- The Washington Times - Tuesday, March 3, 2009

QUITO, Ecuador

Posters plastered on the walls of supermarket chains across this Andean nation proudly declare “Ecuador First.” But for many shoppers, buying domestic is no longer really a matter of choice.

In what may be the world’s most protectionist response to the global economic crisis, Ecuador’s leftist government has imposed import restrictions on everything from Peruvian shampoo to Chilean grapes and U.S.-made running shoes.

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President Rafael Correa says he had to take drastic action to prevent the collapse of an oil-dependent economy shocked by plunging petroleum prices, flagging remittances from workers abroad and the drying-up of foreign investment.

Ecuador is particularly vulnerable because it is one of only a few countries in the world - El Salvador and Panama are the next biggest - that have adopted the U.S. dollar as their currencies. It can’t print its own money, so it uses currency printed in the United States. A severe trade deficit could thus drain Ecuador of dollars, potentially causing economic collapse.

It’s a possibility that also worries CIA Director Leon Panetta. He listed Ecuador - along with Argentina and Venezuela - last month as countries in dire economic straits that could be destabilized by the worldwide economic crisis.

“We can’t continue to throw away the money from our oil, the money of our migrants, to buy imported perfumes and imported liquors,” Mr. Correa said as he explained the import restrictions.

Many imports suddenly became out of reach for Ecuadorean shoppers when the measures took effect Jan. 22. Countless jobs also are at stake, in Ecuador and in the Andean neighboring areas that account for nearly half of Ecuador’s imports.

“I think the country painted itself into a corner, and I don’t think there was anything else that could be done,” said Manuel Chiriboga, director of Quito’s nonpartisan Foreign Commerce Observatory.

The barriers affect 627 types of goods and take one of three forms: import volume decreases up to 35 percent; import duty increases to between 30 and 35 percent; or surcharges such as $12 per kilogram for textiles and $10 per pair for shoes.

These measures are as severe as any of the protectionist moves catalogued by the World Trade Organization last month, and no other country has tougher import restrictions, said Gary Hufbauer of the Peterson Institute for International Economics in Washington, D.C.

Oil sales account for 40 percent of Ecuador’s budget, but Mr. Correa isn’t just concerned about declining petroleum revenues. Exports of bananas, flowers, shrimp and other products also are down.

Mr. Correa, a U.S.-trained economist, said the restrictions should keep $1.46 billion from flowing out of Ecuador’s $50 billion economy.

While Ecuador’s economy is small in global terms, free-trade disciples fear a general spread of similar protectionist measures will seize up the global economy just when it needs rebooting.

Already, the International Monetary Fund predicts global trade will decline by 2.8 percent this year - the first contraction in almost 30 years - as country after country makes protectionist moves. They include:

• The United States and Russia propping up troubled auto industries.

• India imposing a six-month ban on Chinese toys and 5 percent tariffs on some iron and steel products.

• The stimulus package signed by President Obama, favoring American steel, iron and manufactured goods for government projects.

• The European Commission reintroducing export subsidies for butter, cheese and milk powder.

• China increasing tax rebates for exporters.

“In my view, stronger measures are needed to keep smoldering protectionism from breaking into a blaze,” Mr. Hufbauer said.

Mr. Correa predicts only a “small impact” on his 14 million citizens. “The poor don’t consume perfumes, liquor and chocolates,” he said.

But Ecuador’s automotive sector is expected to suffer greatly, since most vehicles and parts are imported. Auto industry association president Diego Luna expects this year’s vehicle sales to plunge 38 percent to 70,000 because of the new import quotas, making layoffs likely. “I don’t know that companies can keep this level of employees,” he said.

Small businesses are affected as well in a country whose official unemployment rate is 7.9 percent.

“We’re going to have to lay off three employees,” said Lenin Salazar, who employs 10 in a business that imports TV, video camera and recorder parts. “It strikes me as very strange because no factory [domestically] makes these types of parts.”

Some other nations are seeking to borrow their way out of crisis, but Mr. Correa closed that avenue by defaulting on a third of Ecuador’s $10.3 billion foreign debt. He claimed the bond issues were negotiated by crooked former officials and foreign bankers.

Mr. Correa says he prefers to dedicate government funds to anti-poverty programs - spending that includes $30 monthly stipends for single mothers. Ecuador’s new constitution also burdens the treasury by promising free education for all through college.

Such spending was easier when oil prices climbed well above $100 a barrel. Ecuador’s oil revenues jumped 222 percent last year from 2007, while imports increased by 26.7 percent.

Now Mr. Correa forecasts a $3.5 billion trade deficit for 2009 with the plunge in oil prices and remittances, the twin pillars of Ecuador’s economy.

Money sent home by Ecuadoreans abroad dropped to $2.8 billion last year from $3 billion in 2007 - a trend the central bank expects to continue.

Some economists think Mr. Correa will need to ditch the U.S. dollar - which was adopted in 2000 after the near-collapse of Ecuador’s banks - and give his people their own currency again, or keep the dollar as a second currency, as many nations in the region do.

Otherwise, they warn of shortages, smuggling and a dangerous increase in the black-market economy.

“Inevitably, contraband will be on the rise. Legal commerce will cede space to the informal,” said economist Walter Spurrier of the independent Spurrier Group.

For now, many Ecuadoreans lament having to buy inferior domestic brands.

“The increases for [imported] detergents are brutal,” Paola Padilla, a 26-year-old programmer, said as she stared at foreign-made fabric softeners in one Quito supermarket. Her brand had jumped a dollar to $3.60. “I’ll see about buying some next week.”

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