BUENOS AIRES, ARGENTINA — Brazil's abrupt 1999 currency devaluation did more than throw the largest Latin American economy into turmoil — it sparked tensions with Argentina that seemed to threaten the Mercosul free-trade zone. A year later, at the Argenplas 2000 trade show, most plastics industry leaders felt confident Mercosul will hold together, even as Brazil lures factories away from its smaller neighbor and Brazilian-made products price Argentine goods out of the market.
"In my opinion, it's impossible to reverse Mercosul," said Merheg Cachum, president of the Brazilian processors association, Abiplast. "Mercosul is the future."
Debora Giorgi, Argentina's secretary for industry, commerce and mining, spoke about relations between the two countries during ceremonies to open Argenplas. After the speech, she was asked if Mercosul could unravel. "Never. It would not happen. Mercosul will improve and become stronger and stronger," she said.
Hector Mendez, president of CAIP, the Argentine plastics industry association, also supports free trade. "Our position is that we need a policy that reinforces Mercosul as a common trade region and minimizes economic conflicts," he said.
Nestor Krasnansky, director of Simko SA, a Buenos Aires manufacturers' representative, called free trade "indespensible" for his export-dependent country of just 37 million people. "We are putting all our resources to deal with Mercosul. We believe in Mercosul. But the reality is that it's not working today," he said.
Krasnansky and other Argentine plastics officials say that, economically, Brazil is an unpredictable gorilla, and Argentina is a mouse. Brazil has 164 million residents and is Argentina's largest trading partner. But Argentines worry that the gorilla can squash the mouse.
Veja, Brazil's weekly newsmagazine, recently devoted a cover story to the conflict. The cover depicted a scowling face on the sun in the center of the Argentine flag. The headline: "Why the Argentines are so irate at Brazil."
Krasnansky can relate. "It's very difficult to make the Brazilians think that we are partners, we are the same, that we are a region," he said. "It's very, very difficult because they've reacted in such a way that we are suffering a lot and the economy has been destroyed."
Simko represents several U.S. companies, including Advanced Elastomer Systems LP, Gala Industries Inc. and Maag Pump Systems Textron Inc., and German extruder-maker Krupp Werner & Pfleiderer GmbH.
At Argenplas, held April 3-8 in Buenos Aires, uncertainty lurked in the background, as machinery hummed and winsome booth attendants handed out plastic bags.
Argentina is mired in recession. Brazil and its now-cheap currency, the real, gets much of the blame in Buenos Aires.
Argentina's peso has been pegged 1-to-1 to the U.S. dollar since the early 1990s. Brazil used to have a similar exchange rate, back when a dollar would buy 1.2 Brazilian reais. Then, in early 1999, Brazil, under pressure, allowed the real to float freely on foreign exchange markets.
The real plummeted to below 2 reais to the dollar, before recovering to the current level of about 1.8. That means products made in Brazil are more than 50 percent cheaper now, when measured in Argentine pesos. As a result, Argentina exports have tumbled by 30 percent.
"That's very nice for Brazil, but it's not good for Argentinian manufacturers," said Enrique Escobar, regional sales manager at PlasTec U.S.A. Inc. of Miami. "They can't [lower prices] anymore. You can play around at 2-3 percent, but not with 50 percent."
Brazil has managed to rebound quickly. Its economy is growing at a strong pace, interest rates have fallen and inflation remains under control.
Argentina is another story. Although Argentina enjoys very low inflation, unemployment stands at 14 percent and is climbing. The country is having trouble exporting its suddenly expensive goods to Brazil.
"They depend on exports, and the most significant [market] is Brazil," said Escobar, who was selling Milacron machinery at Argenplas. "But the problem with Brazil is their economy fluctuates too much and they change the rules. That creates a lot of problems."
Argentines may complain, but the country simply can't afford to pull out of the free-trade agreement, said Fabio Seabra, the Buenos Aires-based regional manager for Husky Injection Molding Systems Argentina SA.
