Argentine president Cristina Fernández recently travelled to China to attempt to solve the soy oil controversy between the two countries. For weeks, China has been blocking the commodity from entering the country in retaliation against anti-dumping measures that Argentina has applied against Chinese imports.
By COHA Research Associate Azul Mertnoff
After months of delay, President Cristina Fernández Kirchner of Argentina traveled to China on July 11th to discuss economic issues affecting the two countries. China is Argentina’s largest commercial partner after Brazil. The primary purpose of this meeting was to convince China to lift the now two-month blockade against Argentine soy oil. However, the most significant occurrence of the meeting was the signing of an investment agreement that will boost mining and railroad infrastructure in Argentina through the import of Chinese goods. Though this is seen as a successful agreement in terms of Argentine interests, both countries, but especially Argentina, are suffering from the ongoing soy oil dispute.
The Importance of Soy
During the 1990s neo-liberal era of former president Carlos Menem, Argentina started to make the switch from exporting wheat and meat to cultivating transgenic soybeans. Thirteen years ago, the US-based Monsanto Company—the leading multinational corporation in agricultural biotechnology—started operating in Argentina by producing genetically modified soybean, also known as Roundup Ready soya. By 2004, soy oil production had increased by 75%, bringing large profits for the farmers. Monsanto has used the case of Argentina as one of the examples of the “success stories” of genetically modified agriculture.
Today, soybean crops cover half of the pampas, the most fertile land in Argentina. Argentina has become the world’s top soybean oil supplier over the past few decades and the fourth largest producer of soybeans. Between 1996 and 2004, soy output in Argentina rose from 11 million to 36.5 million tons, 95% of which was for export. The profits on soybean oil can be as high as 50% on a good soy harvest.
While this has brought a huge influx of profits, the focus on soybean production has produced desertification, deforestation, environmental threats due to the danger of using transgenic products, and a crisis in the meat and milk industries caused by the soy mono-crop. Monsanto claims that the soil degradation and use of pesticides is not because of the use of genetically modified soy, but because the farmers do not rotate with other crops in order to allow the soil to recover.
Associated with the environmental problems that soy production can bring are the social costs it can impose. Soy production does not require much investment. A large soy crop only requires the labors of two to five men and proper technology. Regions where soy output has brought high profits have also witnessed increasing poverty as additional farms are purchased to grow soy crops. This increasing poverty has happened particularly in the Northwest of Argentina, where unemployment is above 20% and the number of rural workers has halved. Elite “soy barons,” who can afford expensive machinery, are purchasing land from the poor, who in turn become displaced and have to resort to working in the much less lucrative informal workforce.
In March 2008, Cristina Kirchner decided on changing the export tax rate on soy from a fixed rate to a sliding one pegged to commodity prices. The intention was to encourage farmers to move away from monoculture production of soy and to distribute the revenue from the increased tax into welfare programs to decrease instances of poverty among the Argentine population. After a stormy period of strikes by the powerful rural organizations opposing the reform, the bill was vetoed in Congress.
Today, an export tax of 20% on soybeans goes to the national government while provincial governments earn revenue from taxes on land ownership. The Argentine state is not intervening to diversify agricultural production at the moment. This could become a problem if the current high price of soy decreases on the international market, thus causing greater unemployment and a loss of export profit.
The Importance of China
The Argentine soy market was worth $3.245 billion in 2009, with $1.5 billion coming from exports to China. Argentina’s record crop yield has reached 55 million tons; by contrast, China only produces 15 million tons, forcing Beijing to import 70% of the soy oil that is used in China. However, since last April, China has stopped buying from Argentina as a way of retaliating against the anti-dumping restrictions carried out by the Argentine government. The Argentine newspaper Clarín claims that this unfortunate government policy marks the country’s commercial vulnerability to such pricing and marketing strategies. However, President Cristina Kirchner asserts that the restrictions were applied because the prices of the Chinese products that enter Argentina are lower than those in other countries. According to reports, 98% of what China sells to Argentina (such as machines, tools, electronics) has an added value, while 82% of what Argentina sells to China does not, making the trade less lucrative for Argentina.
Compared to May 2009, the amount of Argentine soy oil that entered China was 78% less than the previous year. Prior to this, Argentina sold an average of 150,000 tons per month to China. After a lack of trading for several months, China now needs to meet its internal soy oil demand. Because of the blockade, China has recently begun buying soy oil from the United States and Brazil, even though it is more expensive than Argentine soy oil. While Argentine soy oil costs $800 per ton, that of Brazil is $850.
President Cristina Kirchner has visited China in order to negotiate the lifting of the oil barrier and in return has offered to buy railway equipment worth $13 billion. The Argentine Foreign Ministry invited 70 Argentine businessmen to accompany its delegation heading for Beijing to further encourage business with China and prove that Buenos Aires was serious both in its business deals and in strengthening political ties.
The countries are clearly facing different situations at the negotiation table. For China, Argentina is the 44th country that receives their exports and the 26th from which they import, while China is Argentina’s 2nd largest business partner. Fortunately for Argentina, China was willing to compromise. For the moment, Argentine officials have announced that with these new agreements, the Argentine railway infrastructure deal will be financed by China at an incredibly low rate. The ending of the trade block has yet to be finalized.
Due to the lack of changes with regard to soy oil, the arrangement has yet to be finalized. Clarín portrays the China trip as a failure but Chancellor Timerman added: “I have no doubt that the Clarín and La Nación newspapers see this visit as a failure: when national interests are being defended, they consider it a failure.” Nevertheless, the President expressed her satisfaction with the results that were obtained during the visit, saying that everyone took note of the importance of Argentina as a market economy. She said that everything is going very well both for Argentina and China and that the two countries are able to complement each other very well. Kirchner feels that the positive change in the two countries’ bilateral ties will prove beneficial in the future.
Argentina on a good run
On balance, Kirchner’s China trip deserves to be seen as an important success for Argentina. China is the only major economy that has grown in 2009 (8.2%), and it is expected to grow 11% in 2010. For Argentina, dealing with China can mean many positive things for its economy. The Foreign Affairs Ministry explained that, although it may seem that the soy dispute was not entirely resolved, it expects shipments to China to start again in September.