bundling and sales as well as other financial services. Since the Argentine market is currently wide open, U.S. companies are free to choose their own strategies for exporting to Argentina. The financing of imports is virtually the only major obstacle to expansion of U.S. exports. Local currency financing remains incredibly expensive, perhaps reflecting the caution of the lending institutions. A 24 month loan to finance capital goods imports would bear an interest rate of between 9 and 12 percent in U.S. dollars but require a 15 to 18 percent rate if the loan were made in pesos. There had been some rate improvement over time until U.S. rates recently increased, causing local rates in both currencies to shoot up. U.S. ExIm bank financing is available in Argentina for larger transactions but remains difficult to obtain for smaller ones (many local banks have bank-to-bank lines with ExIm guarantees but favor mega-transactions to keep costs down.) OPIC is very active in Argentina and should be consulted by U.S. companies planning major investments. No SBA transactions are known to FCS/Argentina at mid-year 1994. While the Japanese are not yet major competitors in Argentina, they are actively looking over the market. The Europeans, especially the Italians, Spanish, French, Germans, Swiss, Dutch and Swedes as well as the Brazilians are aggressive. Because of restrictions under the Foreign Corrupt Practices Act, the presence of American companies in government supervised procurements and privatizations indicates to the top levels of the Argentine government that the process has been clean. Third country competition is hard fought when the playing field is level and U.S. companies should never underestimate their competitors. Several U.S. companies have lost out on contracts they should have won for reasons which have more to do with their failure to actively pressure the contract than with the unfair practices of their competitors.