1 Import Liberalization and Price Indexes in Argentina: a brief analysis for 2016-2018 1. Introduction This short note aims at assessing the evolution of different price indexes – import prices, consumer prices, and producer prices - against the backdrop of the import liberalization process occurred in in Argentina in the 2016 – 2018 period. For that purpose, the note is structured in four key sections besides this short introduction. The first one describes the data used for the analysis. The second section recapitulates key import liberalization measures implemented between December 2015 and end of 2018. The third section computes the average effective import tariff variation by type of product resulting from those measures and assesses the associated changes in import product composition. Finally, the fourth section assesses changes in import prices as well as in consumer and producer price indexes. The note finds evidence that import liberalization measures implemented in the first two years of the Macri administration did not bring substantial changes in average import tariffs and that that the few tariff positions that experienced some reduction (notably chemicals, machinery/electrical equipment and wood/wood products) had low weights in the consumer price index composition. On the other hand, it is also worth noting that these same tariff positions are concentrated on groups of intermediary goods which are likely to bring positive trickle-down effects for global value chain (GVC) and export competitiveness and may have brought an indirect beneficial effect on consumer price index through input-output linkages. 2. Data The information used in this note draws from different and complementary sources. The information about the import norms was collected for the period between end of 2015 and end of 2018 from the INFOLEG web system of the Ministerio de Justicia y Derechos Humanos: http://www.infoleg.gob.ar/. The information on average effective tariffs was obtained from the World Integrated Trade Solutions (WITS) system of the World Bank and provided in annual frequency for the years 2015, 2016, and 2017, using an eight-digit HS2012 code. WITS had no information of 2018 annual average effective tariffs. Import data was obtained yearly from the WITS system and covered from 2015 to 2018, aggregated per type of product in a six-digit HS2012 code (H6). The database included the country of origin, the value in USD, the type of units, and the quantity measured in units. Data on consumer price index (CPI) was provided by the Instituto Nacional de Estadísticas y Censos (INDEC) on monthly frequency from December of 2015 to October of 2018. For the six Argentinian regions, the CPI included information from December of 2016 to October of 2018. We have access to the six regions ponderations. The data of producer price index (PPI) was provided by the INDEC on monthly frequency from December of 2015 to October of 2018. 2 3. A summary of import liberalization reforms in Argentina 2016- 2018 Facing an economy poorly connected with the world economy, the Macri Administration started to implement trade policy reforms since the beginning of its term. Table 1 presents a comprehensive list of legal norms related to imports adopted in Argentina from December 2015 to end of 2018. Table 1. Import liberalization measures, by legal norm implemented in Argentina between the end of 2015 and the end of 2018 Name Date Description Resolución 5/2015 23-Dec-15 All tariff positions of the MERCOSUR Common Nomenclature (NCM) can be imported using automatic importing licenses (LAI), but those in a list included in Annexes II to XVII that have to apply for non- automatic importing licenses (LNAI), for the later the FOB tolerance, is minus 5% and plus 4%. All licenses have a validity of 90 days. Resolución 2/2016 8-Jan-16 Modifies the list of tariffs positions in the Annexes of Resolución 