17 March 2015 - 07:12 AM
Ecuador Protects Local Economy in Light of Low Oil Prices
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The government of Ecuador recently introduced a series of “safeguard” tariffs on a number of imported goods, as a measure to protect the national economy.

The safeguard tariffs on imported goods implemented by the Ecuadorean government mostly applies to luxury goods

The measures were announced in light of the dramatic drop in the price of oil, which has affected many oil and raw material exporting nations.

Ecuador, like other South American nations such as Venezuela, is an exporter of oil. The sale of this commodity on the international market is not only an important source of revenue but also an important source of hard currency, as the trade of oil on the international market is always done with the U.S. dollar.

With the drop in the price of a barrel since 2014, oil-exporting countries with their own currency have intentionally devalued their currency on world markets. This results in a wide availability of that currency within the country's borders despite less revenue.

Unlike other countries, however, Ecuador does not have its own currency. As a consequence of failed neoliberal policies, the Ecuadorean economy underwent a “dollarization” in 2000, where Ecuador's national currency, the sucre, was fully substituted by the U.S. dollar.

In countries without their own currency, the drop in the price of oil means the availability of hard currency within the national economy becomes more restricted.

Governments that find themselves in this situation have a number of ways of responding, with the measures implemented often a reflection of the administration’s political bent.

Right-wing and neoliberal governments often choose put the load of this issue onto the residents of their countries by raising the prices of essentially goods, such as gasoline.

The government of leftist Ecuadorean President Rafael Correa however, has responded by temporarily implementating of “safeguard” tariffs, ranging from 5 percent to 45 percent, on less than one-third of imported goods. The government has said these tariffs will be in place for 15 months.

"The toolkit that we are using right now has three main objectives: we want to defend jobs, production and the dollarization monetary scheme that Ecuador currently has," said Patricio Rivera, the coordinating minister for political economy in Ecuador.

The government has announced that the tariffs generally impact goods that are also produced domestically. The increase in the price of imported goods is expected to change consumer behavior. If the population spends more on domestically produced products, then more money stays in the country, meaning that there is a reduction in the flight of dollars.

Because these tariffs are a temporary measure, the government is hoping that people put off large expenditures on durable goods that are not produced domestically, such as certain appliances, and instead spend that money on items that are produced locally. In addition, because these tariffs affect more expensive consumer goods, the middle and upper classes are expected to be impacted the most, whereas the effect on lower-income residents is expected to be negligible.

Accordingly, this change in consumer behavior is also expected to benefit Ecuadorean industry.

Presently, Ecuador has a negative balance of trade, or a trade deficit, that is, the monetary value of what it imports exceeds the monetary value of what it exports. These “safeguard” tariffs are also designed to address the trade deficit that has deepened since the drop in the price of oil.

The “safeguard” tariffs affect 2,800 goods, which the government has specified affect mostly luxury goods and deliberately do not apply to basic goods and supplies.

The opposition, in an attempt to score political points, has deliberately tried to mislead the public by calling these tariffs a tax. Tariffs differ from taxes in a number of ways, not the least of which is that that the goal of tariffs is not to increase the government's revenue, rather it is a response to an external pressure.

The private media in Ecuador – often hostile to the government of President Correa – has also misled the public. The Information and Communication Development and Regulatory Council of Ecuador has expressed concern that the coverage by local press has "led to a biased, rather limited, compression of economic decisions taken by the government."

Some elements within the private productive sector of Ecuador have also publicly criticized the decision of the government to implement the “safeguard” tariffs. However, while some domestic producers view it as an opportunity.

“The small and medium businesses in (the province of) Pichincha, and in the country as a whole, have the necessary capacity to supply market niches, that as a result of the safeguards offer an opportunity to place their products on the market,” said Marco Carrion, president of the Pichincha Small Business Chamber of Commerce.

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