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Argentine 936 faces phaseout threat
The San Juan Star / May 27, 1996

By Larry Luxner

USHUAIA, Argentina -- First-time visitors to the world's southernmost city expect to see penguins and sea wolves frolicking against a backdrop of snow-capped mountains. They're surprised when instead, they discover row after row of factories turning out Philco TV sets, Grundig car stereos and Aurora washing machines.

The reason behind this facade of prosperity is simple: Law 19640, an aging tax incentive program aimed at spurring investment in Ushuaia -- capital of the chilly island province of Tierra del Fuego. Law 19640 is Argentina's equivalent of Puerto Rico's Section 936, and for many years, it kept the local economy afloat, even prosperous.

Yet, like 936, Law 19640 is now on the verge of being phased out, and Ushuaia (population 40,000) is quickly learning that it can't survive on tax loopholes alone. Experts warn that the isolated town at South America's southern tip is living on borrowed time. Even though the incentives have succeeded in bringing factories and jobs to Ushuaia, Law 19640 is quickly being made irrelevant by Mercosur, a new customs union that links the economies of Argentina, Brazil, Paraguay and Uruguay into a powerful trading bloc.

With Mercosur in place, Argentines can now buy TV sets made in Brazil for about half the price of a television manufactured in Ushuaia. As a result, several factories have gone belly-up in recent months, putting hundreds of workers out on the street.

Things came to a head last year, when violent protests broke out in front of Ushuaia's city hall after the bankrupt Continental Fueguino electronics plant laid off all its employees without notice. One onlooker, 26-year-old Victor Choque, was killed and more than 150 people were injured, forcing the federal government in Buenos Aires to fly down riot police to quell the unrest.

"We are demanding the resignation of the governor and police chief, trial and punishment of those who committed the repression, and payment to the workers of Continental," said Marcelo Carlos Sosa, secretary-general of Ushuaia's Unión de Obreros Metallurgica, which organized the protest.

Another sympathizer, Carlos Sabatini, accuses the local police of repression.

"The employees were guarding what little was left of the factory," he said. "They just wanted to get paid what they were owed. They were tired of hearing excuses."

Even if Continental's workers get the compensation they're demanding, Ushuaia's problems aren't likely to go away. If anything, they'll get worse as more factories -- unable to compete against imports -- close their doors forever.

"The [assembly] industry is disappearing because it doesn't make sense anymore," says Felix Zumelzu, executive director of the American Chamber of Commerce in Buenos Aires. "It was a completely artificial situation. Before, we had very high import barriers, and these guys could bring in parts tax-free, put TVs together and sell them here. With Mercosur, there's going to be free zones, but only for sending merchandise outside the four countries."

On a globe, Ushuaia is so far south you can hardly find it. Fifty-five degrees south of the equator, the pioneer town is closer to the South Pole (2,480 miles) than to Argentina's northern border with Bolivia (2,540 miles).

With its howling winds and freezing winters, it's no wonder that for much of its history, Ushuaia has always been a backwater. Getting there is still an adventure -- it's a six-hour flight from Buenos Aires, and a round-trip ticket costs $504. A museum documenting the town's history is appropriately named "Museo del Fin del Mundo."

In the 24 years since its enactment, however, Law 19640 has boosted Ushuaia's population more than 10-fold. Under the law, companies that manufacture TV sets, VCRs, car stereos and so-called "white goods" -- washing machines, refrigerators and other appliances -- are exempted from paying federal taxes on their Ushuaia operations. They also pay a far lower import tax rate on raw materials and electronic components than do their counterparts elsewhere in Argentina. In addition, all residents of Ushuaia are exempt from national income tax.

The law is remarkably similar to Puerto Rico's 936, an anti-poverty measure that gives generous tax breaks to companies establishing factories on the island. Both laws were passed to give special preferences to territories (before Tierra del Fuego became a province three years ago, it had the status of territorio nacional). And both laws were responsible for bringing factories and jobs to an area that -- for transportation and other reasons -- would otherwise be uncompetitive as a manufacturing site.

