consultations with ecuador

Background Document by the Secretariat

1.  This document has been prepared in accordance with paragraph 12 of the Understanding on the Balance-of-Payments Provisions of the GATT 1994.

1  RECENT MACROECONOMIC AND TRADE DEVELOPMENTS

1.1  Real sector and prices

2.  Ecuador's economy has performed relatively well since 2010 sustained to a large extent by higher oil prices and strong domestic demand. Ecuador's economy was moderately affected by the global economic crisis, which caused a slowdown in GDP growth to just 0.6% in 2009. In 2010 and 2011, the economy improved, with GDP growing at rates well above 5%, aided by strong investment and private and public consumption, but also by the performance of the external sector. Exports, especially of petroleum products, contributed particularly to growth in 2011 and 2012. The economy slowed down somewhat in 2012-14, posting growth rates of around 4%. Slower growth was partly triggered by lower domestic demand growth, particularly private consumption, and, in 2013 by the negative contribution of net exports of goods and services (Table 1).

3.  In 2014, real GDP expanded by 3.8%, supported by strong household consumption expenditure, and gross capital formation. There was also a slightly positive contribution from net exports, while changes in inventories detracted from growth. Consumption over the last few years has been supported by the Government's general monetary stance adopted since 2009, which consists in injecting liquidity in the financial sector through a Fund and capping interest rates. Reflecting domestic demand strength since 2010, imports of goods and services expanded at an average 6.2% rate between 2010 and 2014. Exports of goods and services increased by an average annual rate of 3.7% over the same period. Government expenditure has also been a strong contributor to growth over the period, increasing at an average annual rate of 7%. General government expenditure growth was particularly solid in 2011-13, but slowed down considerably in 2014.

Table 1 Basic economic indicators, 2009-14

a             Since January 2013, new population data is used, based on official figures for the 1990 to 2010 period and projections of population from 2010 to 2020, published on the website of the National Institute of Statistics and Census (_Instituto Nacional de Estadística y Censos, INEC) in http://www.inec.gob.ec/estadisticas/index.php?option=com_content&view=article&id=329&Itemid=328&lang=es.

b             Includes real estate, entertainment, recreation and other services.

c             As of 2010, data correspond to the General State budget, which are not comparable because the data include the Autonomous Entities.

d             As of 2010, includes the tax on currencies and other taxes.

e             Expenses correspond to accrual records.

Source:   Central Bank of Ecuador, Monthly Statistical Bulletin (various issues); and International Monetary Fund, International Financial Statistics.

4.  Strong domestic demand growth over the 2009-14 has reflected policies to facilitate the allocation of credit and keep its cost under control. It has led, to a large extent, to a substantial increase in imports, which almost doubled in the case of merchandise trade, during that period. The gross capital formation/GDP ratio remained steady, at some 28.5% in 2014. However, in general, domestic absorption growth (including imports) has remained high over the period, contributing to higher deficits in the current account of the balance of payments.

5.  From a sectorial point of view, growth has been unevenly distributed across sectors during the period. Between 2010 and 2014, the most dynamic productive sectors have been electricity and water (expanding at an annual average rate of 15.1% in real terms); construction (11%); communications (7.1%); professional services (6.9%); financial services (5.5%); and mining (5.3%), while manufacturing and agriculture increased at lower rates (4.6% and 3.6%, respectively), and petroleum refining contracted sharply.

6.  Ecuador's relatively high growth rates during the 2009-14 period have helped keep the pace of employment creation. As a result, Ecuador's unemployment rate is relatively low, at 4.8% at end‑March 2015. Also, social indicators have improved considerably since 2010.^[1] Ecuador is classified as an upper middle income country: GDP per capita is estimated at US$6,273 in 2014, up from US$4,633 in 2010.

7.  Inflation has remained moderate since 2009. After accelerating somewhat between 2010 and 2011, from 3.3% to 5.4%, the increase in the Consumer Price Index (CPI) decelerated in 2012 and 2013 (4.2% and 2.7%, respectively), but accelerated slightly in 2014 to 3.7%. The CPI increased by 3.8% in the 12-months until end-March 2015.^[2] The recent appreciation of the U.S. dollar is likely to contribute to maintain inflation subdued over the near future.

1.2  Fiscal accounts

8.  Fiscal policy is the main tool for macroeconomic adjustment given that the dollarization of the economy leaves limited scope for any monetary policy initiative. The main fiscal policy objectives as stated in the Four Year Budget Programme 2012-15 are to promote income redistribution and boost economic activity, and its main tools are the use of incomes policies, expenditure management and public sector financing. The incomes policy underpinning the medium-term fiscal scenario is associated with the strengthening of tax and tariff management. With respect to the latter point, the authorities have sought the implementation of "a tariff policy that provides adequate and proper protection to the national productive sectors".^[3] The Budget Programme also calls for the use of tax incentives to promote the development of productive activities. Public expenditure policy is geared firstly to maintain and expand the coverage of public services and secondly to strengthen public investment in projects and programmes in strategic sectors (petroleum, electricity, etc.) and in social and infrastructure projects.