5/2015. Resolución 32/2016 14-Mar-16 Modifies the list of tariffs positions in the Annexes of Resolución 5/2015, extending the duration of licenses to 180 days. Resolución 114/2016 1-Jun-16 Modifies the list of tariffs positions in the Annexes of Resolución 5/2015. Resolución 172/2016 5-Jul-16 Modifies the list of tariffs positions in the Annexes of Resolución 5/2015. Resolución 264/2016 9-Sep-16 Modifies the list of tariffs positions in the Annexes of Resolución 5/2015. Resolución E 301/2016 21-Oct-16 Modifies the list of tariffs positions in the Annexes of Resolución 5/2015. Decreto 117/2017 17-Feb-17 Reduces the extra zone imports rights (DIE) to zero for 72 informatic and telecommunications tariff positions until 2021, following a July 2015 Mercosur decision. Resolución E 152/2017 3-Mar-17 Modifies the list of tariffs positions in the Annexes of Resolución 5/2015. Decreto 331/2017 11-May-17 Establish temporary tariffs (36 months) corresponding to the DIE for motor vehicles. Resolución E 292/2017 7-Jul-17 Derogates Resolución 5/2015 Resolución E 523/2017 7-Jul-17 All tariff positions of the MERCOSUR Common Nomenclature (NCM) can be imported using automatic importing licenses (LAI), but those in a list included in Annexes II to XVIII that must apply to non- automatic importing licenses (LNAI)for the later the FOB tolerance is +/- 7%. All licenses have a validity of 180 days. Decreto 629/2017 09-Ago-17 Regime of imports for Hydrocarbon industry Decreto 814/2017 11-Oct-17 Establish temporary tariffs corresponding to the (DIE) for some plastics, glass, metals, machinery, and instruments. Its validity was only for 2018. Decreto 6853/2017 23/11/2017 Less than one year temporary Export Refund levels (RE) for some meat and marine tariff lines. Resolución E 898/2017 30-Nov-17 Modifies the list of tariffs positions in the Annexes of Resolución E 523/2017. 3 Decreto N° 1126/2017 29-Dec-17 Approves the MERCOSUR Common Nomenclature (NCM). It modifies the list of products that are included in the common external tariff and other exceptions. Decreto 1/2018 03-Jan-18 Modified the list of tariff positions in Annexes I, II, X and XIV in Decreto N° 1126/2017 Resolución Conjunta-E 08-Jan-18 Derogates the DJAI and replaces it with the Sistema Integral de 4185/2018 Monitoreo de Importaciones (SIMI), a completely electronic system. Resolución 5-E/2018 08-Jan-18 Modifies the list of tariffs positions in the Annexes of Resolución E 523/2017. Resolución 170/2018 27-Mar-18 Modifies the list of tariffs positions in the Annexes of Resolución E 523/2017. Resolución 507/2018 27-Aug-18 Modifies the list of tariffs positions in the Annex XI of Resolución E 523/2017. Resolución 526/2018 3-Sep-18 Modifies the list of tariffs positions in the Annex XI of Resolución 507/2018. Decreto 837/2018 19-Sep-18 Reduces to 2% the DIE of annex III of Resolución E 523/2017 Decreto 847/2018 25-Sep-18 Replaces annexes II and X of Decreto Nº 1126, reducing some extra zone imports rights (DIE) following a Mercosur agreement. Decreto 864/2018 26-Sep-18 Replaces annex IX of Decreto Nº 1126 reducing some DIE to zero. Decreto 973/2018 30-Oct-18 Replaces (again) annex IX of Decreto Nº 1126 reducing more DIE to zero. Source: Ministerio de Justicia y Derechos Humanos: http://www.infoleg.gob.ar/ The most significant changes affecting imports in this period were fourfold. First, the Resolución 5/2015, that simplified a discretionary licensing regime called Declaración Jurada Anticipada de Importación (DJAI) by reducing the number of tariff positions that needed tariff licenses to a list of around 1400; all the rest tariff positions could apply for automatic tariff licenses. This list was modified seven times afterwards. Second, the Resolution E 523/2017, that replaced the whole Resolución 5/2015 list with a new list of tariff positions that need to apply for non-automatic import licenses, a list that was