In this section, we provide an account of the history of Argentine tariff policy. Our objective is to derive a list of stylized facts that constitute the salient and exceptional features of interventions to imports in Argentina. We cover most of Argentine history, from 1890 to 2006. Due to differences in the quantity and quality of trade policy data, we split the analysis in two. The first analysis covers the period 1890–1966 and is based on the abundant, but fragmented, data available in the literature. The second analysis covers the period 1966-2006 and it is instead based on a huge data collection effort on detailed export taxes and import tariffs, at a high level of disaggregation (8 digits). This effort generated a unique data set of trade policy for thousands of product lines in Argentina for the last 40 years of Argentine history.
The period from around 1810 to World War I was the first “global century:” transport costs continuously declined and commodity markets were increasingly integrated (Williamson and O’Rourke, 1999). During this period, Argentine tariffs were relatively high. Based on data from Clemens and Williamson (2002), Table 6 reports measures of average tariff rates (calculated as the ratio of total revenue from import duties and the value of total imports). The highest tariff rates can be found in Latin American countries. In Argentina, for instance, the average tariff from 1870 to 1899 was 26.1% (which was high, but actually lower than in Brazil, Colombia, Peru, and Uruguay). Argentine tariffs remained high from 1900 to 1913 (23.4%) and only declined to around 18%, on average, in the post World War I period. It is noteworthy that the trends in average tariffs in Argentina are similar to those observed in the United States (while tariffs in Europe were significantly lower). Note that, during the late 1800s and early 1900s, import tariffs were one of the main sources of revenues for countries like Argentina (i.e., countries abundant in land, scarcely populated, and with limited access to capital markets). In these cases, internal taxes on expenditure and wealth were hard to collect (Irwin 2002).Footnote 4 This suggests a revenue-raising motive, rather than a purely protectionist motive, behind trade policy during this period.
During this first phase of globalization, despite high tariffs, Argentina enjoyed very high growth rates in comparison not only to the rest of the periphery and but also to the Core. The main source of growth was agriculture. This growth was driven by at least three major factors: an increase of the harvested area following the expansion of the Argentine border (after the “Campaña al Desierto—”military campaigns against the indigenous local population); the penetration of the railways (mostly financed by British capitals) that facilitated crop transportation and exports; and booming international markets for exports (Cortés Conde 1993).
After a few dark years during World War I, Argentina boomed in the 1920s. Imports and exports rapidly expanded in a growing world that was recovering from the war. In consequence, both the agricultural and industrial sectors grew. The domestic industry benefitted not only from increased world aggregate demand and higher relative prices but also from high exchange rates and from changes in the structure of tariffs. On one hand, import taxes were expressed in aforos and, in 1923, the value of the aforos was increased (Barbero and Rocchi, 2003). On the other hand, from 1909 to 1927, tariffs on manufactured products were increased, while tariffs on raw materials were reduced, thus increasing effective protection (Díaz Alejandro 1970).Footnote 5
World trade doomed with The Great Depression of the 1930s. The large decline in economic activity around the world, the abandonment of the Gold Standard, and a move towards bilateralism (as opposed to multilateralism) halted trade. This had strong negative implications for Argentina. Furthermore, the improvement of the terms of trade that boosted the growth in the periphery in the early globalization era strongly reversed in the 1930s. According to Clemens and Williamson (2002), the decline in Latin America’s terms of trade was of nearly 40%. This scenario pushed many developing countries into autarky in the 1940s, 1950s, and 1960s, in a context of a highly interventionist industrialization strategy which is usually known as “import substitution industrialization” (ISI).
In Argentina, the Depression of the 1930s is, indeed, considered as the formal beginning of the import substitution process. In Fig. 3, we see that Argentina reverted to protectionism. While tariffs had been increasing since the early 1920s (due to mostly a revenue motive), there was a sharp jump in 1930 when the average import tariff increased from 16.7 to 28.7% in 1933. Furthermore, Díaz Alejandro (1970) reports that Argentina actually raised tariffs by more than the US and Canada. From 1925–1929 to 1930–1934, for instance, Argentina increased tariffs by 7.5 percentage points, compared to increases of 4.7 percentage points in the US and 0.6 percentage points in Canada. After the peak of the Depression, tariffs were reduced slightly, but remained high (Fig. 3).
