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Why does Ecuador say “NO” to FTA?

Ecuador negotiations with the EU are paralysed since they could not reach an agreement, from the last time in 2009 in which they had an argue about the commercialization of bananas. The chief executive of the negotiation with the EU, the Ambassador Mentor Villagómez, said that it was more of a date for evaluation about the positions of each of the parties to see if it was possible to continue or end with the negotiations.

Ecuador’s President said “Ecuador looks for a smart trade” in its exchanges with the EU, as well with the US. In comparison with its neighbor countries, said the President, “Colombia and Peru had nothing to lose in the negotiation of the EU FTA, since thay had already gave everything in the FTA with the United States”. Correa believes that signing a FTA will damage Ecuador’s domestic employment.

In additon, Rafael Correa emphasized “Has the US signed a FTA with Europe? No, the developed countries are the one that subscribe with the developing countries to guarantee the free access of its merchandises, since they know they are going to win with that”. Also, it is consider that for Ecuador the possibility of a FTA with the EU is much more difficult to visualize due to the fact that Peru and Colombia could already have preferential access to such market.

Wether our neighbor have or not preferential access to such market, what should be more important to consider is the signing of an agreement of commercialization with the EU since it could hurt Ecuador’s export industries such as: banano, flowers, shrimps, tuna, chocolate,etc. In view that the European Union is one of our major markets, to not say the first, according to the Director of the Ecuadorian Export Federation.



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What about AS[E]ANs?

Have you wondered which is the most famous and active trading bloc in Asia? … It is the ASEAN

The Association of Southeast Asian Nations, or ASEAN, was established on 8 August 1967 in Bangkok, Thailand, with the signing of the ASEAN Declarartion (Bangkok Declaration) by the Founding Fathers of ASEAN, namely Indonesia, Malaysia, Philippines, Singapore and Thailand.

As set out in the ASEAN Declaration, the aims and purposes of ASEAN are:

  1. To accelerate the economic growth, social progress and cultural development in the region through joint endeavours in the spirit of equality and partnership in order to strengthen the foundation for a prosperous and peaceful community of Southeast Asian Nations;
  2. To promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries of the region and adherence to the principles of the United Nations Charter;
  3. To promote active collaboration and mutual assistance on matters of common interest in the economic, social, cultural, technical, scientific and administrative fields;
  4. To provide assistance to each other in the form of training and research facilities in the educational, professional, technical and administrative spheres;
  5. To collaborate more effectively for the greater utilisation of their agriculture and industries, the expansion of their trade, including the study of the problems of international commodity trade, the improvement of their transportation and communications facilities and the raising of the living standards of their peoples;
  6. To promote Southeast Asian studies; and
  7. To maintain close and beneficial cooperation with existing international and regional organisations with similar aims and purposes, and explore all avenues for even closer cooperation among themselves.

Tariffs in ASEAN

Being part of an FTA, means that there are still tariffs imposed, but they are gradually reduced, as rates to 20% have been decremented within a time frame of 5 years to 8 years from 1 January 1993, subject to a programme of reduction decided by each member Member State. As well, each ASEAN member may impose tariffs on goods entering from outside ASEAN based on its national schedules. However, for goods originating within ASEAN, members are to apply a tariff rate of 0 to 5 percent (the more recent members of Cambodia, Laos, Myanmar and Vietnam, aka CMLV countries, were given additional time to implement the reduced tariff rates). This is known as the Common Effective Preferential Tariff (CEPT) scheme.

ASEAN members have the option of excluding products from the CEPT in three cases: 1.) Temporary exclusions; 2.) Sensitive agricultural products; 3.) General exceptions. Temporary exclusions refer to products for which tariffs will ultimately be lowered to 0-5%, but which are being protected temporarily by a delay in tariff reductions. General exceptions refer to products which an ASEAN member deems necessary for the protection of national security, public morals, the protection of human, animal or plant life and health, and protection of articles of artistic, historic, or archaeological value. Members have agreed to enact zero tariff rates on virtually all imports by 2010 for the original signatories, and 2015 for the CMLV countries.