9.  The Constitution mandates that the State maintain a disciplined fiscal policy. The reforms introduced by the Fiscal Responsibility, Stabilization and Transparency Law (Law No. 72, Official Journal of 4 June 2002), set fiscal deficit limits: annual growth of primary central government expenditure must not exceed 3.5% in real terms (excluding capital spending); and the fiscal deficit as a percentage of GDP (excluding oil export revenue) must decrease by 0.2% each year. The Law also sets a public debt limit of 40% of GDP. However, in practice these goals have not been met, as expenditure growth has been high, particularly capital spending and remunerations. Expenditure increased by almost 90% between 2009 and 2014 in U.S. dollar terms, equivalent to an annual average rate growth of some 13.5%, higher than the average annual growth rate of nominal GDP (10%). Spending continues to remain relatively inflexible despite the fact that the practice of earmarking tax revenue to different areas and levels of Government has been discouraged.^[4]

10.  Between 2009 and 2014, Central Government revenue increased at a nominal average annual rate of 11.8%, below the rate of increase in expenditure. Revenue grew steadily up to 2013, but declined somewhat in 2014, mainly on account of a sharp contraction in oil-related revenue, which in 2014 was some 40% below its peak in 2012. In contrast, non-oil revenue grew steadily through the 2009-14 period, at an average annual rate of 12.3%. In this area, Ecuador relies considerably on taxes on international trade, which amounted to US$3.66 billion in 2014, some 3.6% of GDP or 18.3% of Central Government Revenue, including the corresponding portions of the VAT or the ICE on imports. Of this total, tariff revenue amounted to 1.3% of GDP, or 6.4% of Central Government Revenue.

11.  Ecuador has run a fiscal deficit in every year during 2009-14. The Central Government deficit declined to 1.6% of GDP in 2010 and 2011, years of faster economic growth. The fiscal situation has deteriorated since then mainly as a result of decreasing oil revenues amidst continued expenditure growth: the deficit peaked at some 6.4% of GDP in 2014. Despite the increase in the traditional non-financial sector public enterprises' surplus, the non-financial public sector (NFPS) deficit increased from 0.9% of GDP in 2012 to 4.6% of GDP in 2013 and 5.3% in 2014 (Table A1).

12.  Fiscal deficits have complicated the balance-of-payments situation in recent years, both from the current account and capital and financial accounts sides. From the current account point of view, the deficit has triggered an increase in imported goods and services to meet the public sector increasing investment and other expenditure needs. From the capital account side, it has resulted in an increasing reliance on foreign loans, particularly in 2013 and 2014, to finance the deficits in the current account and income balances (Table A2).

13.  The public sector's consolidated debt reached US$31.7 billion at end-March 2015, or 29.2% of GDP. Of this, US$19.1 billion (17.6% of GDP) was external debt and US$12.6 billion (11.6% of GDP) was domestic debt. This is a substantial increase with respect to the situation of just twelve months earlier, since at end-March 2014, total public debt had reached US$23.8 billion, or 23.6% of GDP, of which US$12.9 billion (12.8% of GDP) were foreign debt and US$10.9 billion (10.8% of GDP) domestic debt.^[5]

1.3  Monetary and exchange rate policy

14.  The 2008 Constitution eliminated the Central Bank of Ecuador's (CBE) autonomy and transferred to the Executive the responsibility for the formulation of monetary, credit, foreign exchange and financial policies. These policies are implemented through the CBE. The 2009 Ley Reformatoria de la Ley de Régimen Monetario y Banco del Estado established that Bank's Board be composed wholly of government officials. It was also decided to invest domestically a portion of the Banks's free availability reserve resources, especially in the generation of credit lines to productive sectors considered strategic for national development.^[6]

15.  The U.S. dollar has been the currency of legal tender in Ecuador since March 2000. Reflecting this, the Central Bank does not act as lender of last resort and cannot conduct an active and independent monetary policy being a fully dollarized economy. This has implications for Ecuador, since it limits its ability to respond to external risks. Through its use of the U.S. dollar, the Ecuadorian economy absorbs the effect of currency fluctuations which may not be necessarily in harmony with its own economic cycle. On the other hand, dollarization has played an important role in securing macroeconomic stability.^[7] Although there has been a real effective appreciation of some 6.7% between 2010 and end-2014, the IMF staff considers that Ecuador's real effective exchange rate appears to be broadly in line with medium-term fundamentals as of end-2013.^[8] To partly offset the lack of a lender of last resort, the authorities established a Liquidity Fund (Fondo de Liquidez), which is a commercial investment trust, created and established to serve the liquidity needs of private financial institutions subject to reserve requirements. There are also minimum liquidity requirements (Reservas Mínimas de Liquidez) that banks have to meet.

16.  The Central Bank' basic interest rate has been kept at 0.2% since January 2010, when it was lowered from 5.1% adopted in 2009 in the context of the global financial crisis.^[9] Also, since July 2008, the Central Bank has been regulating lending interest rates, establishing interest rate ceilings for commercial, consumer, housing and micro-credits. As a result, lending interest rates have remained broadly stable since 2010, with the reference lending rate averaging 8.1% in 2014, a similar level than in the previous two years. However, this may have discouraged competition among banks. In this respect, in the context of Ecuador's July 2014 Article IV consultations with the IMF, the Fund's Board recommended a gradual lifting of interest rate caps and greater competition in the determination of interest rates.^[10]

1.4  Balance of Payments

17.  After posting a deficit equivalent to 2.3% of GDP in 2010, Ecuador's current account of the balance of payments showed moderate deficits in 2011 and 2012. In 2013, the deficit increased to US$984.2 million, equivalent to 1% of GDP (Table 2) on account of deteriorating merchandise and services trade balances, particularly due to an increase in imports. In 2014, the deficit moderated to some US$601.7 million or 0.6% of GDP on account of a faster increase in exports of goods compared to imports. Also, there was contraction in the services account deficit, due primarily to an increase in receipts for the exportation of services.^[11] This was countered, however, by deterioration in the income balance and lower net transfers. The capital and financial account has posted a surplus during every year between 2010 and 2014, with the exception of 2012. This reflects an increasing resort to external financing as witnessed by the increase in the foreign debt over the period (see below).