In the 1930s, Argentina started manipulating the exchange rate to provide additional protection to the local industry. In 1933, the government created a dual exchange rate system, a so-called “controlled” market and a “free” market. Traditional agricultural exports and imports from the UK were traded at a low exchange rate in the “controlled” market, where the difference between the sale and buy rates worked as an implicit export tax or import tariff. Imports from the US were instead traded in the “free” market at a higher exchange rate. The fact that UK and US imports were not traded in the same exchange market was not casual. Since the US had become Argentina’s main import partner, the higher exchange rate in the “free” market lowered US competitiveness and promoted the development of a local industry to replace the US imports.
In the 1940s, Argentina deepened the promotion of the local industry, a policy driven in part by necessity—another World War had blocked Argentina’s imports—and in part by conviction. Shortly before Perón’s access to power in June 1946, the government created the IAPI—the Argentine Institute for the Promotion of Exchange. This institution held the monopoly over the country’s foreign trade and originally had an evident anti-agriculture bias. The IAPI withheld around 50% of world agricultural export prices to finance both imports and to support newly created public companies. In the meantime, import tariffs were raised, the multiple exchange rate system was maintained and a scheme of import permits was created. In this context, many local firms that would later become very important (such as Techint—mostly steel—or FATE—tires) were born. In addition, Argentina suffered from the nationalization of railways, telephones, electricity, public transport, and other utilities and services between 1945 and 1950 (the early Peronist years).Footnote 6
During the 1950s and 1960s, several concomitant external factors conspired against Argentine agricultural exports, thus encouraging further domestic protection. First, in the late 1940s, the restrictions faced in the international grain market as a result of the country’s exclusion from the Marshall Plan hit Argentina’s exports very hard. Second, while world trade recovered in the 1950s, the composition of trade shifted against Argentine comparative advantage: exports of manufactured goods grew consistently more than exports of primary products. This coincides with the emergence of intra-industry trade (mostly among Western Europe, the US and Japan). Third, the agricultural protectionism that followed the end of World War II hindered Argentine exports. In Western Europe, the hindrance originated in the Common Agricultural Policy inside the European Economic Community (EEC) in 1962. In the United States, the hindrance originated in a system of subsidies and tariffs that protected its agricultural sector in the early 1950s.
Argentina turned towards inner development. In 1952, the Peronist government launched its second 5-year plan with the aim of developing the heavy and basic input industry as well as the oil sector (concession to start prospecting work was given to Standard Oil in April 1955). Soon after Perón, Frondizi deepened policies for the development of heavy industry as well as the automotive industry. And in the 1960s, President Illia mostly shared the view to support and develop the heavy industry. Nevertheless, something new appeared in the economic policy agenda: the local market solution for the industry was growingly seen as inefficient (particularly in light of the experience of the automotive industry, which had grown strongly but kept consuming a large deal of foreign currency), and the idea of an exporting industry was gaining consensus among the country’s authorities.
Import substitution: the evidence from 1966 to 2006
For the period 1966-2006, we were able to compile very disaggregated data on export and import tariffs. The data collection effort built on previous work done by Galiani and Porto (2010), who study the impacts of tariffs on wages. Their database contains detailed tariff data at ISIC 3-digits (International Standard Industrial Classification) from 1974 to 2001. In this paper, we expand the Galiani and Porto databases in two fronts. First, our tariff data are more detailed, reaching up to 6 to 8 digits of disaggregation. Second, we extend the time coverage backwards (to 1966) and forward (to 2006). Furthermore, we add the whole series of 8-digit export taxes from 1966 to 2006 (see Sect. 4).
The preparation of the data involved significant work. The data on tariffs come from two sources. WITS (World Integrated Trade Statistics) provides detailed data on tariffs based on the Harmonized System from 1991 to 2006. WITS data are electronically available (with paid subscription). Tariff data from 1966 to 1990 are available only on hard copies of the Guía Práctica, a publication of Argentine Customs detailing the tariff rates for thousands of product lines using the NADI nomenclature (Nomenclatura Arancelaria y Derechos de Importación). This information had to be manually typed and matched to the Harmonized System nomenclature.
In our account of import protection, we begin with time trends in average tariffs. In Fig. 4, we report the swings in tariff reforms observed by Argentina from 1966 to 2006.Footnote 7 Overall, the trends in average tariffs portray a general process of trade liberalization staged in various different reform episodes.