modified four times afterward. Third, the Resolución Conjunta General 4185/2018 that replaced DJAI with the Sistema Integral de Monitoreo de Importaciones (SIMI), in which most of the tariff positions of the Mercosur Common Nomenclature (NCM) could apply for automatic import licenses. Fourth, the Decreto N° 1126/2017 that approves the NCM, that was later modified by four decrees that reduced the extra zone import rights or Derechos de Importación Extrazona (DIE). Table 2 displays the number of tariff positions per HS classification that had to apply to non-automatic licenses between December of 2015 and end of 2018; it shows that in 2018 the number of tariff positions that needed to apply to non-automatic licenses had an important reduction. 4 Table 2. Number of tariff positions that must apply for non-automatic import licenses, Argentina, 2015 and 2018 HS classification List of 23-Dec--15 in List of 7-Jul-2017 in List updated at 31- Resolución 5/2015 Resolución E 523/2017 Dec-2018 Animal & Animal Prods. 0 0 0 Vegetable Products 0 1 0 Foodstuffs 0 0 2 Mineral Products 0 0 0 Chemicals 9 58 31 Plastics/Rubbers 14 48 26 Raw Hides, Skins, Leather 16 16 13 Wood & Wood Prods. 35 70 25 Textiles 692 691 465 Footwear/ Headwear 35 35 153 Stone/Glass 21 30 22 Metals 132 161 112 Machinery/Electrical 342 356 193 Transportation 39 44 31 Miscellaneous 93 98 76 TOTAL 1428 1608 1149 Source: Ministerio de Justicia y Derechos Humanos: http://www.infoleg.gob.ar/ 4. Evolution of Tariffs and Import Prices during 2016-2018 Average Effective Tariffs and Import Patterns in Argentina between 2015 and 2018 In addition to the measures described above, a temporary reduction in some vehicle tariff lines by Decreto 331/2017, that established temporary tariffs, for 36 months, corresponding to the extra zone import rights (DIE) for motor vehicles. In the case of informatics and telecommunications, in February of 2017, a list of 72 tariff positions had the extra zone import rights reduced to zero until 2021 following a Mercosur decision from July of 2015. Drawing from WITS data it is possible to assess whether changes in trade policy measures pertaining to imports - as described in the previous section – are associated with a reduction of the effective import tariffs. Specifically, drawing from yearly WITS' Tariff and Trade Analysis section data it is possible to compute the percentage of tariff positions that had a change in tariffs for the years 2015, 2016, and 2017. The information of average effective tariffs from 2018 still was not available in WITS and was not possible to extend the analysis to 2018. As displayed in Table 3, from a total of 10,033 different eight-digit HS2012 tariffs positions reported in the WITS system as traded between 2015 and 2017, only 106 experienced some change. These changes were concentrated in the following HS groups: Machinery/electrical, Transportation, and Metals. In this regard, it is worth highlighting that these groups account for a reduced proportion of the consumer price index composition. 5 Table 3. Changes in average effective tariffs measured as a percentage of tariff positions, Argentina, between 2015 and 2017 Total Number of Number of Tariff Percentage of Tariff HS classification Tariff Positions noted Positions that had a Positions that had a by WITS between change in average tariffs change in average tariffs 2015 and 2017 between 2015 and 2017 between 2015 and 2017 Animal & Animal Prods. 481 0 0.0% Vegetable Products 475 0 0.0% Foodstuffs 298 0 0.0% Mineral Products 206 0 0.0% Chemicals 2961 8 0.3% Plastics/Rubbers 425 2 0.5% Raw Hides, Skins, Leather 113 0 0.0% Wood & Wood Prods. 