18.  According to balance-of-payments data, merchandise exports rose by 3.6% in 2014, to US$26.1 billion, due to 15.7% increase in exports of non‑petroleum products and despite a decrease in petroleum exports.^[12] Merchandise imports increased by 1.9% to US$26.7 billion in 2014. There was a small decline in imports of consumption goods.

19.  Ecuador traditionally runs a large services balance deficit due mainly to its deficit in transportation and some other services. This structural deficit has generally been in the range of 1.2%-2% of GDP and has been one of the factors leading to the posting of a current account deficit, since it has not been offset by the fluctuating merchandise trade balance. In 2014, there was an important increase in travel receipts, which helped lower somewhat the traditional services balance deficit from US$1,495.3 million in 2013, to US$1,219.3 million in 2014 (Table 2).

Table 2 Balance of Payments, 2009-14

(US$ million)

a             Provisional data.

Source:   Central Bank of Ecuador.

20.  Ecuador's current account presents some specific structural characteristics: apart from the traditional deficit in the services balance, there is also a substantial deficit in the income balance and a strong reliance on current transfers, in particular remittances. The deficit in the income balance stems mainly from payments related to direct and other investment in Ecuador, linked to a large extent to the petroleum sector and to mining activities. The deficit in the income balance increased gradually between 2010 and 2013 and rose more sharply, to US$1.6 billion in 2014 (compared with US$1.4 billion in 2013), equivalent to 1.6% of GDP, due to higher dividend and royalty payments for foreign direct investment. The surplus in transfers peaked in 2011, when they reached US$2.7 billion or 3.9% of GDP. Transfers declined somewhat in the following years totalling some US$2.3 billion, or 2.2% of GDP in 2014 (remittances reached US$2.5 billion in the same year). Transfers, especially remittances, are an important source of financing for Ecuador's other parts of the current account; in particular, they contribute to cover the deficit in the (merchandise and service) trade balance. They also provide an important support to domestic demand, especially private consumption, although not to the same extent than in other countries in Latin America.

21.  The capital and financial account deficit registered in 2009 (US$2.7 billion) was caused primarily by portfolio investment outflows in the midst of the global financial crisis. This situation was reversed in 2010 and 2011 when the capital and financial account was in surplus due to FDI inflows and an increasing reliance in foreign loans, which more than doubled between 2010 and 2011. The boost in petroleum exports in 2012, made it less necessary to resort to foreign financing to finance the small current account deficit. However, this situation was reversed in 2013 and 2014, when loans of US$2.77 billion and US$2.57 billion, respectively, were necessary to finance the current account deficit (Table A2).

22.  After increasing in 2011, international reserves declined considerably in 2012 despite an increase in exports. This reflected especially the decline in current transfers. Ecuador resorted to foreign loans and other types of financing to boost international reserves in 2013, when they peaked at US$4.36 billion. By end-2014, however, this level had declined to US$3.95 billion. The decline continued in the first three months of 2015 (Table 3). As of 31 March 2015, international reserves had declined to US$3.67 billion, covering just 1.5 months of future imports of goods and services. Ecuador's reserve coverage of import has been traditionally low since 2009; coverage has never exceeded 1.9 months (in 2009 and 2012) and has been as low as 1.2 months (in 2011).

Table 3 International reserves (end of period), 2010-15

(US$ million)

a             The total amount of exports less imports performed by Ecuador through the Single System of Regional Compensation (Sistema Único de Compensación Regional, Sucre) is included in the Free Availability International Reserve account (Reserva Internacional de Libre Disponibilidad, RILD) since2013. The decision was made by the Board of Directors of the Central Bank of Ecuador (BCE) in Resolution DBCE-046-SUCRE, of 29 December 2012.

Source:   Ecuador's Central Bank online information. Viewed at: http://contenido.bce.fin.ec/documentos/PublicacionesNotas/Catalogo/Coyuntura/s731/BMS_24042015.xls.

23.  After declining as a share of GDP between 2009 and 2012 (from 21.1% to 18.2%), total external debt increased to some 23.9% of GDP by end-2014 (some US$24 billion). Although this ratio is relatively low, it has been increasing fast recently: just in 2014, it rose by 4.1 points of GDP.

2  Relations with the IMF

24.  Between 2009 and early 2014, Ecuador did not hold any Article IV consultations with the IMF. At the time of drafting this report, Ecuador had concluded its latest Article IV consultations in July 2014. Ecuador is scheduled to hold consultations again in 2015.

25.  In the context of the 2014 Article IV consultations, the IMF staff noted that Ecuador had made significant economic and social progress over the last decade; growth had averaged 4.5% annually since 2001, and inflation had gradually declined to around 3% a year. Financial stability, achieved with dollarization, had been preserved and together with low inflation, sustained growth, and higher social spending, helped reduce poverty and improve social indicators. High oil prices in the last several years had generated a windfall income that had supported the balance of payments and fiscal accounts, facilitating higher public spending.

