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DE RUEHQT #0060/01 0272002
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FM AMEMBASSY QUITO
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RUEHLP/AMEMBASSY LA PAZ JAN LIMA 3004
RUEHGL/AMCONSUL GUAYAQUIL 4061
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/USDA FAS WASHDC 0619

UNCLAS QUITO 000060 
 
SENSITIVE 
SIPDIS 
 
USTR for Bennett Harman 
 
E.O. 12958: N/A 
TAGS: ETRD ECON EFIN EC
SUBJECT: ECUADOR ISSUES BALANCE OF PAYMENTS SAFEGUARD MEASURES 
 
REFTEL A:  Quito 37 
       B:  State 4902 
       C:  08 Quito 1178 
       D:  08 Quito 1144 
 
¶1.  (SBU) Summary:  On January 22, the GOE implemented balance of 
payment (BOP) safeguard measures on 627 products (almost all 
consumer goods) for one year, using a mix of ad valorem tariffs and 
specific tariffs that exceed its WTO bindings, and quotas.  The 
measure will also apply to Ecuador's FTA partners, who will have to 
pay both the safeguard surcharges and MFN tariffs.  Vice Minister 
for Trade Egas met with the Ambassador on January 22 to explain the 
government's rationale for the measures; he encouraged American 
companies with specific problems to raise them with the GOE.  End 
Summary. 
 
¶2.  (U) On January 22, the GOE announced BOP safeguard measures on 
627 consumer products for a period of one year, effective 
immediately.  The measures include tariff charges, specific tariffs, 
and quotas.  The first measure is an ad valorem charge of 30-35% in 
addition to the MFN tariff for certain products, including candies, 
alcoholic beverages, cosmetics, mobile phones, furniture, and toys. 
(Note:  Many of these products were subject to tariff increases to 
WTO ceiling levels in November 2008, raising the average MFN tariff 
at that time for non-FTA partners to 30%, reftel D).  The second 
measure is a specific tariff of $10/pair for certain footwear, 
$12/kilo for certain apparel products, and 10 cents/kilo for certain 
ceramic products, in addition to the MFN tariff.  The third measure 
is a quota of either 65 or 70% of 2008 import levels to be applied 
to, among other products, vehicles and parts, meats, fruit and 
vegetables including grapes, apples, and pears, breads and cookies, 
pasta, canned and prepared foods, perfumes, toiletries, tires, 
suitcases/bags, toilet paper/diapers/tissues, small and large 
appliances, lamps, bicycles, Christmas ornaments, and pens.  (A copy 
of the measure was e-mailed to Washington agencies on January 22). 
 
¶3. (U) The decree establishes that countries or groups that have 
preferential trade arrangements with Ecuador, such as the Andean 
Community (CAN), will now be subject to both the safeguards and MFN 
tariffs. 
 
Rationale for the Safeguard Measure 
----------------------------------- 
 
¶4.  (U) Vice Minister of Trade Eduardo Egas met with the Ambassador 
on January 22 to explain the measure and its justification.  The 
meeting was only with the U.S. Embassy, but was part of a series of 
meetings he held that day to explain the measure to Ecuador's main 
trading partners. 
 
¶5.  (SBU) Egas explained that the trade limitations were being 
imposed because of the balance of payments pressure created by 
falling oil prices, declining non-petroleum exports, and a drop in 
remittances.  He added that in addition to falling revenues, 
Ecuador's access to international finance had been reduced, brought 
in part by the global financial crisis and compounded by Ecuador's 
decision to default of some of its official debt.  He said that 
since Ecuador was dollarized, it could not devalue its currency as 
its neighbors had done.  He continued that an alternative to 
invoking balance of payments safeguards would be to abandon the 
dollar, which the government was not prepared to do. 
 
¶6.  (SBU) Egas said the government estimated that it had an 
un-financeable trade deficit of $2.2 billion, which he characterized 
as "optimistic" (Note:  He did not provide any further details on 
how the government established that figure).  He said the government 
was looking to restrict that amount of trade.   After discussions 
with industry on the safeguards, the GOE was imposing restrictions 
that it believed would inhibit $1.46 billion in trade and would look 
for alternative financing for the difference. 
 