351 1 0.3% Textiles 1013 5 0.5% Footwear/ Headwear 70 0 0.0% Stone/Glass 280 1 0.4% Metals 739 7 0.9% Machinery/Electrical 1769 74 4.2% Transportation 215 4 1.9% Miscellaneous 637 4 0.6% TOTAL 10033 106 1.1% Source: Data from World Integrated Trade Solutions (WITS) dataset (https://wits.worldbank.org/). A complementary approach to compute changes in average effective tariffs is to compute the value of imports - in current USD - for each tariff position that had a reduction in tariffs - and the total value of imports for all tariff positions. Results presented in Table 4 suggest that most of the changes in tariff positions, measured in millions of USD, were in Chemicals, Machinery/Electrical, and Wood& Wood Products categories. Again, none of these categories account for a large proportion of consumer price index composition. Table 4. Changes in average effective tariffs measured as a percentage of imports in millions of USD, Argentina, between 2015 and 2017 HS classification 2016 Imports in Millions of USD 2017 Imports in Millions of USD Tariffs All Tariff Percentage Tariffs All Tariff Percentage positions Positions (1)/(2) positions Positions (1)/(2) that had (2) that had (2) change in change in tariffs (1) tariffs (1) Animal & Animal Prods. 0 243 0.0% 0 294 0.0% Vegetable Products 0 1052 0.0% 0 1594 0.0% Foodstuffs 0 922 0.0% 0 1116 0.0% Mineral Products 0 5029 0.0% 0 6166 0.0% Chemicals 1071 8485 12.6% 1160 9071 12.8% Plastics/Rubbers 26 3186 0.8% 30 3485 0.9% Raw Hides, Skins, Leather 0 165 0.0% 0 178 0.0% 6 Wood & Wood Prods. 54 1198 4.5% 68 1289 5.3% Textiles 32 1464 2.2% 22 1562 1.4% Footwear/ Headwear 0 612 0.0% 0 697 0.0% Stone/Glass 10 655 1.5% 11 781 1.4% Metals 116 2622 4.4% 135 3573 3.8% Machinery/Electrical 1938 15412 12.6% 2198 18562 11.8% Transportation 57 11414 0.5% 84 14825 0.6% Miscellaneous 2 2737 0.1% 4 3149 0.1% TOTAL 3306 55196 6.0% 3712 66343 5.6% Source: Data from World Integrated Trade Solutions (WITS) dataset (https://wits.worldbank.org/). Table 5 displays the relative weights of the consumer price index (CPI) and shows that the group of goods with more importance in the CPI are Food and non-alcoholic beverages with more than one-quarter of participation, followed by Transport (11%), Clothing (9.9%), and Housing (9.5%). Table 5. Consumer price index weightings of the basket according to divisions, Argentina, December 2016 Divisions Percentage Food and non-alcoholic beverages 26.9% Alcoholic beverages and tobacco 3.5% Clothing and footwear 9.9% Housing, water, electricity and other fuels 9.5% Equipment and maintenance of the home 6.4% Health 8.0% Transport 11.0% Communications 2.8% Recreation and culture 7.3% Education 2.3% Restaurants and hotels 8.9% Miscellaneous goods and services 3.5% Total 100% Source: INDEC. When taken together, results from Table 3 and Table 4 suggest that changes in trade policy related to imports implemented in the first two years of the Macri administration did not bring significant changes in import tariffs, and the few tariff positions that experienced some reductions were concentrated on groups of products that do not account for a large weight in terms of the CPI composition. Starting in September of 2018 there were some reductions in extra zone imports rights, but the analysis of Table 4 could not be replicated for 2018 because the information of average effective tariffs was not available in WITS for 2018. Against the backdrop of import liberalization reforms, the value of imports of goods to Argentina changed substantially in 2016 and then returned to 2014 levels. By comparing the 7 evolution of total import value (in current USD) by H2 tariff positions from 2014 to 2018, Table 6 shows that the total amount of imported goods dropped from $64.5 Billion in 2014 to $59.2 Billion in 2015. It then continued falling during the first year of the Macri administration to $55.2 Billion in 2016, and then increased to $66.3 Billion in 2017 and $64.8 Billion in 2018, reaching the 2014 levels. It also noteworthy that some tariff positions had significative increases in 2016-2017 in comparison with 2014-2015; specifically, Vegetable Products, Foodstuffs, and Footwear/Headwear were the H2 tariff positions that experienced significant growth in monetary value in 2016-2017 with respect to 2014-2015. Table 6. Evolution of Imported Goods in Millions of USD, Argentina, 2014 to 2018. HS classification 2014 2015 2016 2017 2018 Animal & Animal Prods. 