Argentina-Brazil Trade Spat Threatens Weaker Peso: Week Ahead

 Argentina’s import restrictions aimed at stoking economic growth may slow a recovery instead and cause the peso to extend a year-long 13 percent tumble, according to RBS Securities Inc.

Brazil, Argentina’s biggest trade partner, responded to the limits last month by blocking the entry of about 500 Argentine trucks carrying apples, pears and French fries earmarked for McDonald’s Corp. restaurants. Argentine President Cristina Fernandez de Kirchner, 56, and Brazilian President Luiz Inacio Lula da Silva, 64, will seek to resolve the dispute during talks in Brasilia on Nov. 18, according to Argentina’s Foreign Ministry.

“These trade wars between neighbors are counterproductive for both sides, but Argentina has more to lose,” said Boris Segura, a Latin America analyst at RBS in Stamford, Connecticut.

Argentina’s economy, South America’s second-largest after Brazil, will grow 2 percent in 2010 after shrinking 3.5 percent this year while the peso may weaken more should the dispute drag on. This will be a “strong blow,” Segura said.

Fernandez’s administration beefed up the import restrictions and maintained a policy of pushing down the peso to protect local industry and spur a recovery after the global credit crisis that began a year ago sank the country into an economic slump.

Peso vs. Real

Argentina’s peso is the worst performer among emerging- market currencies in the past 12 months, falling 13 percent to 3.8081 per dollar. Brazil’s real is the best performer, having surged 35 percent to 1.7225 as investors poured money into the country’s stock and bond markets.

The disparity added to trade tensions between the two countries by driving Brazilian exporters such as Sao Paulo- based appliance maker Latina Eletrodomesticos SA out of the Argentine market.

“I have been unable to export ceiling fans because of the price due to the exchange rate,” said Latina Eletrodomesticos President Valdemir Dantas. “Technical” barriers have also hurt his company’s ability to sell over the border, he said in a telephone interview.

Brazil exported $1.16 billion of goods to Argentina in September, down 33 percent from $1.73 billion a year ago, according to Brazil’s Trade Ministry. Argentina sent $1.07 billion of products to Brazil, a 26 percent decline from September 2008.

Toys, Shoes, Tires

Argentina’s restrictions stretch back to 2004, when former President Nestor Kirchner, Fernandez’s husband and predecessor, began demanding license applications for imported products such as home appliances.

Kirchner’s government added toys and shoes in subsequent years and Fernandez’s administration, which took office in 2007, included textiles, tires and wood furniture products as the economy began to falter last year. Today, 354 goods require license applications, according to Argentina’s Industry Ministry. The ministry can take up to 60 days to decide whether to grant the license.

“It is impossible to export home appliances to Argentina,” Dantas said.

The conflict intensified last month when Lula’s administration began demanding similar license applications from some Argentine exporters and Brazilian officials forced Argentine trucks to sit idle on the border for several days.

‘Tug of War’

“It’s a tug of war,” said Adrian Pesciallo, the vice president of the Argentine-Brazilian Chamber of Commerce in Sao Paulo. “Brazil took an ill-timed measure but didn’t do anything different than what Argentina has been doing.”

Argentine Foreign Minister Jorge Taiana said at a Nov. 12 news conference in Buenos Aires that the measures taken by his nation seeks to protect domestic manufacturers. He said he expects that this week’s meeting between the two nations’ presidents will be a “step forward.”

McCain Foods Ltd.’s Argentine unit had several trucks of French fries en route to the border when the Brazilian restrictions took effect. While those trucks made it through a few days later, McCain, the world’s largest maker of frozen French fries, has received approval from Brazil for 50 of the 300 orders it is trying to ship, said Claudio Rivero, a human resources manager at McCain in Balcarce, Buenos Aires.

McCain halted production for four days last week at its Argentine plant as it waited for authorization from Brazil, costing the company $1 million, Lucas Alvarez Bayon, the company’s supply chain director for South America, said in a telephone interview from Buenos Aires. McDonald’s in Brazil is among the biggest buyers of McCain’s Argentine production, Rivero said.

“This conflict means that we have to absorb the plant’s fixed costs and run the risk of losing our market in Brazil,” Rivero said in a telephone interview. “We want a normalization of trade.”

Markets Last Week

The yield on Argentina’s benchmark 8.28 percent dollar bonds due in 2033 fell 12 basis points last week to 12.19 percent, according to JPMorgan Chase & Co. The peso rose 0.2 percent to 3.8081 per U.S. dollar from 3.8157 on Nov. 5. The Merval stock index advanced 0.5 percent to 2,233.43.