ASEAN Export and Import Activity

  • Brunei

Export commodities: crude oil, natural gas, garments

Import commodities: machinery and transport equipment, manufactured goods, food chemicals

  • Cambodia

Export commodities: clothing, timber, rubber, rice, fish, tobacco, footwear

Import commodities: petroleum products, cigarettes, gold, construction materials, machinery, motor vehicles, pharmaceutical products

  • Indonesia

Export commodities: oil and gas, electrical appliances, plywood, textiles

Import commodities: machinery and equipment, chemicals, fuels, foodstuffs

  • Laos

Export commodities: Wood products, coffee, electricity, tin, copper, gold

Import commodities: machinery and equipment, vehicles, fuel, consumer goods

  • Malaysia

Export commodities: electronic equipment, petroleum and liquified natural gas, wood and wood products, palm oil, rubber, textiles, chemicals

Import commodities: electronics, machinery, petroleum products, plastics, vehicles, iron and steel products, chemicals

  • Myanmar

Export commodities: natural gas, wood products, pulses and beans, fish, rice, clothing, jade and gams

Import commodities: fabrics, petroleum products, crude oil, fertilizer, plastic, machinery, transport equipment, cement and construction materials, food products and edible oil

  • Philippines

Export commodities: semiconductors and electronic products, transport equipment, garments, copper products, petroleum products, coconut oil, fruits

Import commodities: electronic products, mineral fuels, machinery and transport equipment, iron and steel, textile fabrics, grains, chemicals, plastic

  • Singapore

Export commodities: consumer electronics, information technology products, petroleum products, pharmaceutical, chemicals

Imports: crude oil, electronic components, industrial machinery, motor vehicles, food and beverages, iron and steel

  • Thailand

 Exports: textiles and footwear, fishery products, rice, rubber, jewelry, automobiles, computers, electrical appliances

Import commodities: machinery and transportation equipment, basic manufactures, mineral fuels, chemicals, raw materials

  • Viet Nam

Export commodities: crude oil, textiles and garment, rice, coffee, rubber

Import commodities: petroleum products, steel, fertilizer, electronics, machinery and equipment, automobiles


Categories: Trading Blocs | 2 Comments

Trade: Creation & Diversion

Trade Creation

  • Takes place when domestic consumers in member countries import more goods from other members as import prices fall due to a removal of tariff and quotas; production will shift to lower cost producer.
  • Increased income resulting from specialization & benefits of scale can further this by creating increased demand for imports from non-member countries.
  • Initial effects are the increase in consumer welfare resulting from more goods and lower prices, while the long-run effects include enhance competitive advantage and increasing specialization.

Trade creation

In the upper image, there is a movement from high-cost relatively inefficient French producers to lower-cost more efficient Bristih producers.

Trade Diversion

  • When a customs union is created and tariffs differentials between members and non-member result in trade flows being diverted toward higher cost producers.
  • In other words, lower cost imports from outside the union have been replaced by high cost imports from within the union.

Trade Diversion

In the upper image, once the UK joined the EU, it had to place tariffs on the textiles that it used to import from Thailand at lower prices, since Thailand has the comparative advantage.

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The World Trade Organization

The WTO is an international entity establieshed on January 1st 1995, that sets the rules for global trading and resolves disputes between its member countries, it now counts with 149 members.

Functions of the WTO:

  • To administer WTO trade agreements
  • To be a forum for trade organizations
  • To handle trade disputes among members countries
  • To monitor national trade policies
  • To provide technical assitance and training for developing countries
  • To cooperate with other international organizations

The last round of negotiation is the Doha round. The programme called the Doha Development Agenda, covers many areas such as: agricultural tariffs, non-agricultural tariffs, trade and environment, anti-dumping, subsidies, competition policy, transparency in government procurement, and intellectual property. On July 2006, this round was suspended since the members could not reach an agreement based on two key concerns: First, he EU and the US are being urged to reduce their agricultural subsidies to improve market acces for developing countries’ exports. Second, the more developed countries want the larger developing countries such as Brazil and India to lower their barriers to imports of manufactured goods.

Is the WTO a success or a failure?

There are several benefits that member countries gain from this organization:

  • The system helps to promote peace in the world
  • Freer trade cuts the cost of living for the majority of consumers
  • Trade raises income and stimulates economic growth
  • Freer trade provides more choice of products and better quality products
  • The system encourages good government
  • Disputes are now handled constructively at forums
  • Rules make life easier for everyone. Small countries have an equal say and gain from “collective bargaining” with the larger countries.

