The Euro Economy

Ecuador: Bananas over trade

Bananas over trade

International trade talks are usually so jargon-filled that it can make your head spin and very few can actually make sense over what this gobbledygook entails for a country’s economy. It’s therefore easy to get lost in translation when you read about TRIPs and TRIMs during TPP and TTIP negotiations. And when ordinary people don’t understand how such an agreement will impact them, they tend to take matters into their own hands and head for the streets in protest.

Take Ecuador for example. Ten years ago Ecuadorians vented their anger in public squares over a proposed free trade agreement with the United States, because of the perceived belief that their country won’t be able to compete with US exports. The claim proved to be wrong and after intense negotiations, the agreement was signed. Exports are now up 335% from 2000 and Ecuador enjoys a year-on-year bilateral trade surplus of $3.6 billion with its North American partner. Roses for instance, have become a highly prized ware with over two-thirds of Quito’s indigenous production ending up in American markets.

Now a new deal is on the horizon in the form of a tailored trade agreement with the European Union that could bring a new twist to Ecuador’s already dynamic economy. Officials met in January for the first round of talks and pen proposals on issues such as agricultural and industrial goods, services and public-sector purchases. According to Rafael Correa, Ecuador’s firebrand president, “there are practically no disagreements”, but that some details still need to be hashed out before he will sign the deal. Analysts point out that difficult chapters to close will be those referring to intellectual property rights and patents, access for European corporations to Ecuador’s market and the chemical industry.

Bilateral trade is already considerable and would go up considerably. Ecuador sends about 30% of its non-oil exports to the EU, mainly to Spain, Holland, Germany and Belgium, totalling $2.45 billion. The major staples are bananas, shrimp, cocoa, tuna and (of course) roses.

Signing this agreement is now more important than ever. Bilateral trade is presently regulated under yet another acronym, called the GSP+ regime, which offers preferential tariffs for a wide array of goods. One of Ecuador’s most sought after exports is the banana, that has a lower import tariff than would otherwise be applied. Unfortunately for the country, this system is set to expire on the 1st of January 2015, following the Union’s overhauling of the GSP+ system. What this means is that Ecuadorian products will lose competitiveness on European markets, being forced to pay supplementary tariffs of 2% to 40% to gain access. Hence it is vital that Ecuador negotiates a replacement for this regime in order to preserve its advantages.

The history of bilateral relations with the EU is a bit more convoluted than it seems at first. Taking a walk down memory lane, we will see that in 2007 the Andean Community of Nations, of which Ecuador is a member, started regional bloc talks for a comprehensive free trade agreement with the European Union. However, they broke down in 2008 in the face of disagreements over the major elements of the deal. The agreement was buried, and Peru and Columbia went on to sign bilateral FTAs with the Union, leaving the other countries behind.

Ecuador was reluctant at first to engage in a similar direction, fearful that a full-blown FTA would spell “suicide” for the Andean economy. Ecuador has no independent monetary policy, having adopted in 2000 the US dollar as its currency in the wake of a disastrous banking crisis. It is for this reason that the country is not seeking an FTA-type agreement, but a more limited trade deal that will give it sufficient leeway in protecting its own economy.

Correa, an economist by profession, is known for his left reformist tendencies and has been a staunch critic of free trade. He has been quoted saying that, “We trust in free trade, but in trade for mutual benefit; bad trade can break a country”. It can be expected that the final form of the agreement will be very cautious in managing the potential negative impact that SMEs could incur as a result. On the up side, the country has the fastest growing economy in the region, which would generate an additional $327 million in the first three years after the entrance into force of the agreement. This will have real effects for the regular citizen, creating jobs and increasing consumer purchasing power.

The morale of the story is that even if free, unrestricted trade may not be as successful a recipe for some countries as is for others, progressive liberalization can have transformative effects. As the FTA with the US has shown, all those obscure acronyms, correctly understood and negotiated, have translated into better living conditions for both consumers and producers alike. It’s fair therefore to go a bit bananas when it comes to trade. As long as its for the right reasons.

 

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