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President Rafael Correa's harsh new import rules are leading to increased scarcity. (Photo: Miguel Romero/Presidencia)
Wednesday, March 19, 2014

Ecuador Import Problems Grow

Venezuela-style scarcity creeps into Ecuador economy.





Soap, veterinary cat food, replacement parts for pumps – social networks report incipient scarcity of some imported goods after the Correa administration set harsh new import rules in December. Public officials do respond quickly to such consumer complaints, rushing to unstick shipments delayed at customs because of the new regulations, according to entrepreneurs in the commerce business. This aims to balance the target of reducing expenditures on what president Rafael Correa considers frivolous imports and on goods better produced domestically with the potentially devastating impact on public opinion Cuban and Venezuelan-style scarcity could have in Ecuador.

The heavy-handed approach to Ecuador’s balance of payments issues thus faces challenges that put into question the extremely ambitious target of shaving a combined $6 billion off the import books through 2017.

The 2013 review of foreign trade published by the central bank in February reports a trade deficit of $1.08 billion, more than double the $440.6 million of 2012. The oil export surplus totaled $8.03 billion, a decline of 4 percent from $8.35 billion in 2012. The non-oil import deficit a lower 3.6 percent to $9.11 billion from $8.79 billion. Correa has for years called the balance of payments the main threat to the economy, ordering a currency export tax and the repatriation of overseas bank deposits to stimulate the economy and keep cherished dollars inside Ecuador, all the while downplaying the need to hold dollar reserves in the central bank. The data don’t corroborate the anxiety however: with a gross domestic product of $87.5 billion in 2012 and greater than $90 billion last year, the trade deficits of 0.5 percent and about 1 percent of GDP, respectively, look harmless indeed. Balance of payments data meanwhile
point to a surplus rat her than a deficit for 2013.

Among the measures to reduce imports, the government has opted for a two-tier system: On the one hand, it aims to slash $944 million a year from imports by protecting local industry from competing goods, including, among others, antidumping measures and safeguards, as well as labor standards for imports and higher taxes on raw materials and machinery also produced here. On the other, it has decided to reduce a similar annual amount of imports ($812 million a year) through non-tariff trade barriers in the form of new rules set – or not - by the national bureau of standards (INEN). This assumes however that other countries will fail to react, which isn’t a realistic assessment.

Ecuador imports close to a quarter of the affected products from Asia, 22 percent from the US,
and 20 percent from the Andean Community, a crucial market for value-added Ecuadorian exports. Already, Peru has begun to block Ecuadorian durable goods, including refrigerators. Ambassadors from EU countries, with whom Ecuador wants to swiftly complete a free trade agreement, have also met to discuss joint reactions. This puts a cloud of doubt over the free trade negotiations with the EU that looked promising just a few weeks ago.

The new protectionism risks repeating the historical failure of 20th-century import substitution in Latin America, including Ecuador, although government officials insist that this time, it will be “intelligent,” promising to adopt policies akin to those successful in East Asia.

INEN at least so far has failed to prove up to the self-imposed challenge. Companies have largely managed to win release of containers stuck in customs because of retroactive, hence probably illegal,
application of the new rules. Confusion however reigns as INEN hasn’t shown skill in working out the fine print of different product categories, while customs has adopted an attitude of if in doubt, keep out. Thus, importers count up to 13 steps to be taken before a product may enter thanks to the red tape holding up issuance of obligatory new certificates. Imports of medicines in bottles have often fallen prey to the new attitude. Because they may be consumed and come in bottles, some customs officials have insisted that they are in fact food and thus have run afoul with new rules for food packaging. Except in the cases where the image of the government could suffer if goods become scarce, officials have largely turned a deaf ear to entrepreneurs’ pleas.

While unnecessary with regards to the balance of payments, the move towards protectionism may follow from the president’s disappointment with industrialization, which has receded as a share of GDP since 2006. Correa firmly believes in the wisdom of sheltering infant industries. He has railed against imports such as coconut water, banana purée, or what bureaucrats wrongly translated as “corn husks”
(hojas de maíz), in reality cornflakes. Local industry could conceivably produce these goods in quantities to fully supply the domestic market.

But these imports, too, fail to have any macroeconomic relevance. It’s also hardly clear that allowing companies to import these products will slow down Ecuador's general industrial development. The opposite is more likely, given the cost to efficiency for local producers that forcing them to use locally
produced wares will entail. Some companies likely require imports of very basic products like beef and potatoes to meet certain quality and quantity demands from their markets. Contracts signed under the new policy may spur local production, but have come under strong political pressure.

Quality standards may look more palatable from a public relations standpoint than the controls that have so obviously failed in Venezuela and become public knowledge worldwide. The setting of quality standards, of course, belongs to the regulatory prerogative of the state. The current, accelerated change fails to create the institutional framework with the required care however. Ironically, officials should understand that imports do make perfect sense, since the roughly $6 billion annual foreign purchases made by the government remain unaffected by the new restrictive rules. In the longer run, if the government’s mercantilism survives, and the hoped for increase in domestic factories comes about, the new policies risk saddling the economy with a herd of white elephants.

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

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