However, there is some criticism to consider:

  • In reality, many important decisions get made in informal negotiations between small groups of the wealthier nations. Hence, many of the WTO’s developing countries members are often excluded from decision-making negotiations; apart from the fact that many of such countries cannot afford to participate in all negotiantions and send their representatives.
  • The WTO’s General Agreement on Trade and Services includes a long list of services that should be privatised (childcare, sewage, garbage disposal, park maintenance, care for the aged and postal services), which is not well seen in developing countries where the majority of the poor population would not be able to afford for such services.
  • It is argued that WTO treaties are unfairly biased towards the interest of multinational corporations and the rich nations. For example: rich countries being allowed to maintain high import duties and quotas on certain products from developing countries; increasing non-tariffs barriers against developing countries; intellectual property rights banning developing countries from incorporating technology that originates in developed countries; etc.
  • It is claimed that in the quest for free trade, issues of health, safety at work, and environmental protection are too often ignored to the great detriment of health, safety, and the environment, at the forums.

Now that you have read and heard about the WTO… what is your opinion?

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What is the “ALBA”?

ALBA stands for (in its native Spanish acronymun) Alternativa Bolivariana para América Latina y el Caribe. It is a project of coolaboration, and political, social and economic complementation between the countries of these regions; initially promoted by Cuba and Venezuela against the US alternative, the ALCA.

ALBA defends the idea that trade and investment should be instruments to reach an equitable and sustainable development.

ALBA minds concepts as:

  • Techno-Productive integration
  • Food Sovereignty
  • Citizen participation in public affairs
  • Warranty of fair and sustainable trade
  • Productive competitiveness with ALBA non-member countries
  • Social justice
  • Sovereignty
  • Pluriculturality
  • Diversity

Witht he signing of the ALBA treaty, Cuba and Venezuela agreed clear steps of liberization (according to the BussinessDictionary it is The removal of or reduction in the trade practices that thwart free flow of goods and services from one nation to another. It includes dismantling of tariffs, such as duties, surcharges, and export subsidies;  as well as nontariff barriers such as licensing regulations, quotas, and arbitrary standards). As well, as a series of projects concerning social and economic cooperation. Some examples:

  • Cuba eliminates all the taxes and non-taxation barriers on products coming from Venezuela
  • Venezuela eliminates the non-taxation barriers on products and services coming from Cuba
  • Investment concerning textile and mixed industries are not requiered to pay taxes on revenue until they recover their initial investment
  • Cuba gives away all its participation on Cuban enterprises in Venezuela
  • Venzuela offers to Cuba transfer of technology and financial support in energy and infraestructure
  • Cuba will supply oil to Venezuela on preferential terms
  • Non-Taxation barriers are liberalized in Bolivia for Cuban and Venezuelan enterprise
On the other hand, there are a lot more other purpose for this integration, but one of the most controversial is the creation of a “SouthAmerican Bank”. Its aim is to give credit to binational o multinational infraestructure projects, without the multiple impediments  of the World Bank or the IMF. Venezuela has already made the first step by purchasing government bonds from Argentina and Bolivia.

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Ecuador´s forms of protectionism


Ecuador maintains the APBS (Andean Price Band System) on 153 agricultural products imported
from outside the CAN. The 13 “marker” products are wheat, rice, sugar, barley, white and
yellow corn, soybean, soybean meal, African palm oil, soy oil, chicken meat, pork meat and powdered
milk. The APBS works as an internal price stabilization mechanism whereby the basic (ad-valorem)
tariff is adjusted (increased or decreased) using a variable levy. The amount of the variable levy results
from the relation between bi-weekly reference prices and floor and ceiling prices established by the CAN
for each marker product.

Tariffs-Rate Quotas

In May of 2000, Ecuador created a TRQ Committee to administer and manage
TRQs, which have remained constant and in line with WTO commitments since 2001.

Products subject to TRQs include wheat, corn, sorghum, barely, barely malt, soybean meal, powdered milk,                                            frozen turkeys and chicken parts.

Non-Tariffs Measures

Ecuador has failed to eliminate several non-tariff barriers since its WTO accession. Importers must
register with the Central Bank through approved banking institutions to obtain import licenses for all
products. Ecuador requires prior authorization from the Ministry of Agriculture (MAG) for the
importation of most agricultural products. For certain sensitive products such as corn, soybean meal,
dairy and poultry, the Minister himself or a designee must sign the authorization.