26.  The IMF's Executive Board agreed with most of the staff appraisal, welcomed the authorities' reengagement with the Fund through the Article IV consultation and commended the significant improvements in Ecuador's social and economic indicators over the past decade. They noted that Ecuador's growth prospects were generally favourable and risks were broadly balanced. However, they cautioned against a potentially less favourable external environment, which in the context of dollarization and limited policy flexibility could complicate macroeconomic management, and called on the authorities to continue to strengthen the financial system, and pursue further reforms to boost competitiveness and sustain high growth. The Board welcomed the authorities' intention to moderate current spending and prioritize capital expenditure to accommodate large planned and ongoing public investments, but emphasized the need to create additional fiscal space. They recommended a carefully planned overhaul of fuel subsidies and improving revenue collection further. The Board also recommended the deepening of structural reforms to raise productivity and sustain economic growth, including efforts to improve the business climate, increase labour market flexibility, upgrade human capital, and strengthen institutions and the legal framework.^[13]

3  Developments in Trade

27.  According to the information provided by the authorities and data from COMTRADE (which may differ from BOP data), Ecuador's merchandise exports (f.o.b.) in 2014 totalled US$25.7 billion^[14], a 3.1% increase compared to 2013, while merchandise imports (c.i.f.) reached US$27.5 billion in 2014^[15], a 1.7% increase.

3.1  Composition of Trade

28.  Mineral products, in particular petroleum, are Ecuador's main export goods, accounting for some 52.6% of total exports in 2014, down from 56.9% in the previous year.^[16] This reflects to a large extent a decline in the value of petroleum exports, triggered mainly by lower prices. Agricultural products are the second largest export category. Exports of vegetable products and live animals and animal products accounted for 25% of total exports in 2014, some three percentage points higher than in the previous year. Exports of prepared foodstuffs and beverage remained relatively stable, at 10.5% of total exports in 2014.

29.  Over two-thirds of Ecuador's imports are manufactured goods. The main import categories in 2014 were machinery and appliances (21.5% of the total) chemicals (12%), and automotive products (8.6%). Imports of mineral products, mainly refined oil, make up for almost 25% of total imports, while the rest are imports of agricultural products. The high share of mineral imports in total imports is explained by the fact that, although it is a major oil producer, Ecuador has insufficient refining capacity to meet domestic demand for refined products and must import many oil derivatives. Ecuador is largely dependent on imports of diesel, gasoline, and cooking gas.

30.  Chart 1 shows the product composition of merchandise trade by HS Section.

Chart 1 Product composition of merchandise trade by HS Section, 2013 and 2014

Source:   WTO Secretariat estimates, based on UNSD Comtrade database and data provided by the authorities for the year 2014.

3.2  Geographical distribution of trade

31.  Ecuador's merchandise exports are mainly directed to trading partners in the Americas, which combined account for almost three quarters of total market share. The main single destination for Ecuador's exports is the United States, which accounted for 43.8% of total exports in 2014, followed by the EU (28), accounting for 11.6% of the total, Chile (8.9%), Peru (6.1%), Panama (5.5%), and Colombia (3.7%) (Chart 2). The geographical distribution of Ecuador's exports has not changed much between 2009 and 2014.

32.  Ecuador's merchandise imports also have their origin mainly in trading partners in the Americas, which accounted for 62.5% of total imports in 2014, up from 56.9% in 2013. The main sources of imports in 2014 were the United States (31.9% of the total), China (13%), the EU (28) (11%), Colombia (8%), Panama (5.1%) and Peru (3.7%). In 2014 the America's share of Ecuador's imports increased, while China's share decreased.

Chart 2 Direction of merchandise trade, 2013 and 2014

Source:   WTO Secretariat, based on data from UNSD Comtrade database, and data provided by the authorities for the year 2014.

4  Trade Policy Features and Developments

4.1  Trade Policy Framework

33.  Ecuador has been a WTO Member since 21 January 1996. Ecuador has not signed the Agreement on Information Technology nor does it participate in the WTO Agreement on Government Procurement. Since its accession, Ecuador has participated in three disputes as complainant^[17], three as respondent^[18], and 27 as third party. Ecuador participates actively in the negotiations of the Doha Development Agenda (DDA). It has presented submissions in various areas, including trade facilitation, market access for non‑agricultural products, agriculture, regional trade agreements, fisheries subsidies, and biological diversity. Ecuador's trade and investment policies have been reviewed twice in the Trade Policy review Body. The last review took place in November 2011.^[19] The Committee on Balance-of-Payments Restrictions held consultations with Ecuador in 2009 with respect to trade measures for balance-of-payments reasons.^[20]

34.  In January 2009, Ecuador imposed one-year trade measures for balance of payments purposes, including both price-based measures (tariff increases) and quantitative restrictions to imports, to 630 tariff lines at the ten-digit level, i.e. 8.7% of a total of 7,230 tariff lines.^[21] In February 2009, Ecuador notified these measures to the Committee on Balance‑of‑Payments Restrictions, under Article XVIII:B of the GATT 1994 and the Understanding on the Balance‑of‑Payments Provisions of the GATT 1994.^[22] The measures affected mainly some durable and non-durable consumer goods and transport equipment as well as textile and clothing products, and footwear; they were applied on imports from all trading partners.