173 167 243 295 320 Vegetable Products 705 743 1,052 1,594 3,310 Foodstuffs 897 873 922 1,116 1,075 Mineral Products 12,099 7,331 5,029 6,166 7,134 Chemicals 9,802 9,439 8,485 9,071 9,701 Plastics/Rubbers 3,742 3,642 3,186 3,485 3,394 Raw Hides, Skins, Leather 136 154 165 178 180 Wood & Wood Prods. 1,275 1,374 1,198 1,289 1,319 Textiles 1,385 1,423 1,464 1,562 1,572 Footwear/ Headwear 418 472 612 697 642 Stone/Glass 647 700 655 781 730 Metals 3,432 3,521 2,622 3,573 3,621 Machinery/Electrical 16,795 16,924 15,412 18,562 17,334 Transportation 10,395 9,649 11,414 14,825 11,521 Miscellaneous 2,621 2,819 2,737 3,149 2,990 TOTAL 64,522 59,230 55,196 66,343 64,843 Source: Data from World Integrated Trade Solutions (WITS) dataset (https://wits.worldbank.org/). 8 Evolution of Prices during 2016-2018 Figure 1 shows the evolution of CPI for the Great Buenos Aires from April 2016 to December 2018. Both the aggregate index and its components are displayed. A clear increasing trend is revealed for all components, with Alcoholic drinks and tobacco, Housing and utilities, and Health as the key categories leading this process. In terms of annualized inflation, a Chow test of structural test can distinguish two distinct periods: one from April 2016 to November 2017 with 22%, and another from December 2017 to October 2018 with 40%. Figure 1. CPI Great Buenos Aires, April 2016 = 100 240 220 200 180 160 140 120 100 Nov-16 Nov-17 Jun-16 Jun-17 Jun-18 Aug-16 Aug-18 Aug-17 Apr-16 Apr-17 Jan-17 Apr-18 May-16 May-17 Jan-18 May-18 Dec-16 Dec-17 Jul-16 Mar-17 Jul-17 Jul-18 Oct-16 Mar-18 Oct-18 Oct-17 Sep-16 Feb-17 Sep-17 Feb-18 Sep-18 General CPI Food and beverages Alcoholic drinks and tobaco Clothes and shoes Housing and utilities Appliances Health Transport Comunications Recration Ecucation Restaurants Source: CPI data from INDEC Figure 2 shows the evolution of the producer price index (PPI) for the same period. A Chow test of structural change identifies two distinct periods of annualized inflation: one from December 2015 to November 2017 with an annualized change in prices of 18%, and another from December 2017 to October 2018 with an annualized change in prices of 46%. In terms of PPI categories, it is worth highlighting the trend experienced by the index of electric energy, which was multiplied by six in that period (see right-hand side scale in Figure 2). 9 Figure 2. PPI Argentina, December 2015 = 100 (electric energy in the right scale) 350 700 600 300 500 250 400 200 300 150 200 100 100 Apr-16 Jun-16 Apr-17 Jun-17 Apr-18 Jun-18 Dec-15 Feb-16 Aug-16 Dec-16 Feb-17 Aug-17 Dec-17 Feb-18 Aug-18 Oct-18 Oct-16 Oct-17 General Index Primary Agricultural Fishing Mining Manufacturing Food and beverages Electric energy Source: PPI data from INDEC Figure 3 compare the PPI, CPI, and an index of the exchange rate, using as a base month April 2016. In the period between December 10th of 2015 and October 31st of 2018 the exchange rate (sell) reported by the Argentinian Central Bank (BCRA) grown from 9.85 Argentinian Pesos (ARG) for each US dollar (USD) to 36.98 ARG/USD. A Chow test was performed and up two structural breaks were identified: January 2018 and May 2018. From April 2016 to May 2018, the CPI was above the PPI, and the PPI was above the exchange rate index. After May 2018, that pattern was reversed, the exchange rate index was above the PPI, and the PPI was above the CPI. 10 Figure 3. Evolution of the PPI, CPI, and USD Exchange Rate 300 275 250 225 200 175 150 125 100 75 50 Feb-16 Apr-16 Feb-17 Apr-17 Feb-18 Apr-18 Aug-16 Aug-17 Aug-18 Dec-15 Dec-16 Dec-17 Jun-16 Oct-16 Jun-17 Oct-17 Jun-18 