"Argentina needs Brazil more than Brazil needs Argentina," he said.
Support remains strong for the 9-year-old Mercosul free-trade agreement that links Brazil, Argentina, Paraguay and Uruguay. In 1990, $3 billion worth of business moved between the four countries. Today, it's $30 billion, said André de Oliveira Castro, general manager at Argentine subsidiary of the Brazilian resin maker Petroquimica Ipiranga SA.
An economist, Daniel Artana, said Argentina would trade a significant amount of goods with Brazil, Mercosul or not. He predicts "spectacular development" for the free-trade pact if Brazil continues its structural reforms and if Argentina can restart its engines.
In past years, when one partner was down, the other was up. "1999 was the first year when things were bad for both countries," said Artana, director of the Latin American Economic Research Foundation (FIEL).
Both countries have engaged in tit-for-tat protectionism. Argentina has imposed quotas on Brazilian steel and other goods. Just before Argenplas, news reports said Argentine trucks full of garlic were being turned back at the Brazil border.
That's too bad for the spice industry ... but other industries are suffering as well. Artana said other sectors in trouble include automotive, dairy, poultry, steel, paper and textiles.
What about plastics? Right now, the biggest threat is that plastics factories may join an exodus of manufacturing moving to Brazil, which is now a much cheaper place to do business.
Tupperware Corp. cut costs last year by closing its Buenos Aires factory, reportedly laying off about 200 workers. The plastic housewares maker now serves Argentina from its plant in Sao Paulo, Brazil.
Argentina's key automotive industry has been roiled by plant closings, both real and threatened.
Getting hard facts is difficult. The Argentine Industrial Union says 100 companies have left for Brazil, but never released a list of names — and local newspapers have listed no more than 28 defecting firms.
So far, industry officials say, very few plastics factories have left. But Krasnansky, of Simko, said Brazilian states are aggressively courting plastics processors to cross the border.
"They are fighting between states in Brazil. They offer: `Put your plant in my state. We need jobs.' They want to have the work. They offer land. They offer soft credits, say 10 years to pay the land. Or you never pay for the land. You will have tax exemptions," he said.
The trends are disturbing here in the wealthiest nation in Latin America. Argentina's average annual per-capita income is $7,500 — compared with $4,700 for Brazil. The cheap real has made the wage gap even larger.
The only solution for Argentine processors is to improve their technology, said officials of machinery manufacturers exhibiting in Buenos Aires.
"Mostly, the equipment here is outdated. They have to invest to be competitive, even with the Brazilians because the Brazilians are upgrading their own technology. But right now the economic situation is not that great, so it's difficult," said German Laverde, manager of marketing at Battenfeld Gloucester Engineering Co. Inc. The company makes film equipment in Gloucester, Mass.
Visitors did spend money at the show, despite Argentina's slow economy, according to Jorge Guzman, Maag Pump's manager of South American sales and marketing.
"Brazil has got the edge in people. But these people right here have got the edge in technology," he said. "Now they have this phenomenal push to export."
One major wild card might be the peso.
The intense economic pressure from Brazil could force Argentina to release the peso from its dollar-lock and let it float. But that might unleash inflation, not a pleasant thought to people who can recall prices erupting by 2,000 percent.
"There's a lot of rumors that it will explode," said Elizabeth Luno, an administrative secretary for Plastec U.S.A. in Buenos Aires.
Husky's Seabra doesn't think it will happen. "They'd prefer to give away something socially [such as higher unemployment], rather than give up this taste of first-world stability."
Meanwhile, the two countries will continue walking a free-trade tightrope.
On April 29, Brazil and Argentina signed a treaty meant to ensure growth, which will allow Argentina to create temporary protection mechanisms in those economic sectors most affected by the devaluation of the real. Details on the measures and the specific sectors they will apply to will come in the next couple of months.
"Both economies are suffering a lot," Krasnansky said. "If they help us, they ruin their own economy. We help them, we ruin our economy.
"That's the problem. And to arrive at a balance, it's very difficult."
