In January 2002, after 3 years of recession, a prolonged bank run, and a sovereign debt default, Argentina abandoned the quasi-currency board system ("convertibility") which had pegged the peso to the dollar at a one to one rate for over 10 years. While convertibility had brought the country macroeconomic and price stability, and provided the framework for a broad-based deregulation, privatization, and market liberalization in the 1990s, it had proved unable to withstand the persistent fiscal deficits. The Mexican "Tequila" crisis of 1995, the East Asian crisis of 1997, the Russian default of 1998, and the Brazilian devaluation of 1999 combined to raise the cost of external borrowing and make Argentine exports and production uncompetitive in world markets. Meanwhile, the national and provincial governments continued to run fiscal deficits even in boom years, and the debt service burden eventually became unsustainable.

While most observers recognized by late 2001 that a devaluation and default had become almost inevitable, the manner in which the devaluation was implemented has significantly increased the damage done to the economy. Strict limitations on cash withdrawals from bank accounts (the "corralito") imposed in December 2001 after a prolonged bank run were followed in January 2002 by the freezing of almost all dollar-denominated bank accounts and their conversion to pesos at an artificial rate of 1.4 pesos to the dollar. Subsequent floating of the peso in February 2002 increased depositors' sense of expropriation. Meanwhile, almost all dollar-denominated loans within Argentina were converted to pesos at 1 to 1. This "asymmetric pesification" has destroyed banks' balance sheets as well as their reputations. The banking system, once one of the strongest in Latin America, has been hollowed out. The number of banks and the scale of banking operations is shrinking, with most domestic banking now limited to transactional operations.

GDP fell by 20% between 1999 and 2002, but recovery began in late 2002. GDP is expected to grow over 7% in 2003, with inflation staying low at 3%. Exports rose 17% in the first seven months of 2003 thanks to strong prices for agricultural commodities. Imports rose 41% in the first seven months after declining 56% in 2002. The official unemployment rate dropped below 16% in late 2003.

Foreign Trade
In 2002,, foreign trade equaled about 35% of GDP--up from 11% in 1990--and plays an increasingly important role in Argentina's economic development. Exports represented about 26% of GDP in 2002, up from 10% in 2001. Argentina merchandise trade surplus of $16.9 billion in 2002.

The United States recorded trade surpluses with Argentina every year from 1993-2001, as Argentina's firms increased purchases of capital goods during that period. This trend reflects the Argentine Government's policy of encouraging modernization and improved competitiveness of industry through relatively lower tariffs on capital goods. However, Argentina's exports to the U.S. rose to $2.9 billion in 2002, while imports fell to $1.8 billion, leading Argentina to record a $1.1 billion trade surplus. The U.S. took 11.3% of Argentina's exports in 2002, and provided 20.1% of its imports.

Although Argentina's trade patterns may be affected by the factors outlined above, its major export markets are likely to remain MERCOSUR countries, NAFTA countries, and the European Union. These same areas are likely to remain the principal sources of Argentina's imports as well.

MERCOSUR Trade Pact
MERCOSUR, the customs union that includes Argentina, Brazil, Paraguay, and Uruguay, remains the cornerstone of Argentina's international trade policy. Close cooperation between Brazil and Argentina--historic competitors--is the key to the integration process of MERCOSUR, which includes political and military elements in addition to a customs union. Chile and Bolivia have become associate members. MERCOSUR members are active participants in the negotiation of the Free Trade Area of the Americas (FTAA). MERCOSUR also continues to pursue an active program of trade negotiations with other countries and regional groups including Mexico and the European Union.

Argentina adheres to most treaties and international agreements on intellectual property. It is a member of the World Intellectual Property Organization (WIPO) and the World Trade Organization (WTO). The Argentine Congress ratified the Uruguay Round agreements, including the provisions on intellectual property, as Law 24425 on January 5, 1995. However, extension of adequate patent protection to pharmaceuticals has been a highly contentious bilateral issue. In May 1997, the U.S. suspended 50% of Argentina's generalized system of preferences (GSP) benefits because of its unsatisfactory pharmaceutical patent law. In November 2000, after years of protracted debate, a new patent law took effect, and a number of pharmaceutical patents were issued. This law improved earlier Argentine patent legislation but provides less protection than that called for in the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

In April 2002, negotiations between the Governments of the United States and Argentina clarified aspects of the latter's intellectual property system, such as provisions related to the patentability of microorganisms and the import restriction regime. In addition, the Government of Argentina agreed to amend its patent law so as to provide protection for products obtained from a process patent and to ensure that preliminary injunctions are available in intellectual property court proceedings, among other steps. Congress is expected to pass the outstanding amendment by the end of 2003. Finally, on the outstanding issues that remain, including data protection, the U.S. Government retains its right to seek resolution under the WTO dispute settlement mechanism. In return, the U.S. Government is committed to considering all Argentine requests to expand market access for Argentine products as soon as U.S. legislation reauthorizing trade preferences under the GSP is enacted.

Investment
U.S. investment is concentrated in financial services, telecommunications, energy, petrochemicals, food processing, and motor vehicle manufacturing. However, the economic crisis and recent government decisions have clouded the country's investment climate, and many U.S. firms have substantially written down the value of their Argentine investments. Other major sources of investment include Spain, Chile, Italy, France, Canada, and Japan. Several bilateral agreements generated significant U.S. private investment during the 1990s. Argentina has an Overseas Private Investment Corporation (OPIC) agreement and an active program with the U.S. Export-Import Bank. Under the 1994 U.S.-Argentina Bilateral Investment Treaty, U.S. investors enjoy national treatment in all sectors except shipbuilding, fishing, nuclear power generation, and uranium production. The treaty allows for international arbitration of investment disputes, and some U.S. investors are currently pursuing arbitration claims against the Government of Argentina.