**Trade liberalization helped boost manufacturing output, which shrunk during the 2001-crisis but rebounded since 2003.** The output of the largest firms rose during the 1990s, although that of small and medium-sized businesses fell sharply. These firms were operating behind protective barriers and were ill-prepared to face international competition. Following the introduction of a special promotional regime and a bilateral agreement with Brazil, the Argentinean automotive industry boomed during most of the 1990s. Manufacturing’s share of GDP reached almost 30 percent in 1998. It shrunk during the 2001-2002 crisis –the largest output declines were recorded in the textile and metal-mechanic industry (including motor vehicles). Since 2003, the rebound in domestic and external demand and the steep devaluation of the peso that led to import-substitution in some sectors led to a recovery of the manufacturing’s share of GDP. The first sectors to respond to the stimulus of the devaluation of the peso were those supplying the domestic market, where imports had become prohibitively expensive.

**FDI flows increased in the 1990s following trade liberalization and improved market entry.** Since the 1990s, regulations related to market entry do not differentiate between foreign and local capital as long as the company has presence in the country<sup>2</sup> .  As a result, the presence of foreign firms increased through both greenfield investments and foreign acquisitions. Argentina was one of the main markets for FDI flows during the 1990s<sup>3</sup> , higher (as share of GDP) than in Brazil (Figure 3) although the trend has reversed since 2007.

**Figure 3. FDI flows to Argentina, Brazil and Chile**

<!-- Start of picture text --> 9 30<br>8<br>25<br>7<br>6 20<br>5<br>15<br>4<br>3 10<br>2<br>5<br>1<br>0 0<br>1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007<br>AR BRA CHL AR Total Direct Investment<br>FDI/GDP<br>US$ billion<br><!-- End of picture text --> _Source:_ Ministerio de Economia (AR Total FDI) and WDI 2008. _Note:_ Direct investment in reporting economy/gross domestic product, current prices from WDI 2008.

**In spite of the progress achieved, tariff and non-tariff barriers remain** . Argentina’s tariff barriers as measured by the tariff restrictiveness index remain more restrictive than in an average LAC country (11.2 versus 8.2 in LAC). Import restrictions remain in several product categories (such as vehicles, auto parts, and used tires).  In 2002, following the devaluation of the Argentinean peso, export taxes were increased. The declared objective was to act as a barrier against the effect of exchange rate fluctuations on domestic prices and to boost fiscal revenue. Export taxes represented, on average, some 10 percent of total fiscal revenue between 2002 and 2005. They were introduced as temporary measures, but no end date to their application has been announced. Primary products have been particularly affected.  Processors and other consumers, on the other hand, have benefited from the

> 2 Argentina Trade Brief, PREMTR World Bank.

> 3 Chudnovsky, D., López, A. and Orlicki, E., The Impact of Foreign Takeovers and FDI on Export and Import Performance in Argentina.

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