Uruguay is a tiny nation on the Atlantic sandwiched between a behemoth to the north (Brazil), and Argentina to the south.

Argentina has twelve times the population of Uruguay, sitting on a land mass fifteen times larger. And so, the decision  last Monday by the government of Cristina Fernández in Argentina to raise taxes on most tourism outside the country will have a profound impact on Uruguay’s much smaller economy.

Uruguay’s Flag

The tax includes  flights, buses, travel agency packages, and even credit card purchases outside the country. Ostensibly, the tax has been put in place to foment tourism within Argentina, and therefore help prop up Argentina’s struggling economy, which has been so seriously damaged by the incessant populist policies of Cristina Fernández. The tax comes after a 7% decrease in tourism last year in Uruguay, which was partially due to Argentina’s inflation rate, which runs around 25% according to independent estimates (as opposed to the official inflation rate of approximately 11%). An inflation rate so high would make it difficult for struggling Argentinians to save funds for vacations.

With a population of just over three million people, Uruguay saw an estimated 2.85 million visitors last year. Most of those visitors come from neighboring Brazil, and Argentina, with Argentinians making up 60% of those visitors.

Fortunately for Uruguay its economy is diversified enough that tourism only accounts for 6% of Gross National Product (GNP), but the country is doing its best to counter these damaging taxes from its neighbor to the south, through a number of counter measures including rebates on VAT taxes for tourists, and reductions in other areas such as gas vouchers, or discounts on wireless service for tourists to help offset costs imposed by the Argentine government on its citizens.

Uruguay’s Vice President, Danilo Astori, said that economic and commercial relations between the two countries have “reached their worst moment in a long time.”