II Trade Policy Measures

II.1 Mercosur Customs Union Begins

Regional integration is one of the pillars of the country's foreign trade policy and contributes to increased economic competitiveness.On January 1, 1995 a convergence process towards the creation of a customs union by the member countries of the Southern Cone Common Market (Mercosur) went into effect.

A customs union requires the elimination of import tariffs (and non-tariff barriers) for trade among the member countries and the adoption of a common external tariff on imports of goods from the rest of the world.

The convergence process towards a customs union has required the adoption of a set of measures regulating trade within Mercosur, the establishment of programs and special treatment for the modernization of some sectors, as well as the implemenation of a common external tariff and a tariff convergence system. To individualize and classify the traded goods, with their respective tariff levels agreed among the four countries, for trade with countries both within and outside Mercosur, it was necessary to approve a single nomenclature.

Decree 2,275 of December 30, 1994 replaced the existing foreign trade nomenclature with the Mercosur Common Nomenclature (MCN) with the corresponding levels of the common external tariff, import duties and refunds applicable as of January 1, 1995.

In the new MCN a common external tariff was established for imports from non-Mercosur countries. It runs from zero to 20% (generally applying a higher tariff for higher added value).

At the same time a system of exceptions to the common external tariff and a convergence schedule was instituted for goods and services granted temporary exceptions. The tariff may initially be above or below the common external tariff level but will converge on its level by January 1, 2001, according to a schedule that has been established.

To determine the goods included in the list of exceptions to the common external tariff, each country was able to submit a list for consideration before October 7, 1994. Argentina, Brazil and Uruguay were permitted exceptions up to a maximum of 300 tariff positions until January 1, 2001 (not including those for capital goods, computers and telecommunications), while Paraguay was granted a maximum of 399 exceptions. The rules of origin defined a local product as one which contains a minimum of 50% of its components of Mercosur origin until the year 2001. General rules of origin would be in effect from 2001 to 2006.4

Some of the Argentine products that have been excepted from the common external tariff include certain juices and vegetable extracts, chemical compounds, rubber, tires for motorcycles and bicycles, some types of paper, polyester yarns and cloth, certain sports footwear, most types of steel tubes, copper bars and beams, electrical household appliances, electrical conductors, bicycles, furniture and toys.

For capital goods, computers and telecommunications special exception programs were established as well as a tariff convergence schedule:

a) Capital goods will converge automatically and on a linear basis towards a common external tariff of 14% on January 1, 2001.5 In general, Argentina's initial tariff levels are zero or 24% (for goods produced in the country), the rest have a tariff of 14%.

b) Computer and telecommunications goods will converge automatically and on a linear basis to a common maximum external tariff of 16% on January 1, 2006. In most cases the initial tariffs are lower (zero, 2%, 6%, 8%, 12%) than the common external tariff on which they converge; the initial tariff is higher than the common external tariff only in some cases (18%, 25%, 30%).

An adaptation regime and a tariff convergence schedule were established for the common external tariff for products from other countries and zero on products from the member countries. Also included in this regime are products requiring special tariff treatment for their final adaptation to the customs union. This was fully applicable as of January 1 of this year. These goods were proposed by each country (according to lists that had to be submitted before October 31, 1994) based on those previously included in the lists of exceptions or had been subject to the safeguard regime. They are subject to a final period of automatic and linear tariff reductions through January 1, 1999.

When the goods are from outside the bloc the initial tariff level is always above the common external tariff. Additionally, for imports of the majority of these goods which originate within the area, quotas with preferential tariffs of 100% have been established (in other words, a zero tariff).7

Among the items subject to the adaptation regime for trade within Mercosur are steel products, paper and cardboard, electrical household appliances, clothing and tires.

The annual import quotas with preferential tariffs of 100% cover most of the products subject to the adaptation regime for within Mercosur, particularly steel products such as coils for cold lamination, hot-laminated sheets of different thickness, chromed and zinced sheets.

Export duties have been established for: a) oilseeds exported for consumption, 3.5%, and, b) exports of hides, of 15% initially with a tariff reduction schedule which that will converge on zero on January 1, 2000.

Specific duties have been fixed until December 31, 1995 on textile products, clothing and sports footwear. They will not be applied to imports originating in the region and will enjoy current tariff preferences when they come from other Latin American Integration Association members.

Tax reimbursement rates have also been instituted on goods exported. These reimbursements range from 2% to 20%. The reimbursement rate on exports will diminish 2.5% monthly as of February 1, 1995, with the exception of products included in the adaptation regime established by the other countries.

With regard to the sugar and auto sectors, ad-hoc committees were set up to develop the transition regime to allow these sectors to adapt to the common external tariff and free trade within Mercosur.

As to sugar imports, Decree 2,275 established import duties of 20%.