Oct-18 PPI (April 2016=100) CPI (April 2016=100) Exchange Rate (April 2016=100) Source: BCRA (http://www.bcra.gob.ar/publicacionesEstadisticas/Planilla_cierre_de_cotizaciones.asp/) Table 7 presents the calculation of the Laspeyres Price Index for imports using as the base year 2015 for each one of the 15 HS categories and the total of imports. The Laspeyres index was calculated using the annual data provided by WITS with six digits (H6) classification, using the monetary value of imports in USD (𝑉𝑡 ), and the quantity in number of units (𝑄𝑡 ). The index per each was calculated in the following way: ∑𝐻6 𝑃𝑡=𝑛 ∗𝑄𝑡=0 ∑𝐻6 (𝑉𝑡=𝑛 /𝑄𝑡=𝑛 )∗𝑄𝑡=0 𝐼𝑃𝐼 = ∑𝐻6 𝑃𝑡=0 ∗𝑄𝑡=0 = ∑𝐻6 𝑉𝑡=0 Compared with 2015, in 2016 there was a reduction in the imports price index, which is consistent with the decline in the monetary value of imports in 2016 (see Table 6). In 2017, the import price index had a significant increase, caused by the rise in transportation and chemicals categories, but also because there was a substantial increase in the monetary value on imports (see Table 6). 11 The decrease in the imports price index reversed in 2018, with most of the HS categories with important weights in the CPI like Foodstuffs, Vegetable products, Transportation, and Footwear had only modest reductions. Only Raw hides, skins, and leather, Textiles, and Plastics and rubbers were had important reductions in the import price index. Table 7. Laspeyres Price Index of Imports (base 2015) HS classification 2015 2016 2017 2018 Animal & Animal Prods. 1.00 0.96 1.04 0.98 Vegetable Products 1.00 1.02 1.03 0.96 Foodstuffs 1.00 0.97 0.97 0.96 Mineral Products 1.00 0.70 0.82 1.02 Chemicals 1.00 0.91 1.18 1.01 Plastics/Rubbers 1.00 0.90 0.90 0.91 Raw Hides, Skins, Leather 1.00 0.96 0.87 0.85 Wood & Wood Prods. 1.00 0.93 0.92 1.00 Textiles 1.00 0.93 0.89 0.87 Footwear/ Headwear 1.00 1.03 1.04 0.99 Stone/Glass 1.00 0.98 0.99 1.04 Metals 1.00 0.97 1.04 1.23 Machinery/Electrical 1.00 1.07 0.96 1.03 Transportation 1.00 0.98 3.57 0.98 Miscellaneous 1.00 1.02 1.06 1.22 TOTAL 1.00 0.95 1.41 1.02 Source: Data from World Integrated Trade Solutions (WITS) dataset (https://wits.worldbank.org/). 5. Conclusions The main conclusion of this note is that changes in import policies implemented in the first two years of the Macri administration (2016-2017) did not bring significant changes in average import tariffs and that the few tariff positions that experienced some reduction – precisely, chemicals, machinery & electrical equipment and wood & wood products - had low weights in the consumer price index. During these first two years, the reduction in tariffs affected only 1.1% of individual tariff positions and only 6% of the total monetary value of imported goods. On the other hand, it is worth highlighting that those tariff positions that experienced some reductions were concentrated on groups of intermediary goods which is likely to bring positive trickle-down effects for GVC and export competitiveness and may have brought an indirect beneficial effect on the consumer price index through input-output linkages. The note also found evidence that the monetary value of goods imported did not change substantially between 2015 and 2018. From 2014 to 2016, there was a reduction in the monetary value of goods imported from USD 64.5 Billion to USD 55.2 Billion only to rebound to USD 64.8 Billion in 2018. 12 The note presented some estimations of import prices index; results showed that import prices index experienced a reduction in 2016 and a rebound in 2017 to reach in 2018 almost similar values to those of 2015. Finally, the changes in trade policies were in parallel with inflation that passed from 22% to 40%, with similar changes in the PPI and the USD exchange rate, making difficult to identify a relationship between the observed changes in inflation and the small changes in the import price index described in this note.