35.  The Committee on Balance-of-Payments Restrictions held consultations with Ecuador in April and June 2009 (and later in September and October of the same year). The IMF participated in the consultations. As a result of the consultations, a Committee report was agreed in which Ecuador committed to replace most of the quantitative restrictions for price-based measures no later than 1 September 2009 and to eliminate all the measures by 22 January 2010.^[23] However, the measures were not dismantled on 22 January 2010, but were extended for another six months, subject to a gradual schedule of reductions.^[24] In July 2010, Ecuador notified to the Committee that the measures had been eliminated on 23 July 2010.^[25]

36.  The Foreign Trade and Investment Council (COMEX), a body where the Ministries in charge of foreign trade policy, agricultural policy, industrial policy, and public finances as well as the Internal Revenue Service, the customs authority, and the National Secretariat of Planning and Development (SENPLADES) participate, is responsible for the formulation of Ecuador's trade policy and for the approval of specific trade policy measures.^[26]

37.  The Foreign Trade and Investment Law (Law No. 46, Official Journal of 19 December 1997), contains the main guidelines with respect to trade policy, which is identified as a national priority. The Law provides the main guidelines with respect to trade policy, namely: the promotion of export growth and diversification; export and import facilitation; the promotion of international competitiveness in an environment of fair and equitable trade practices; and participation in regional integration as well as multilateral agreements.

38.  Ecuador is a member of the Andean Community, together with the Plurinational State of Bolivia, Colombia, and Peru. Although the Cartagena Agreement calls for the formulation of a common trade policy among member countries, this goal has not been yet achieved, and trade policy decisions continue to be taken mainly at the national level. The Andean Community's customs union has yet to be completed, as well as the full application of a common external tariff. However, there are common Andean rules covering a number of areas, including customs procedures, technical regulations, contingency measures and intellectual property.

39.  Ecuador maintains a number of preferential trade agreements under the umbrella of the Latin American Integration Association (LAIA). Ecuador has such agreements with Chile, Cuba, the MERCOSUR member countries, Guatemala and Mexico. The agreement with Chile (Economic Complementarity Agreement No. 65 of 10 March 2008, which replaced Economic Complementarity Agreement No. 32 of 1994), in effect since January 2010, is comprehensive, and has resulted in the elimination of tariffs on some 96.6% of tariff lines; the exception being around 230 mainly agricultural products. Ecuador together with Colombia and Venezuela, and the MERCOSUR countries put in place a 15-year tariff reduction chronogram with the aim of establishing a free trade area, as specified in the Economic Complementarity Agreement No. 59 of 18 October 2004, in effect for Ecuador since March 2005. Under the agreements with Cuba (Economic Complementarity Agreement No. 46 of 10 May 2000) and Mexico (Partial-Scope Renegotiation Agreement No. 29 of 30 April 1983) tariff preferences are granted on a limited number of products. The partial-scope agreement with Guatemala entered into force in February 2013.

40.  In 2010 Ecuador replaced its free-zones and maquila scheme by the special economic development zones (ZEDE) regime, introduced by the December 2010 Organic Code of Production, Trade and Investment. However, free zones whose concessions have been granted under the aegis of the Free Zones Act will continue operation under the conditions in force at the time of approval, for the term lasting their concession. ZEDE have the objective of promoting production for export, as well as fostering territorial development, and creating quality employment. The ZEDE are customs areas, and must be installed in delimited geographical areas of the country. They aim at attracting new investments by offering tax incentives and streamlined customs processes. An enterprise operating in a ZEDE may claim a tax credit for value‑added taxes paid in the acquisition of commodities, goods, and services to be used in production processes in the zone. It may also import duty‑free goods and services related to their businesses at the ZEDE.

41.  A general policy for the establishment of ZEDE was approved in April 2014: it aims at promoting the establishment of ZEDE in parts of the country defined as priority areas, as well as at diversifying the supply of goods and services in sectors with growth potential. Another policy goal is to promote the use of domestic suppliers in the ZEDE's production clusters, as well as the production in the ZEDE of goods and services with high domestic content so as to substitute imports and promote exports. The policy also aims at facilitating export producers within the ZEDE and promoting R&D and technology transfer. Five strategic industries have been identified which should be given priority in the ZEDE: strategic industries; basic industries; information technology and communications; chemical and pharmaceutical products; and machinery, equipment, vehicles and parts.^[27] As at May 2014, three projects of ZEDE had been approved: Eloy Alfaro (petrochemical sector) in the province of Manabí; Piady (distribution centre), in Guayas, and Yachay (technology and research), in Imbabura.^[28]

4.2  Investment policy framework

42.  Ecuador is open to foreign investment in sectors not classified as strategic, including manufacturing, retail trade and services. Foreign investment with up to 100% foreign participation is allowed without prior authorization or review in most sectors also open to domestic private investment, and, in these cases, national treatment applies. Foreign investors must register their investments with the Central Bank for statistical purposes. Private companies must distribute 15% of pre-tax profits to their employees each year. There is no restriction for the repatriation of profits or the remittance of royalties; however they are subject to a tax on capital outflows, which was increased from 2% to 5% in November 2011.

43.  The Constitution reserves for the state the responsibility to manage strategic sectors (energy, telecommunications, non-renewable natural resources, such as petroleum, natural gas, and mining, transportation, hydrocarbon refining, media, water, biodiversity, and genetic patrimony) through state-owned or controlled companies. Despite this, Ecuador allows foreign investment in petroleum; until 2010, this was done through production-sharing contracts with the state oil company Petroecuador. Through this modality, private investors received a share of the profits. Since the reforms introduced by Ecuador's Hydrocarbons Law, which came into effect in July 2010 and provided the legal framework for the Government to negotiate new contracts with foreign oil companies, this scheme was replaced by a fee-for-service one. The introduction of the new scheme resulted in new service contracts for seven concessions with five operators, while three operators closed their business in Ecuador. Under this scheme, the State receives an initial payment of 25% of gross revenues as a sovereign margin, while private companies receive a negotiated per barrel tariff for oil produced. However since 2012, the scheme has been made more flexible and has become a hybrid system between the first two.