Ecuador assesses a special consumption tax (ICE) on imported and domestic spirits. However, the taxable base                                           upon which Ecuador assesses the ICE is arbitrary and complicated and differs for domestic and imported spirits.

Ecuador also continues to maintain a pre-shipment inspection regime for imports with a free on board
value of more than $4,000. An authorized inspection company conducts pre-shipment inspection (both before                                    shipment and after specific export documentation has been completed at the intended destination), and customs                             authorities perform random spot-checks.  These practices generally add between six and eight weeks to shipping times.

Ecuador maintains bans on the import of used motor vehicles, tires and clothing.

Standards, Testing, Labeling and Certifications

Ecuador’s Animal and Plant Health Inspection Service (SESA) is responsible for administering Ecuador’s
sanitary and phytosanitary controls. According to Ecuadorian importers, bureaucratic procedures
required to obtain clearance still appear to discriminate against foreign products. Ecuador is bound by the
WTO Agreement on the Application of Sanitary and Phytosanitary (SPS) measures, yet denials of SPS
certification often appear to lack a scientific basis and to have been used in a discriminatory fashion to
block the import of U.S. products that compete with Ecuadorian production. This occurs most often with
poultry, turkey and pork meats, beef, dairy products, and fresh fruit. The ability to import some products,
such as rice, corn, soybeans and soybean meal, depends entirely on the discretion of the MAG which will
often look to the Consultative Committees for advice. Ecuador has yet to fulfill its notification obligations
under the WTO SPS Agreement. The impact of removing this barrier would mean an increase of U.S.
exports of up to $10 million.

Sanitary registrations are required for imported as well as domestic processed food, cosmetics, pesticides,
pharmaceuticals and syringes as well as some other consumer goods. However, in a side agreement to its
WTO Accession Agreement, Ecuador committed to accept the U.S. Certificate of Free Sale authorized by
the U.S. Food and Drug Administration, instead of the Government of Ecuador’s Sanitary Registration.In                                                      August 2000, the  government of Ecuador passed a law (Ley de Promocion Social y Participacion
Ciudadana, Segunda Parte – also known as Troley II), followed by regulations issued in June 2001, to
reform the issuance of sanitary permits for food products. This is a step towards modernizing the issuance                                                         of sanitary registrations with new regulations that allow the acceptance of free sale certificates, require                                                                that the government issue sanitary permits within 30 days of receipt of a request, and reduce the number                                                                 of documents required to obtain a permit. However, it does not appear that these regulations are being                                                          applied consistently and U.S. export losses are estimated to be around $5 million.

Example of Certification issued by the State of California

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Types of Protectionism


A tax that is charged on imported goods. It shifts the world supply curve of such product upwards, since it is place on the producers of the good worldwide.

  • There is loss of consumer surplus since there is an amount of the good that is not being demanded
  • There is a larger quantity of the good now being produced by more inefficient domestic producers, that earn a higher revenue that the more efficient foreign suppliers.

Free Trade of a product

Tariff imposed on imported goods


A physical limit on the numbers or value of goods that can be imported into a country. The imposition of quota creates a dead-weight loss of welfare:

  • There is a loss of consumer surplus since there is a quantity of products that is not being purchased
  • There is more quantity of wheat now being produced by relatively inefficient suppliers (domestic)

Trade before and after the imposition of a quota


An amount of money paid by the government to a firm, per unit of output. In terms of trade, the government is giving such amount of money to domestic producers to make them more competitive; therefore, the effect will be to shift the domestic supply curve downwards by the amount of the subsidy.

  • There is again another dead-weight loss of welfare since there is a quantity of the good being produced by relatively inefficient suppliers (domestic), missallocating the world´s resources.
  • As price does not change, there is no loss of consumer surplus. But, governments may use tax revenues to fund subsidies, so higher tax payments can be expected.

Voluntary Export Restrains (VERs)

Agreements between exporting and importing countries in which the exporting country agrees to limit the quantity of exports of a specific good below a certain level. This measure is usually taken to avoid the imposition of legal restrictions by the importing country; and the agreement may be reached at either industry or government level.