Through Decree 2278 of December 30, 1994 the Argentine Motor Vehicle program was modified (it was previously enforced under Decree 2677/91 and its modifications) in order to comply fully with the agreement with Brazil. This ratifies the sectoral agreement until December 31, 1999. As of January 1, 1995:

• Motor vehicle companies operating in Argentina can calculate their exports with reference to their balance of trade, exports of parts, pieces and components to Brazil are calculated by multiplying their FOB value by 1.2, as long as the resulting increase of the differential calculation is applied to compensate for imports of parts, pieces and accessories originating in the neighboring country. The differential calculation is applied both to exports by the auto factories and their associated companies, as well as those that have been ceded to them by independent parts manufacturers, and in the case of exports by independent parts manufacturers which use them to offset imports which they sell to the car manufacturers in the country, exempting them from the need to compensate.

• Imports of parts, pieces and components originating in Mercosur countries which are used by the car factories only for the production of new compensated goods are exempt from tariffs and considered to be of domestic origin, for the purpose of measuring the maximum imported content, without the obligation of bilateral compensation.

• The manufacturers will have to pay fines equivalent to 100% of the unfulfilled requirements of the regime related to local content. Independent parts manufacturers will also be subject to this rule. The funds collected in this last case will be used in a modernization program for small and midsized parts manufacturing companies.

II. 2 - Posterior Modifications

After the devaluation of the Mexican peso at the end of December last year, Argentina's balance of payments situation changed rapidly. In response, the government modified its 1995 economic program.

As explained in Chapter 6 of this Economic Report, in February and March of this year the government announced a series of measures to deal with the considerable reduction in foreign capital inflow, to strengthen public finances and ensure that the public sector would be able to meet its commitments.

Given the impact on public revenue, the Economy Ministry utilized the provisions of the same Decree that set the rules to include or withdraw products from the exception and adaptation regimes, bring forward convergence schedules, and increase import quotas temporarily or permanently.

The foreign trade measures that were mainly adopted for fiscal reasons included:

• The maximum level of reimbursements for exports to other markets was reduced from 20% to 15% and refunds of between 2% and 2.5% were reduced to zero. The other reimbursement levels were reduced proportionately (25%). With regard to exports to Mercosur countries, the reimbursement reduction schedule described previously was brought forward (Res 310/95).

• The tariff on imports from outside Mercosur was increased for a number of products that were on the list of exceptions to the common external tariff (modifying the convergence program). For example, for footwear the rate was raised from 29% to 31%, for laminates from 19% to 21%, for pipes from 24% to 26%, for radiotelephone devices from 18% to 32% and for some toys from 20% to 26%/27%. (Res 383/95)

Additional products were added to the list of exceptions. In addition to capital goods, computers and telecommunications, this provision allowed the member countries to submit lists of exceptions to the common external tariff for 300 items (399 in the case of Paraguay). The list had to be completed by April 30, 1995. Since Argentina had only submitted 231 positions by March, the list was completed with 69 descending exceptions, which will converge on the common external tariff level on a linear and automatic basis by January 1, 2001.

• The convergence schedule was brought forward for certain goods included on the common external tariff exception list. Thus, of the 231 tariff positions included in this regime, 147 were of a descending nature. In March the tariff applicable to these 147 descending exceptions was raised by 5%.

The tariff convergence schedule was brought forward for capital goods, computers and telecommunications goods. The zero tariff fixed by Argentina for these goods was raised to 10% as of March 23, 1995. This altered the corresponding convergence schedule to the common external tariff, which is now: 10% up to December 31, 1999, 12% as of January 1, 2000 and 14% as of January 1, 2001.

Therefore, the current situation of capital goods is: a zero tariff within Mercosur and 10% from other countries; a zero statistical tax; subsidy of domestic sales of 5% (reduced from the 10% at which it had been originally set when the tariff was zero); a reimbursement of 15% on exports to non-Mercosur countries and one of 10% on those exported to other member countries - from the moment that the refund level is lower as a result of the general reduction schedule of 2.5% per month.

• A statistics tax of 3% was applied to imports (Decree 389/95).8 The exceptions include the following imports:

• from Mercosur countries;
• Capital goods, computers and telecommunications goods;
• various goods subject to a zero tariff: animals for breeding, most fossil fuels, paper for the publishing industry and certain aeronautic products, newspapers, books and publications, and,
• goods imported under the temporary import regime.

• Modifications were made in the automotive industry program, including:

• No tariff will be paid on imports of finished vehicles from Mercosur countries, subject to compensation (Res 249/95).
• Towards the end of February part of the tariff nomenclature in Chapter 87 was modified.
• The common external tariff on tractors and fire truck imports was reduced to zero. The tariff on trade within Mercosur is zero and a reimbursement of 15% will be paid on exports. However (because of the measure mentioned above) all groups that had been granted a zero tariff as of January 1, 1995 are subject to an increase to 10%, having to fulfill the corresponding convergence schedule.
• The tariff on imports of finished vehicles (from Mercosur and non-Mercosur countries) was raised to 30%. Exports will be subject to a reimbursement of 20%. In the case of some types of small trucks, the tariff is 25% and the reimbursement is 15%. Other vehicles capable of heavier loads remained with a zero tariff and a 15% reimbursement.
• For auto parts, the common external tariff has remains at 18%, with a zero tariff on imports from within Mercosur and a 15% reimbursement on exports.