Starting in the 1930s, Argentina adopted a strategy of strong import substitution that can still be seen in our data. In 1966, the earliest year of our data, the average tariff rate was close to 200 percent. The 95th percentile reached over 300%, and even the 5th percentile was close to 100%. This aggregate level of protection is staggering and reveals how deep the process of import substitution was.
The first liberalization episode took place after 1967 and up to around 1976. Large tariff cuts were implemented and, during the early 1970s, the average tariff was slightly below 100%. Tariffs were still high but relatively stable during this period. Part of this liberalization is explained by a “compensated devaluation,” whereby the devaluation of the exchange rate is accompanied by reductions in tariffs to reduce the impact on the relative prices of tradable goods.
The second episode of large tariff cuts took place between 1976 and 1979, during the Military dictatorship. During these years, the average tariff rate declined steeply, reaching around 30% in 1980. There was also a reduction in the extreme values and in the dispersion of tariff rates.
During the 1980s, the average tariff was kept relatively constant. Interestingly, notice that, in the early 1980s, while the high extreme values (the 95th percentile) declined slightly, the low extreme values (the 5th percentile) actually increased. One shortcoming of our data is the lack of information on non-tariff barriers. In Argentina, quantitative restrictions were intensively used in the early stages of the import substitution process (1950s). However, they were eliminated in the 1960s and never used again, except in the 1980s. In consequence, the 1980s were actually a period of reversal to protection, because the relatively flat trend in the average tariff came together with an increase in non-tariff barriers.
The last episode of liberalization took place with President Menem in the 1990s. These reforms came in two stages. From 1989 to 1991, the average tariff declined from 30 to 18%, the dispersion in tariff rates was also reduced, and all non-tariff barriers were pulled down. The second stage in the Menem reform was the adoption of Mercosur—a regional trade agreement among Argentina, Brazil, Paraguay, and Uruguay—between 1994 and 1996. The intrazone tariff among members was in most cases reduced to zero. The common external tariff (extrazone) was negotiated between members and implied a further reduction in tariffs in some cases and a reversion to protection in others (as in the case of food products in Argentina, for example). In our data, we account for Mercosur by weighting the intrazone tariff by the share of imports coming from Mercosur (which underestimates the average tariff). There was a slight decline in tariffs after 1996, only fairly noticeable in the average trends. There was also a slight reversal to protection in the 2000s, after the crisis of 2001. However, this reversal was short lived, since tariff levels returned to the previous levels in 2003–2004.
A major factor shapes Argentine trade policy: the distributional conflict. By distributional conflict, we mean the natural tension in the country between the sector with comparative advantage, Agriculture, and factor ownership. Agriculture is intensive in land, which is mostly owned by richer landowners. Industry is the domain of workers. In this scenario, free trade, ceteris paribus, worsens the distribution of income in Argentina, and this provides a distributional root for protection and anti-export bias. There are, of course, many other factors that complement the distributive concern in the determination of trade policy. These factors affect the economic environment and constraints that shape the context into which trade policy is dictated. In Argentina, key factors are the level of international commodity prices, the evolution of international institutions, the exchange rates, and the fiscal resource needs of the government in office.
The story about the interplay between the distributional conflict inherent to the Argentine society and external shocks is developed in the next chapter by Galiani and Somaini. They model a three-sector economy (agriculture, manufacturing, and nontradable services) that uses three factors: land, labor, and capital. Factor owners (workers, landlords, and capitalists) have different preferences over trade protection (i.e., tariffs or export taxes). The model identifies several distinctive dynamic patterns that are broadly consistent with the evolution of the Argentine economy and the trade policy described in our chapter. The authors show that, for very high terms of trade, the economy can specialize in agriculture and services (thus importing manufactures) in a political equilibrium that supports free trade policy. This story is consistent with our account of the period 1930–1943 in Argentina. However, as the terms of trade worsen, the economy begins a gradual but persistent industrialization process that carries support for protectionism until it becomes a viable political equilibrium (consistent with the post 1943 period in Argentina). In the model, however, protection has reinforcing effects, because the additional flow of capital and labor to the secondary sector raises even more demands for protectionism. This describes an import substitution strategy that might drive the economy towards near autarky. In Argentina, this is consistent with the situation of the economy towards the early 1970s.