But unlike Puerto Rico, the motives here were different. In Ushuaia's case, the idea was to attract native Argentines to the remote territory and to strengthen Argentine claims on the nearby Falkland Islands and about 400,000 square miles of Antarctica that the country claims as well.

Today, thanks to Law 19640, about 2,000 of Ushuaia's 40,000 residents work in factories lining Ushuaia's busy port along the Beagle Channel. The largest is Bencer S.A., a subsidiary of the Buenos Aires-based Grupo Aurora-Grundig, where 800 assembly-line workers produce color TVs, VCRs and car radios from kits. Other companies with factories here include Noblex, Philco and Sanyo.

Downtown, Ushuaia's Calle San Martín is lined with duty-free shops selling Christian Dior perfume, Roberta di Camerino cosmetics, imported liquor and Argentine leather handbags at discounted prices. At a convenience store across from the Quality Inn Albatros, a pack of Marlboro costs 60 cents, compared to $1.50 in Buenos Aires -- a six-hour flight to the north.

Yet nearly everything else is prohibitively expensive, even by Argentine standards. Factory workers receive twice as much as their counterparts in Buenos Aires, but the cost of living is three times as high, according to Carlos Manfredotti, a provincial politician and former mayor of Ushuaia. At the city's municipal port, a Coke and cheese-and-tomato sandwich costs $7.50 -- and that's the cheapest restaurant food in town.

Carlos Mariño, Tierra del Fuego's minister of government, says even though Law 19640 won't be abolished until 2003, its relative advantages have declined to the point where the law is practically meaningless.

"I can have a great factory and a great law," he says, "but if nobody's buying, it doesn't do any good."

Adds Roberto Marcial Murcia, Tierra del Fuego's subsecretary of economy: "Up until seven years ago, Argentina was totally regulated in its imports and exports, and Tierra del Fuego was completely deregulated. Now, everything's reversed. Argentina's economy is completely open."

Daniel Aguero, administrator of the Philco plant, says his 600 workers turn out 30,000 TV sets a month; half are for the Argentine market, the other half are shipped to Brazil. Aguero concedes that Law 19640 is the only reason his company came to Ushuaia in 1982 and continues to manufacture here. How long it will remain in business, Aguero wouldn't say. "Everything is up in the air," he sighed. "In my opinion, I don't think you can live all your life off subsidies, but you can't suddenly stop it. At least if the cuts are programmed, people will know what to expect."

But one Philco factory employee, Miguel Aguirre, says companies like his are using Law 19640 as leverage with the government in order to force more tax exemptions for their products -- and in that, there may be a parallel with Section 936.

"Every time the government threatens to reduce benefits, they threaten to lay off workers," says Aguirre, 32. "It's the one thing they can use to keep what they have left."

Union activist Sosa agrees, pointing out that since 1993 -- when Ushuaia produced nearly two million TV sets, its peak year -- more than 25% of the town's workers have been laid off.

According to Marcial, provincial lawmakers are now pushing Decree 479, an extension of Law 19640 that would permit companies to manufacture new products such as cellular telephones and PC peripherals, while receiving the same preferential tax treatment.

Yet officials know that Ushuaia's ultimate salvation lies not in manufacturing, but tourism. City fathers are doing their best to publicize the wild beauty of Tierra del Fuego National Park and the town's proximity to Antarctica, a relatively short 800 miles to the south. Other attractions include the glaciers around Calafate and the newly inaugurated trensito, a refurbished choo-choo train that carriers visitors through inaccessible areas of the national park.

Later this year, Ushuaia also expects to have a new airport terminal with a 9,240-foot runway, large enough to accommodate refueling of Boeing 747s flying the southern polar route between Sydney, Australia, and Buenos Aires. That could boost the town's tourism income to $40 million by 2000 and increase visitor arrivals from the current 48,000 to more than 100,000.

"In another year, we'll have the terminal ready," says Mariño. "We're predicting an explosion of tourism."

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