Administratives Barriers

Administratives processes that have to be undertaken and are usually called “red tape”. Such processes can be lengthly and complicated, they can act as a restriction to imports. For example, paperwork that requieres a large amount of legal work, then it will slow down the process and raise the cost to the importer.

Health and safety standards and environmental standards

An attempt of the country to guarantee the health and safety of their population by preventing the import of unhealthy or unsafe goods. There tends to be a particular difficulty for developing countries, as the costs involved in the certifications to prove that they meet the international standards can be very expensive.


An extreme quota; thefore, it is a complete ban on imports and is usually put in place as a form of political punishment. The most common example is the US trade embargo on all products from Cuba.

Nationalistic Campaigns

Governments running marketing campaigns to encourage people to buy domestic products instead of foreign ones in order to generate more demand for domestic goods and preserve domestic employment. Such campaigns have hapenned in the UK, in the US and in Australia. This measure can be described as “moral suasion”, where the government links the creation of unemployment to the consumption of imported goods.


Investopedia: http://www.investopedia.com/articles/economics/08/tariff-trade-barrier-basics.asp

Economics Course Companion by Jocelyn Blink & Ian Dorton

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What arguments do countries have against free trade?

Free Trade is said to take place between countries when there are no governmental or any other international organization barriers to trade. There is free movement of goods and services between the countries.

Although many countries defend free trade because it seems so good for all, there are some reasons, which may be not always valid, to support their need to apply protectionism (according to Investopedia.com: government actions and policies that restrict or restrain international trade, often done with the intent of protecting local businesses and jobs from foreign competition)

Protecting domestic employment: the sunset industries will decline rapidly, because they will not be able to compete with foreign competition; therefore this will leads to high levels of estructural unemployment (there are vacants in the economy, but due to changes in the composition of Aggregate Demand over time, workers are not able to take them).

Protecting the economy from low-cost labor: This means the government of a country decides to avoid “dumping”, which is when foreign supliers sell goods at lower prices, since at their home countries there is lower cost of production ( labor), and domestic industries are unable to compete with them.

Protecting sunrise industries: Governments believe that as developing domestic industries do not count with the economies of scale like larger industries to be competitive enough, it is necessary to let them develop, and protecte them from imports until these domestics industries are competitive enough.

Protect product standards: A country might wish to impose safety, health, or environmental standards on goods being imported into its domestic market, in order to ensure that imports match the standards of domestic products.

To avoid the risk of over-specialization: Avoiding that the country becomes over-dependent on the export sales of one or two products; since as world markets tend to be volatile, it might implicate serious consequences.

Strategic reasons: It is sometimes argued that certain industries are neccessary to be protected in case they are needed ad useful in times of war, for example, agriculture, steel and power generation will be over valued. In simple words, a country which has specialized greatly will have difficulties in getting hold of certains goods during conflicts.

Raise government revenue: Through the imposition of tariffs on inelastic goods, their tax revenue will increase and their budget will increase to handle their fiscal policy.

Provide safety and health against possible harming industries, and protect the environment.

To correct a balance of payments deficit: To attempt to reduce import expenditure and thus improves a current account deficit whereby the country is spending more on its imports of goods and services than it is earning for its exports of goods and services.

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To which Trading Blocs does Ecuador belong?

First, Ecuador is part of the World Trade Organization, which is charge of setting the rules for international trade between nations; with the goal to help producers of goods and services, exporters and importers conduct their businesses.

CAN- Ecuador is part of the Andean Community, which is a custom union with four member countries (Bolivia, Colombia, Ecuador and Peru) since 1969.  A custom union is  a free trade area with a common external tariff. In this trading bloc, the main products traded are: sugar, cereal, fishes, seafruits, milk, textiles, animal fur, etc.

Mercosur- Even though Ecuador is not part of the official members, our country has several agreements with the member countries (Argentina, Brazil, Paraguay, Uruguay and Venezuela) and works as an associate member. The man traded products between Ecuador and this trading bloc are: bananas, tuna, oils, palmetto, plantain, etc.

On the other hand, Ecuador never signed a FTA (Free Trade Agreement) with the United States and his currents negotiations with the European Union are not very progressing, since the Ecuadorian products are still paying burdains in foreing European countries, affecting our products positioning and our trade balance. Right now, the United States is still our biggest “client”, since most our exports go there, but the trade with China has had rising percentages.

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