44.  The state has sole rights for the domestic fuel distribution, refining, and transport activities. Fuel prices are controlled and subsidized by the Central Government. In January 2013, Petroecuador's production branch was absorbed by Petroamazonas.

45.  The mining sector is relatively open to foreign investment, but investment is modest compared to other countries in the region. Foreigners are granted national treatment in the case of large-scale mining concessions, but may not invest in small-scale mining operations. Royalties to be paid to the Government are in the 5%-8% range and all mining concessionaires must pay a 12% tax on normal profits and a 70% tax on extraordinary profits (above a certain threshold).

46.  The National Mining Company (ENAMI), established in 2010, engages in joint ventures with state and private companies and has the right to reject requests to establish mining operations in areas considered of interest by the Government.

47.  The Organic Law of Production Incentives and Fiscal Fraud Prevention of 22 December 2014 established a number of investment incentives and guarantees, including fiscal stability at a 22% income tax rate for investments in metallic mining at large and medium scale and basic industries, and at 25% for other investments. Also, new investments in basic industries are exempt from income tax for 10 years.

4.3  Tariffs and other duties

48.  Ecuador's MFN applied tariff for 2015 comprises 7,509 HS 10-digit lines, 95% of which are subject to ad valorem duties (Table 4).^[29] Compound rates are applied on 5% of tariff lines. Some 86.2% of the lines concern non-agricultural goods. A small number of lines (29) are subject to tariff quotas under the WTO Agreement on Agriculture.

Table 4 Ecuador's tariff structure, 2015

a             Domestic tariff peaks are defined as those exceeding three times the overall simple average applied rate.

b             International tariff peaks are defined as those exceeding 15%.

c             The number of tariff quota lines is based on WTO document G/AG/N/ECU/38 aligned to the HS12 nomenclature.

Notes:     (i) The 2015 tariff is based on the HS12 nomenclature and consists of 7,509 tariff lines (at 10-digit tariff line level); (ii) WTO bound rates are used as AVEs for tariff lines without 2014 imports or where imports are recorded using a different quantity unit than in the tariff.

Source:   WTO Secretariat, based on IDB database and data provided by the authorities.

49.  Ecuador's 2015 tariff presents an 18‑tiered ad valorem rate structure; if the ad valorem equivalents of the 378 lines subject to compound duties are taken into account, the number of rates increases to 316, according to WTO Secretariat calculations.^[30] The tariff presents a relatively high level of dispersion: 37.7% of tariff lines are duty free, while 10% of tariff lines are subject to a tariff rate of 15%. Some 76.8% of tariff lines are subject to a tariff between 0 and 20% (Table 5). In general, zero and 5% rates are applied mostly on raw materials and capital goods; 10% or 15% rates on intermediate goods; and 20%, 25%, and 30% rates to consumer goods.

Table 5 Frequency distribution by rates of Ecuador's tariff, 2015

Source:   WTO Secretariat, based on IDB database and data provided by the authorities.

50.  The average tariff calculated by the WTO Secretariat for 2015 is 10.7%; the rate is 12% if AVEs are included. The average tariff for non‑agricultural products is 9.6% or 11.1% including AVEs, while that for agricultural goods (WTO definition) is 17.7% (17.9% if AVEs are included) (Table 6). Intermediate (semi-processed) goods face the lowest tariff rates, with final goods facing the highest tariffs.

Table 6 Ecuador, average MFN applied rates, 2015

Notes:     (i) The 2015 tariff is based on the HS12 nomenclature and consists of 7,509 tariff lines (at 10-digit tariff line level); (ii) A simple average calculation was applied for products having two different tariff surcharge rates; (iii) For tariff lines without 2014 imports or with different quantity unit, bound rates are used as AVE.

Source:   WTO Secretariat, based on IDB database and data provided by the authorities.

51.  In March 2015, Ecuador introduced an import measure for balance-of-payments reasons, consisting of a temporary import surcharge of 5%, 15%, 20%, 25% or 45% on some 39% of its tariffs lines (see section 5).^[31] The highest surcharges generally apply on products in HS chapters 1-24. After the tariff surcharge is taken into account on applicable goods, the average tariff is 20.7% (22.8% if AVEs are included), compared to 10.7% (12% if AVEs are included), before the introduction of the surcharge. The average tariff for non-agricultural products is now 18.2% and 35.8% for agricultural goods (20.6% and 36.1%, respectively if AVEs are included).

52.  Ecuador grants duty-free treatment to all imports from the Plurinational State of Bolivia, Colombia, and Peru, provided that they comply with the Andean Community's origin requirements; a similar treatment is provided on imports from the Bolivarian Republic of Venezuela. Ecuador also grants preferential treatment to imports from countries with which it has LAIA agreements. In accordance with general LAIA provisions, the scope of these preferences depends on the degree of development of the beneficiary country, with the Plurinational State of Bolivia and Paraguay been granted the highest level of concession among LAIA participants.

