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President Rafael Correa, pictured last week, is scheduled to travel to Germany, Spain and Italy this month, providing an opportunity for him to define the trade agenda for his upcoming term. (Photo: Ecuador President's Office)
Monday, April 1, 2013
Perspectives

Ecuador: This Time It’s Real

The outlook dims for Ecuador’s non-oil export markets

 

LATINVEX SPECIAL

Analytica

 

Ecuador’s preferential access to the United States, established in the Andean Trade Preference Act (ATPA), runs out at the end of July. The country may still be meeting cooperation targets within the US drug prohibition policy, but there is no reason to think the US congress will “bother” with another extension in the few weeks that remain. Already, exporters are feeling the pinch as their customers look elsewhere for reliable supplies.

With Bolivia outside of the system but deeply integrated in the Mercosur bloc, and both Colombia and Peru having free trade agreements with the United States, Ecuador is now the sole country in the ATPA. If there is real interest in maintaining Ecuador’s trade preferences, little has emerged from official comments. Even the virtually frozen trade negotiations with the European Union have received a modicum of support they lack in the case of the United States.

President Rafael Correa, who will enjoy another term completely unfettered by democratic checks and balances, attacked international arbitration proceedings, particularly regarding cases involving US oil majors: Occidental Petroleum and Chevron, where Ecuador could eventually be forced to pay several billion dollars in compensation payments.

In the case of Chevron, an arbitration tribunal working according to the United Nations Commission on International Trade Law (UNCITRAL) decided the bilateral investment guarantee treaty with the United States could be applicable, which Correa says implies a retroactive use of that law (the president didn’t complain when Ecuadorian courts allowed a retroactive suit by temporary workers go against brewer Cervecería Nacional). This has led him to ask the legislature to finally get around and void the treaty, which he asked it to do in January 2010, but which had been forgotten for three years.

The timing for this to go ahead is poor if Ecuador wants an ATPA or other trade deal, and, while Ecuador continues to cooperate in enforcing the US-led prohibition of certain narcotics, its cooperation is less clear regarding financial ties to terrorism because of its insistence on dealings with sanctioned Iranian banks.

Even though US ambassador Adam Namm has said bilateral dialogue could resume, he told daily El Universo that this could happen “hopefully this year.” Additionally, Ecuador’s vacuous campaign against the Inter-American Human Rights System will have won it few friends on Capitol Hill. A free trade agreement is still not an option, according to Correa, even though the current benefits have played a major role in starting up new, non-oil export industries like flowers that required capital-intensive investments and predictable market access.

Exporters therefore must look at other possibilities. Products favored under the ATPA regime totaled close to a quarter of non-oil exports to the United States, or around $450 million in 2010 and 2011, each. About half of these entered the United States under the US’ Generalized System of Preferences (GSP) program. Overall, the ATPA covers 835 products, out of which the GSP doesn’t cover 247. Having practically abandoned hopes for an expansion of major trade preferences, exporters hope for the inclusion of products under the GSP, which almost certainly will only be one or two of the goods that the United States has agreed to consider – roses, broccoli, and artichokes. Any inclusion of a product will face a challenge from other members of the World Trade Organization, such as India, which has a track record of doing so. Official sources have suggested Ecuador simply saddle taxpayers with the $24-28 million annual bill Ecuador’s Fedexpor exporters’ association estimates the duties cost. But this too, risks running afoul of WTO rules because it would amount to an export subsidy.

While the impending loss of business looks manageable considering that Ecuador’s economy will likely soon top the $100 billion mark, the long-term impact of a loss of market share in the United States will cause a sizeable opportunity cost, according to Fedexpor estimates. Within three years, lost exports will total a combined $250 million, with combined exports of the currently favored goods dropping to $160 million at the end of that time, compared with possible growth to $292 million, according to the exporters’ data. The loss of reliable market access that long-term trade accords offer will be as noticeable as the lack of clear and reliable policies including investment guarantees in Ecuador, which have led foreign investors to almost entirely bypass the country.

Correa’s trip to Europe this month, where he is scheduled to speak to German Latin America investors during an official visit to Berlin poses an opportunity for him to define the trade agenda for his upcoming term. Ecuadorian exporters face a similar problem there. The EU’s GSP program faces its end there 12 months later than originally planned, in December 2014, only because Ecuador convinced the EU that it wasn’t yet a “high middle-income country” contrary to World Bank data that would have made it ineligible for the preferences,. It would be positive if the Foreign Ministry’s officials were instead given authority to concentrate their efforts on hammering out a commercial agreement that would safeguard the interests of producers, and by extension employees and tax collectors.

Numerous products are in fact exported under most-favored nation clauses, indicating that they are competitive even in the face of competition from countries enjoying freer trade with the United States. But the end of trade preferences will only serve to concentrate the export industry by squeezing out less competitive small producers. That would be a very neo-liberal way to handle exports indeed.

This commentary originally appeared in Ecuador Weekly Report published by Analytica. Republished with permission.

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