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Ecuador Running Short of Dollars: More Protectionism, Here We Come

By: Alexandra Veloz - @Alex_Veloz_V - Jan 20, 2014, 11:27 am

Español On December 4, 2013, Ecuador’s Foreign Trade Committee (COMEX) issued Resolution 116, which established new quality control measures for the importation of particular products into the country. The resolution covers 293 variants of items, including cosmetics, toys, toothpaste, meat, cereals, among others.

Compliance with these new requirements must be affirmed by quality control agents from the nation where the products originate. Further, for these new standards to then be accepted by Ecuador, the verifying agent must be recognized with the National Institute of Standards (INEN).

Although the focus of the recent requirements pretends to be for quality enhancement, the measures are in fact designed primarily to reduce Ecuador’s high dependency on imports. The intent is to mitigate the at least US$800 million the country currently sends outside its borders, a statistic the government announced during the first International Summit for Sustainable Strategies and Production Change Matrices, which took place in Guayaquil last week.

Richard Espinosa — minister of production, employment, and competitiveness — stressed during the summit that the implementation of strategies for import substitution is one of the centerpieces of President Rafael Correa’s project. Similar to other government officials, Espinosa gave his support for the production matrix change in Ecuador.

As a dollarized country, Ecuador doesn’t have a monetary policy for printing bills or altering the quantity of money in circulation. Regardless, the oil boom of the last 10 years has allowed a significant quantity of dollars to enter the country. Gaps in industrial development and technology, though, have required Ecuador to import many varieties of foreign goods. Consequently, this has created an economic imbalance, since much of the money that comes into the country also quickly exits and is not invested or circulated in Ecuador.

In the month since Resolution 116 took effect, as a purported solution, businesses have already begun to feel both the advantages and disadvantages of this interventionist measure.

Toni Industries, one of the most important dairy businesses in the country, has already made known the challenges it has experienced. For example, cornflakes, which the company uses as a compliment to one of its products, were retained in customs for not having a certificate issued by an entity supported by the INEN.

This same problem has also affected other businesses, and several businessmen sent a letter to the Ministry of Industry and Productivity last week. They noted, among other things, “the lack of foresight in the availability, both in Ecuador and in other countries, of laboratories or properly validated approval agents by the National Accreditation Body.”        

Other companies, like Pica — one of the largest companies in the plastic industry — have sought to take advantage of the policy. The reduction in importation of certain goods has impeded their competition and allowed them to increase their own production, supplanting foreign industries while staying within the guidelines of the new regulations.

Currency in Ecuador has been running out — that much is true — and the importation restrictions as a means to slow the outflow of capital might bring the expected result. However, both in the short and medium term, consumers will pay inflated prices resulting from local industries ill-prepared to meet the needs of the domestic market.

It is unfortunate and unnecessary that such bans are used by the government to encourage the development of national industry. Instead, Correa should seek to create incentives for investment, like fiscal benefits or legal certainty, which would allow the entry of new competitors into the Ecuadorian market.

The solution for the country to consume what it produces will not be found in increasing import barriers, but in the competitiveness of the products that are offered: competitiveness is not achieved through protectionism.

Alexandra Veloz Alexandra Veloz

Alexandra Veloz is a lawyer in Quito, Ecuador. She has professional experience in corporate legal services. Follow her on twitter @Alex_Veloz_V.