53.  Ecuador grants tariff concessions through schemes such as the drawback, and regimes such as the maquila, free zones, and special economic development zones. Ecuador also maintains special customs regimes that suspend the payment of duties and other taxes levied on imports of goods, under certain conditions, including: the temporary importation to re-export in the same state or for inward processing; temporary customs storage; duty free replacement of previously imported goods for transformation or use for the production or packaging of goods for export; and the importation of certain goods for international trade fairs. In March 2015, Ecuador simplified the procedures for the reimbursement of import duties paid on imports used in exported goods, through COMEX Resolution No. 013-2015. The Resolution established a reimbursement rate of 5% for all goods, except those listed in its Annex.^[32] A rate of 3% was established for a group of fish products and seafood. The 5% rate was determined as being the average collected tariff (value of tariffs collected/imports) in the 2010-14 period, in accordance with the Resolution.

54.  Imports (and domestic goods) are subject to a value added tax (VAT) at a rate of 12%, with exceptions, calculated on the sum of the CIF value and the applicable import duty. A FodInfa (Children's Development Fund) contribution is applicable on all imports at 0.5% calculated on the CIF value. ICE (Consumption Tax) is applicable on certain non-essential goods at rates between 0% and 300% calculated on the sum of the CIF value and applicable import duty.

55.  When it acceded to the WTO, Ecuador bound 100% of its tariff lines. Tariff bindings are contained in Schedule CXXXIII, and range from 5% to 85.5%. Around 98% of the tariff lines are bound at rates of 30% or less. The average bound rate is 21.1% (at the HS six-digit level), the average bound rate for agricultural goods is 25.7%, while that for non-agricultural goods (WTO definition) is 20.7% (including petroleum products). Duties on agricultural products are bound at rates ranging from 5% to 85.5%; the lowest bound rates on agricultural items are for seeds and cereals, as well as for cotton, and the highest for cuts and offal of certain types of poultry. Duties on non-agricultural goods are bound at levels ranging from 5% to 40%, with the lowest rates applying mainly to chemicals, pharmaceuticals, petroleum products and fertilizers, and the highest to motor vehicles. Bound rates are also higher than average for textile and clothing. Ecuador's tariffs are bound at lower levels than those of other Andean Community countries. Ecuador's average bound rate exceeded its average applied MFN rates by some 9 percentage points before the surcharge was applied. After the introduction of the surcharge, the average applied rate including AVEs (22.8%) exceeds the average bound rate (21.1%. If AVEs are excluded, the average applied MFN rate (20.7%) is slightly lower than the average bound rate.

56.  Ecuador continues to implement the Andean Price Band System for a number of agricultural products, including wheat, maize, soybeans, pork meat, some poultry cuts and dairy products. The goal is to stabilize the prices of these products. Stabilization is achieved by increasing ad valorem tariffs when the international price is below the band's floor level for each product category, and lowering the tariff to zero, when the price is above the ceiling. The Price Band System is equivalent to turning the tariff into a variable factor that adjusts automatically to counteract international price fluctuations.^[33] In May 2015, the Andean Price Band system covered 13 "marker" products whose international prices constitute the basis for the calculation of the price bands, and 156 derivatives or substitutes of the "markers" (corresponding to about 2% of all tariff lines).^[34]

4.4  Import Restrictions and Licensing

57.  Under Ecuador's import licensing regime, prior import control, permit, licence or authorization is required for some 18% of tariff lines. Licensing applies to imports of all origins, except for certain agricultural items originating in Andean Community countries. No licence is required for imports entering under a special customs regime, except for hazardous wastes, agricultural products, and narcotics and psychotropic substances. In the last Trade Policy Review of Ecuador, in 2011, 1,364 ten digit tariff items were identified as requiring some type of licence (2,260 including SPS requirements). However, since then other products have been added to the list of goods subject to import licensing requirements. For instance, as from August 2011, 53 ten‑digit tariff items (certain types of tyres, semi-finished and steel articles, refrigerators, freezers, mobile phones, completely knocked down (CKD) kits for mobile phones, television sets and motor vehicles), have been subject to non-automatic import licensing requirements. Also, Resolution No. 102 of the COMEX (published in the Supplement to Official Journal No. 924 of 2 April 2013) subjected 55 tariff subheadings corresponding to basic food products to non‑automatic import licensing, to be granted by the Ministry of Agriculture, Livestock, Aquaculture and Fisheries (MAGAP); Resolution No. 299-A (published in Official Journal No. 48 of 31 July 2013) contains the MAGAP Directive concerning the procedures for obtaining non‑automatic import licences for food staples.

58.  Additional import licensing requirements are contained in COMEX Resolution No. 81 of 30 July 2012, which makes imports under four tariff subheadings corresponding to cotton products subject to import licences, to be granted by the MAGAP. COMEX Resolution No. 89 of 24 October 2012 contains a list of tariff subheadings subject to import licences, to be granted by the Ministry of Transport and Public Works (MTOP), while COMEX Resolution No. 95 of 7 December 2012 regulates import licences for three-wheeled motor vehicles, to be granted by the National Transit Agency (ANT).^[35]

59.  In October 2013, Ecuador notified to the Import Licensing Committee that pursuant to Article 72(f) of the Organic Code of Production, Trade and Investment, published in Official Journal No. 351 of 29 December 2010, COMEX is responsible for issuing regulations on import licensing and import procedures.^[36]

4.5  Contingency Measures

4.5.1  Anti-dumping and countervailing measures

60.  The legal framework governing antidumping and countervailing measures comprises: the relevant WTO Agreements and GATT 1994 provisions; the 2010 Organic Code of Production, Trade and Investment; the Regulation Implementing Part IV of the 2010 Organic Code; and Andean Community Decisions Nos. 283, 456, and 457. The Ministry of Foreign Affairs, Trade, and Integration is responsible for conducting investigations, while COMEX is charged with administering antidumping and countervailing duties.

