[R-G] Meltdown response: Ecuador erects trade barriers

[Anthony Fenton]

Meltdown response: Ecuador erects trade barriers

By JEANNETH VALDIVIESO and FRANK BAJAK – 1 day ago

QUITO, Ecuador (AP) — Posters plastered on the walls of supermarket  
chains across this Andean nation proudly declare "Ecuador First." But  
for many shoppers, buying domestic is no longer really a matter of  
choice.

In what may be the world's most protectionist response to the global  
economic crisis, Ecuador's leftist government has imposed import  
restrictions on everything from Peruvian shampoo to Chilean grapes and  
U.S.-made running shoes.

President Rafael Correa says he had to take drastic action to prevent  
the collapse of an oil-dependent economy shocked by plunging petroleum  
prices, flagging remittances from workers abroad and the drying-up of  
foreign investment.

Ecuador is particularly vulnerable because it is one of only a few  
countries in the world — El Salvador and Panama are the next biggest —  
that have adopted the U.S. dollar as their currencies. It doesn't  
print its own money, using currency printed in the United States. A  
severe trade deficit could thus drain Ecuador of dollars, potentially  
causing economic collapse.

It's a possibility that also worries CIA Director Leon Panetta. On  
Tuesday, he listed Ecuador — along with Argentina and Venezuela — as  
countries in dire economic straits that could be destabilized by the  
worldwide economic crisis.

"We can't continue to throw away the money from our oil, the money of  
our migrants, to buy imported perfumes and imported liquors," Correa  
said as he explained the import restrictions.

Many imports suddenly became out of reach for Ecuadorean shoppers when  
the measures took effect Jan. 22. Countless jobs also are at stake, in  
Ecuador and the Andean neighbors that account for nearly half its  
imports.

"I think the country painted itself into a corner and I don't think  
there was anything else that could be done," said Manuel Chiriboga,  
director of Quito's nonpartisan Foreign Commerce Observatory.

The barriers affect 627 types of goods and take one of three forms:  
import volume decreases up to 35 percent; import duty increases to  
between 30-35 percent; or surcharges such as $12 per kilogram for  
textiles and $10 per pair for shoes.

These measures are as severe as any of the protectionist moves  
catalogued by the World Trade Organization, and no other country has  
tougher import restrictions, said Gary Hufbauer of the Peterson  
Institute for International Economics in Washington, D.C.

Oil sales sales account for 40 percent of Ecuador's budget, but Correa  
isn't just concerned about declining petroleum revenues. Exports of  
bananas, flowers, shrimp and other products also are down.

Correa, a U.S.-trained economist, said the restrictions should keep  
$1.46 billion from flowing out of Ecuador's $50 billion economy, the  
biggest outside the United States to use the dollar as its currency.

While Ecuador's economy is small in global terms, free trade disciples  
fear a general spread of similar protectionist measures will seize up  
the global economy just when it needs rebooting.

Already, the International Monetary Fund predicts global trade will  
decline by 2.8 percent this year — the first contraction in almost 30  
years — as country after country makes protectionist moves:

_ The United States and Russia propping up troubled auto industries

_ India imposing a six-month ban on Chinese toys and 5 percent tariffs  
on some iron and steel products.

_ The stimulus package signed by President Barack Obama last month,  
favoring American steel, iron and manufactured goods for government  
projects.

_ The European Commission reintroducing export subsidies for butter,  
cheese and milk powder

_ China increasing tax rebates for exporters.

"In my view, stronger measures are needed to keep smoldering  
protectionism from breaking into a blaze," Hufbauer said.

Correa predicts only a "small impact" on his 14 million citizens. "The  
poor don't consume perfumes, liquor and chocolates," he said.

But Ecuador's automotive sector is expected to suffer greatly, since  
most vehicles and parts are imported. Auto industry association  
president Diego Luna expects this year's vehicle sales to plunge 38  
percent to 70,000 because of the new import quotas, making layoffs  
likely. "I don't know that companies can keep this level of  
employees," he said.

Small businesses are affected as well in a country whose official  
unemployment rate is 7.9 percent.

"We're going to have to lay off three employees," said Lenin Salazar,  
who employs 10 in a business that imports TV and video camera and  
recorder parts. "It strikes me as very strange because no factory  
(domestically) makes these types of parts."

Some other nations are seeking to borrow their way out of crisis, but  
Correa may have closed that avenue by defaulting on a third of  
Ecuador's $10.3 billion foreign debt. He claimed the bond issues were  
negotiated by crooked former officials and foreign bankers.

Correa says he prefers to dedicate government funds to anti-poverty  
programs — spending that includes $30 monthly stipends for single  
mothers. Ecuador's new constitution also burdens the treasury by  
promising free education for all through college.

Such spending was easier when oil prices climbed well above $100 a  
barrel. Ecuador's oil revenues jumped 222 percent last year from 2007,  
while imports increased by 26.7 percent.

Now Correa forecasts a $3.5 billion trade deficit for 2009 with the  
plunge in oil prices and and remittances, the twin pillars of  
Ecuador's economy. Money sent home by Ecuadoreans abroad dropped to  
$2.8 billion last year from $3 billion in 2007 — a trend the central  
bank expects to continue.

Some economists believe Correa will need to ditch the U.S. dollar —  
which was adopted in 2000 after the near-collapse of Ecuador's banks —  
and give his people their own currency again, or keep the dollar as a  
second currency, as many nations in the region do.

Otherwise, they warn of shortages, smuggling and a dangerous increase  
in the black-market economy.

"Inevitably, contraband will be on the rise. Legal commerce will cede  
space to the informal," said economist Walter Spurrier of the  
independent Spurrier Group.

For now, many Ecuadoreans lament having to buy inferior domestic brands.

"The increases for (imported) detergents are brutal," Paola Padilla, a  
26-year-old programmer, said as she stared at foreign-made fabric  
softeners in one Quito supermarket. Her brand had jumped a dollar to  
$3.60. "I'll see about buying some next week."

Frank Bajak reported from Bogota, Colombia. Also contributing were AP  
writers Joe McDonald in Beijing, Bradley Klapper in Geneva and Aiofe  
White in Brussels.

Copyright © 2009 The Associated Press. All rights reserved.