11/06/2020

Possible agreements facing a more challenging world

The coronavirus unleashed an unprecedented international crisis, which will leave severe impacts both economically and geopolitically. Argentina, in addition to facing the direct impact of this crisis, has the challenge of building, in a scenario that is more adverse than the one before, a strategy of international insertion that is sustainable over time, one that succeeds in overcoming the pendular changes of the last decades. Reaching basic consensus will be central in a world where tensions are growing; a world marked by uncertainty.

The pandemic will have strong consequences at the international level. The world economy will suffer the greatest crisis since 1929. A drop in economic activity of around 5% is expected, which is more acute than in 2009, when world activity decreased by 0.1%-, apart from having a wider spread that impacts a larger number of countries. A sharp drop in international trade and investment flow is also expected. All of these variables were already fragile before this crisis. The world showed low levels of  growth in activity (2.9% in 2019), stagnant international trade (falling  0.2% in 2019 and representing just over 20% of world GDP, well below the 30% that it had reached in the early 2000s), and a drop in direct foreign investment (constituting 2% of world GDP in 2019, far from the 4.5% achieved in 2000). In short, the limitations for globalization to generate economic prosperity were present before the pandemic, and they will be greater from now on.

This crisis will also leave profound changes in production and consumption. On the one hand, it will accelerate processes that were already underway, such as those related to Industry 4.0, digitalization and electronic commerce. Having strong, diversified industries that use frontier technology proved central in many countries to guarantee the provision of essential goods, medical equipment and for the development of diagnostic tests. The presence of 4.0 technologies also strengthens systems of safety and hygiene for production and enables the rapid manufacture of new demanded goods, as seen with the use of additive technologies (3D printers) that facilitate the production of new products with a lesser need for machinery and infrastructure.

On the other hand, the crisis will revalue the environmental agenda that had previously gained ground. The lockdown in the central nations highlighted the importance of tackling strategies that decouple production from waste generation. It is about a return to production, but reducing the environmental impact, and giving greater impetus to the strategies of a circular economy. Technologies 4.0 will also be fundamental in this aspect, since they allow a more efficient use of materials.

In addition to the economic impacts, the crisis will leave an aftermath in geopolitical terms. In this field, the acceleration of pre-existing tensions is also expected to take place. The dispute between the United States and China will intensify and will be reflected in more nationalism and trade protectionism. These two countries have increased the use of non-tariff barriers the most in recent years.

This will also lead to a deeper questioning of the global value chains. Before the coronavirus, countries were discussing their place within the chains and developing strategies to insert themselves in the area with the highest added value. There was a slow process of investment re-shoring, in which the countries that had decentralized the production process were promoting the repatriation of companies to their place of origin.

Another consequence at the international level is the growing economic debility of both Brazil and Europe, traditional trading partners of our country. In both places, the coronavirus has had a strong impact, increasing economic and political fragility. At the local level, this impact will be noticeable and will expand beyond the loss of exports. Brazil's debility erodes its regional leadership at a time when addressing the challenges posed by the new international scenario demands greater coordination in the region.

Finally, the crisis has once again highlighted the weakness of the multilateral decision-making spaces and the void of leadership at both the international and regional levels. These spaces are central to developing countries like Argentina, where international organizations are the only means to channel certain demands that would otherwise be ignored in such an asymmetric world. If the future was already complicated before the coronavirus, we will now have to face greater uncertainty in a more defensive world.

Challenges and opportunities

This panorama brings new challenges for Argentina's international insertion. At the same time that we work to overcome the strong economic and social impact that the coronavirus will leave, we will have to outline a new insertion strategy.

Both central and emerging nations are taking the initiative in the face of the new reality, with ambitious plans for both containing the crisis and for the subsequent recovery. The plans range from fiscal and monetary measures to get through the crisis, to measures that facilitate the reconversion of processes, promote the incorporation of technology, increase productivity and identify markets and business opportunities.

Faced with the revaluation of industry and industrial policy, we have an opportunity ahead of us. Argentina is the third industrial network in Latin America. It has the highest productivity in the region and is diversified in terms of sectors and regional presence. Despite the pendular policies in production and science, we continue to have an important scientific-technological system, with the highest ratio of researchers per capita in the region, and considerable investment in R&D. In terms of resources, the availability of both natural resources in agriculture, energy and minerals (with a great potential for further development) and human resources, indicates that there is a bright horizon if we manage to lead a development project.

But these assets are not enough on their own. They also require a realistic vision of the current world, one that is aware of the obstacles that lie ahead, and a strong commitment to face them. It is a priority to define the guiding principles that allow us to free ourselves from strategic insolvency,  and the “lack of a roadmap” Tokatlian  uses to illustrate the inability of our elites to agree on foreign policy.

A pragmatic foreign policy, with a strategic vision and the ability to adapt its tactics to achieve specific objectives, requires thinking about foreign relations from a new model of production and added value. Argentina is already an industrial country and must seek international insertion in a way that is in tune with the development of its industrial capabilities. It will be fundamental to protect and strengthen our industrial network, as well as to generate initiatives that improve competitiveness. It is important that the trade negotiation agenda be intelligently formulated, so that greater integration can effectively achieve improved commercial performance, generating foreign exchange and employment.

Finally, we need to strengthen a regional perspective that promotes productive complementarities. Compared to other export destinations, the Mercosur has a strategic nature: it is the main destination for industrial exports. Faced with the questioning of global value chains, the challenge is to strengthen regional chains and extend them throughout Latin America.

The first step to facing this difficult agenda is to be fully aware of it. In a less harmonious world, our strength lies not only  in our resources but also in our possible agreements to design and advance a program that is consistent with our reality and that can be sustained over time.

Daniela Rozenbaum. Economist. Coordinator of the UIA Study Center

Diego Coatz. Executive Director / Chief Economist of the Argentine Industrial Union, Academic Director of INSECAP / UCES. Professor of Economic Structure (FCE-UBA) @diegocoatz

[1] According to the World Bank estimation, the drop on 2020 will be 5,2%. https://www.bancomundial.org/es/news/press-release/2020/06/08/covid-19-to-plunge-global-economy-into-worst-recession-since-world-war-ii. On April, the IMF had predicted a minor drop (3,0%), but revisions on the number are expected given the great impact that the isolation measurements of the second trimester had.