Commercial restrictions imposed by the Argentine government are impeding Uruguayan trade flows and are likely to make exporters more reliant on Brazil and Asia.
IHS Global Insight perspective | |
Significance | The Argentine and Uruguayan presidents will both be in Cuba this week, raising the possibility that the two leaders will meet to discuss ongoing bilateral diplomatic and trade difficulties. These include an Argentine ban on its exporters using Uruguay's main port at Montevideo. |
Implications | However, even if diplomatic relations become warmer, this is unlikely to result in a complete re-evaluation of Argentine trade policy, given its ongoing domestic economic difficulties. |
Outlook | Argentine commercial restrictions will therefore continue to impact on Uruguay, which in turn is likely to seek to build trade ties with Brazil and emerging markets in Asia. |
Uruguay's president Jose Mujica. Montevideo, Uruguay, 26 December 2013. |
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Argentine president Cristina Fernández de Kirchner and her Uruguayan counterpart José Mujica will attend a summit of the Community of Latin American and Caribbean States (CELAC) in Havana, Cuba on 28–29 January, raising expectations that a damaging dispute between the two countries could be resolved. Argentina's cabinet Chief Jorge Capitanich said that Fernández will meet regional leaders to discuss improving trade ties. Uruguay has suffered from reduced trade activity since October 2013 as a direct result of commercial restrictions introduced by Fernández's government. Mujica's government, in early 2014, said that relations with Argentina were at their lowest point in recent years. Although a possible meeting between the Argentine and Uruguayan heads of state at the CELAC summit, or at an upcoming MERCOSUR summit in February, could ease current problems, the wider background to the dispute probably dampens that opportunity.
Activity at Montevideo port is being seriously disrupted
In November 2013, the Argentine government imposed a de facto ban on its exporters using Uruguay's main port of Montevideo. According to the decision, Argentine cargoes must only transit via ports whose governments are part of MERCOSUR accords related to shipping. Uruguay, although a full member of MERCOSUR, has not signed the relevant agreements. According to IHS Fairplay, the move has been rumoured since 2010 and is intended by the Argentine authorities to favour Buenos Aires port. The restriction has been interpreted by Mujica's government as retaliation for its decision in October 2013 to allow increased production at Uruguay's UPM (formerly Botnia) paper pulp mill, a long standing issue of dispute between the two (see Argentina-Uruguay: 19 November 2013: Expansion of Uruguay's paper pulp sector poses trade and protest risks around Argentine border).
This has had significant implications for Montevideo Port, given that more than half of its throughput is transshipment, 75% of which originates from Argentina, according to IHS Fairplay. Cargo transiting Montevideo port fell by 43% during November and December 2013, according to the Uruguayan Centre of Navigation (Centro de Navegación de Uruguay: CENNAVE). There has also been a 40% decline in trade activity at the Cuenca de la Plata container facility, according to Belgian-based logistics and port operator Kateon Natie. The move has also been unpopular among Argentine exporters, who are incurring extra costs by using alternatives to Montevideo. The Argentine Chamber of Commerce has claimed that the move damages Argentine export competitiveness, and called on the government to re-evaluate the policy.
Damaging consequences for bilateral trade
The impact on Montevideo port is only one negative side effect on Uruguay of Argentina's current attempts to lower its trade deficit and protect its foreign currency reserves, which fell below USD30 billion on 12 January (see Argentina-Brazil: 22 January 2014: Argentine trade deficit likely to drive restrictions on Brazilian exporters in six-month outlook). Argentine government restrictions on access to US dollars and on the use of credit cards abroad appear to be having a serious impact on the flow of Argentine tourists into Uruguay during the current vacation high season – Uruguay's tourism authorities assess 10% fewer Argentine visits in the early weeks of 2014 compared to 2013. The effects of Argentina's apparent partial relaxation of currency controls on 27 January are likely to be significant for Uruguay (see Argentina: 27 January 2014: Argentina's easing of currency controls unlikely to correct banking-sector vulnerabilities), with a depreciating Argentine peso hitting the competitiveness of Uruguayan exports and making Uruguay more expensive for tourists spending Argentine pesos there.
A series of stringent import procedures implemented by the Argentine authorities in 2011–12 pose a major obstacle affecting the flow of Uruguayan exports to Argentina. According to local media, the value of Uruguayan exports backed up at Argentine customs has increased from USD5 million to USD15 million since October 2013. In January 2014, Uruguayan minister of industry, energy, and trade, Roberto Kreimerman, claimed that USD32 million of Uruguayan exports were delayed at Argentine customs.
Uruguayan agribusiness, manufacturers and port operators bear brunt of dispute
Continued delays to Argentine imports from Uruguay are likely to frustrate Uruguay's agribusiness and manufacturing export sectors (including food, paper, chemicals, and clothing), which are relatively dependent on the Argentine market. In 2011, Argentina accounted for approximately USD587 million of Uruguay's exports, making it Uruguay's second largest export market after Brazil. Exports to Argentina fell by 14.7% in 2012, and are reported to have declined by a further 5.6% during the first eight months of 2013.
Outlook and implications
These dynamics are likely to drive diversification of the Uruguayan export market, and Mujica's government has already taken several steps in this direction. In 2012, Uruguay set up the Markets Diversification Fund (FODIME), aimed at helping companies find alternative export markets. This has been complimented by official state visits to Asia and Europe during 2013, both of which had the declared objectives of strengthening bilateral trade relations (see Uruguay: 29 May 2013: Uruguayan presidential visit to China focuses on trade). China in particular constitutes a major growth market for Uruguay, exports to which increased by 45.3% in 2013. Brazil, traditionally Uruguay's largest trading partner, is likely to continue to be a major focus, although despite 6.4% growth in exports in 2012, exports during 2013 fell by 2.2%. The entrance of Venezuela as a full member of Mercosur is also a good opportunity for Uruguay to place its food sector products.
Given that the balance of power in terms of Uruguay and Argentina's trade relations is strongly weighted in favour of Argentina, Uruguay is highly unlikely to invoke any meaningful retaliatory measures of its own. This was underlined by Mujica's December 2013 offer to sell energy to Argentina to help address its power shortages. In another strategy that would potentially reduce Uruguay's economic reliance on Argentina, Uruguay is embarking upon a USD500-million development of a deep water port, largely driven by Brazilian and Chinese interest. The project, located at Rocha on Uruguay's east coast, is reported to be 80% funded by Brazil and will aim to increase the flow of trade between the two countries while simultaneously seeking to maximise Uruguay's export potential with a focus on its nascent paper pulp and emerging iron mining industries.