The emergence and the strengthening of the IS model in Argentina strongly correlate with the overall level of protection after the 1930s and up to the late 1960s and 1970s. The debacle of the import substitution model can be traced back to changes in the economic conditions and environment. There are at least three factors that made the model become increasingly unsustainable. First, there was an increasing pressure to eliminate inefficient policies that impeded GDP growth. As highlighted in Galiani and Somaini in this volume, the abrupt change in the trends in tariff protection after the oil crisis points to dynamic factors such as the increasing cost of technology adoption in the manufacturing sector as well as the fiscal constraints to finance subsidies to the manufacturing sector. Second, population growth, unions, and unbalanced consumption growth towards services were over time debilitating the protectionist coalition. Third, a major factor that explains the trends in tariff reforms in Argentina in recent years was the increasing need to participate in world fora and to comply with the Uruguay Round and the WTO accession.Footnote 8
We now turn to the cross-sectional variation in tariffs and look at the evolution of tariffs for different groups of products (at the 2-digit level). Table 7 lists the average tariff for the four broad stages of liberalization described above. Footwear has always been the most protected sector. Textiles and Leather have also received consistently higher levels of tariff protection. The case of Food Processing is interesting, because the sector ranked third in 1966–1970 but subsequently lost protection relative to Textiles (starting in 1971) and Stones, Machinery, Metals, Plastics, and Transport Equipment up until the 1990s. From 1991 to 2005, however, the sector recovered protection and it ranked fourth.
There has also been some variation in the ranking of low-protected industries. Minerals were the least protected sectors during the first two periods, but it was replaced by Agriculture after 1977. In addition, Minerals, and Chemicals were at the bottom of the distribution throughout all the stages of liberalization. An interesting case is the Wood sector which moved between the middle and top of the distribution during the first three periods but became the third least protected industry starting in 1991. There is a somewhat analogue story with Machinery, which was always in the middle of the ranking except during the 1980s (when it became the third most protected industry).
Figures 5, 6 give a better sense of the relative structure of protection across time periods. We show the evolution in tariffs for each major product group (solid line) relative to Agriculture (broken line). In general terms, tariffs have been cut in all sectors, though clearly in different degrees. While the historical sectoral differences in protection levels persist today (the most protected industries in the 1960s are still the most protected in the 2000s, and likewise for the least protected), the liberalization process has caused sectoral tariffs to converge to a large extent.
Another feature revealed by Figs. 5 and 6 is how agriculture was left unprotected, relative to other sectors in the economy. The sectors with significantly higher tariff levels than the agricultural sector were Textiles, Footwear, Processed Food, and Leather (Fig. 5). Instead, Transport, Machinery, Metals, Plastics, Minerals, Chemicals, and Wood also show higher tariffs than Agriculture, but the differences are much less pronounced (Fig. 6). The only exception is the Mineral sector which had less protection during certain periods (before 1976 and after 1991).
The cross-sectional structure of tariffs can also be explained by the distributional conflict and how it evolves in time (due to changes in the way which the conflict is assessed by different governments or to changes in the trends in the constraints faced by those governments). We argue that the structure of protection in Argentina, which has favored industrial manufactures like textiles or footwear over agro-manufactures, can be accounted for by two interrelated theories, lobbies (and political economy) and unions.
The political economy argument is based on the protectionists lobby literature developed by Grossman and Helpman (1994, 2001). In this theory, industries are organized in lobbies which make contributions to the government in exchange for protection. The government, in turn, receives these contributions and maximizes social welfare. The outcome is a set of equilibrium sectoral tariff rates that balances the power of the lobbies and the efficiency losses in different industries. There is a little evidence of the role of industry lobbies in Argentina. Olarreaga and Soloaga (1998) show that active lobbying can explain the exceptions to both the intrazone and the common external tariff in Mercosur. However, Olarreaga et al. (1999) show that terms of trade, as well as political economy factors, explain the formation of the common external tariff of Mercosur members.
Another powerful explanation of sectoral tariffs, especially in Argentina, is unions. This setting, explored in Galiani and Porto (2010), exploits the power of unions as a determinant of tariffs. In Galiani and Porto, unions have the power to appropriate part of the tariff rent, which is then distributed to unskilled labor. In the Argentine data, their results suggest that the trends in the structure of protection, and the impacts on the trends in the structure of wages, can be explained by combining long-run forces, as in a Heckscher–Ohlin model, with short-run departures like unions.