Scope and Design of the Import Restrictions 
------------------------------------------- 
 
¶7. (SBU) Egas said that in 2008 Ecuador imported $17 billion in 
goods, of which $3 billion were petroleum derivatives, leaving $14 
billion in non-petroleum imports.  Of those, $3.5 billion were 
consumer goods, and $10.5 billion were capital and intermediate 
goods.  The government was focusing on limiting consumer good 
imports, on the grounds that limiting capital and intermediate good 
imports would inhibit Ecuador's ability to produce exports, which 
were important to help finance the balance of payments problem. 
 
¶8.  (SBU) Egas continued that the government had reached a voluntary 
agreement with importers on the design of the import restrictions 
(Note:  Initially the government had circulated a proposal that 
covered more products and imposed sharper limitations than the final 
measure, including outright prohibitions and 500% tariffs).  He said 
the intent of the agreed measures was to maintain the private 
sector's business arrangements, even as it reduced the volume of 
imports to roughly 2007 levels.  As part of this arrangement, 
importers are supposed to maintain employment levels to the extent 
possible, and remain vigilant against contraband.  The Ambassador 
cautioned that contraband could increase due to the measure.  Egas 
responded that the GOE planned to crack down on contraband, 
including establishing an anonymous hotline for tips. 
 
¶9.  (SBU) Egas said that each major importer would receive a quota 
for the year, based on historical data from 2006-2008.  He said that 
a small portion of imports, which would vary by product, would be 
reserved for non-traditional importers.  He noted that Ecuadorian 
Customs had data on imports by tariff line and company, and as of 
January 22 was ready to implement the quotas.  He said that Customs 
would monitor filling of the quotas and would send out alerts as 
companies approached the quota limits. 
 
¶10.  (SBU) Egas also said that the measure would be in place for one 
year, but that President Correa was committed to removing it earlier 
if balance of payment conditions permitted. 
 
WTO Compliance 
-------------- 
 
¶11.  (SBU) Drawing on reftel B guidance, the Ambassador stressed 
that the U.S. expects that Ecuador will comply with its WTO 
obligations, including notifying the WTO. 
 
¶12.  (SBU) Egas asserted that the safeguard measure was designed to 
be consistent with Ecuador's WTO and other trade obligations.  He 
said that Ecuador would notify the WTO within 30 days and 
participate in the balance of payments safeguard consultations.  He 
said that in order to make the measure non-discriminatory, it was 
being applied to all of Ecuador's trade partners, including those 
with which it had preferential agreements. 
 
¶13.  (SBU) Econ Couns asked whether limiting the scope of the 
measure to consumer goods was in compliance with the WTO guidelines 
that the safeguards avoid sectoral specificity.  In response, 
Orlando Suarez, Director General for Global Trade Affairs, who also 
participated in the meeting, said that exempting capital and 
intermediate goods would support Ecuador's export sector enabling it 
to provide relief to the balance of payments crisis. 
 
¶14.  (SBU) Egas and Suarez took note of our comment that the IMF 
could also participate in the WTO consultation process. 
 
Open to U.S. Company Concerns 
----------------------------- 
 
¶15.  (SBU) Egas said that he and others in the GOE were open to 
hearing specific concerns from U.S. companies, noting that he had 
already met with three U.S. companies.  He said that if they had 
very specific issues that did not undermine the intent of the 
safeguard measures, the GOE would look to address them.  By way of 
example, he said that franchisers of U.S. food chains have 
contractual obligations to import some of their products from the 
U.S., a matter he said that he would take to COMEXI, the GOE trade 
policy body. 
 
¶16.  (SBU) When we raised the problems U.S. companies were facing 
with standard certification requirements (reftel C), Egas said that 
now that the BOP safeguards were in place, the GOE would revisit the 
certification requirements, implying that the GOE would provide more 
flexibility in the requirements. 
 
¶17.  (SBU) Comment:  Ecuador is facing a serious balance of payments 
problem, along with other problems stemming from falling oil prices, 
the partial debt default, and the global economic crisis (septel). 
The GOE needs to find measures to contain the crisis, and in the 
absence of a floating exchange rate finding measures to curb imports 
is part of the required response.  We doubt that the implemented 
measures are preferable to a broader measure, such as a surcharge on 
all imports, but the government's approach of restricting consumer 
goods and facilitating capital goods is consistent with trade 
measures that it has implemented over the past two years.  While 
onerous, the implemented measures are less extensive and severe than 
the measures that the GOE had first planned (outright prohibitions 
and 500% tariffs), which would have terminated rather than 
complicated and disrupted trade arrangements between U.S. suppliers 
and their Ecuadorian customers. 
 
HODGES