61.  As at 31 March 2015, Ecuador did not have any definitive anti-dumping measure in force; however, its latest notification to the WTO in that respect was for the period 1 January‑30 June 2014.^[37] Since 2010, only one investigation has been initiated, with respect to metallized polypropylene up to 25 microns thick (HS code 3920.20) from Chile and Oman.^[38] The investigation was closed without applying provisional or definitive measures.^[39]

62.  Ecuador did not have any countervailing measure in place as at 31 December 2014. Ecuador did not initiate any countervailing duty investigation during the 2010-14 period.^[40]

63.  In July 2013, Ecuador notified to the WTO that it neither granted nor maintained on its territory any subsidies that fall within the meaning of Article 1.1 of the Agreement on Subsidies and Countervailing Measures or that are specific within the meaning of Article 2 of that Agreement.^[41]

4.5.2  Safeguard measures

64.  In April 2012, Ecuador introduced new regulations for the conduction of safeguard investigations. Since 2010, Ecuador has initiated two safeguard investigations in the WTO; one case, started in 2010 resulted in the imposition of definitive measures, while the second case, started in August 2014, led to the imposition of provisional measures and was still ongoing as of May 2015.^[42]

65.  In October 2010, Ecuador decided to apply a safeguard measure on imports of windshields classified under tariff subheading 7007.21.00.00 for three years starting 1 November 2010.^[43] The measure consisted of an import surcharge, applied on a progressively liberalized scale at the following rates: first year, US$12.72 per unit; second year, US$9.54; first half of third year, US$6.36; and second half of third year, US$3.18. Ecuador also notified the non‑application of the measure to Chile and Peru in accordance with Article 9.1 of the Agreement.^[44] The measure expired at end-October 2013.

66.  The second investigation relates to wood and bamboo flooring and accessories thereof, classified under tariff subheadings 4409101000; 4409102000; 4409109000; 4409210000; 4409291000; 4409292000; and 4409299000. Provisional measures were applied in October 2014, consisting of a specific tariff of US$1.50 per kg of imports for 200 days.^[45] In April 2015, Ecuador notified the WTO that it had made a finding of serious injury or threat thereof caused by the increase in imports.^[46]

4.6  Unilateral Preferential Access to Third Markets

67.  Ecuador remains a beneficiary of the Generalized System of Preferences schemes of Australia, Canada, the European Union, Japan, New Zealand, the Russian Federation, Turkey, Switzerland, and the United States. As a Lesser Relative Economic Development Country in LAIA (together with the Plurinational State of Bolivia and Paraguay), Ecuador benefits from special and differential treatment, including a wider margin of preference from participating countries.

5  The Trade Measure Applied and its Possible Effect

5.1  The Measure Applied

68.  On 2 April 2015, Ecuador notified on the basis of paragraph 9 of the Understanding on the Balance of Payments Provisions of the General Agreement on Tariffs and Trade 1994, that on 11 March 2015, it had introduced a temporary tariff surcharge for a period of up to 15 months in order to regulate the general level of imports and thereby resolve Ecuador's critical balance of payments problems. In its notification, Ecuador stated that the notified measure did not exceed what was necessary to address Ecuador's balance of payments disequilibrium, expected to amount to between US$2 billion and US$2.4 billion in 2015.^[47] Ecuador also noted that, since the second half of 2014, the international environment had been unfavourable to the Ecuadorian economy due to lower international prices of oil and other commodities, the decline in remittances from Ecuadorian residents abroad and the appreciation of the U.S. dollar, among other factors, and this had taken its toll on the balance of payments. Ecuador also stated that the purpose of the measure was to rapidly offset the deterioration of the balance of payments and the decrease in liquidity available to the Ecuadorian economy. Ecuador noted that the measure had been introduced pursuant to Article XVIII, Section B of the GATT 1994 and the Understanding on the Balance of Payment Provisions of the GATT 1994. The general tariff surcharge was described in Resolution No. 011-2015 issued by the Foreign Trade Committee (COMEX), published in the Supplement to Official Journal No. 456 of 11 March 2015, and attached as Annex 1 to the notification.^[48]

69.  In its notification, Ecuador stated that the tariff surcharge applied to 2,955 10-digit lines, or 38% of a total of 7,581 tariff lines, which in monetary terms amounted to 31% of imports recorded in 2014. The surcharge is applied at ad valorem rates of 5%, 15%, 25% and 45%, calculated on the basis of the c.i.f. value of imports as indicated for each tariff line in the Annex to Resolution No. 011-2015. Ecuador provided a list of tariff lines for which the bound rate was exceeded by the tariff surcharge, stating, in each case, by how much it was exceeded. Ecuador stated that it would monitor and assess the application of the measure on a quarterly basis; it would relax the measure as the balance of payments improved and would eliminate it when it was no longer necessary. The Plurinational State of Bolivia and Paraguay were excluded from the application of the measure due to their status as Lesser Relative Economic Development Country in LAIA.

70.  COMEX Resolution No 016-2015 of 8 April 2015, which entered into force immediately, made some modifications to the list of tariff lines subject to the surcharge. Namely, it removed six items from the list, lowering the number of lines subject to the surcharge to 2,949, and provided for exclusions from the surcharge^[49], under certain specific circumstances, for 36 tariff lines.^[50]

5.2  Effect of the Measure

5.2.1  Number and percentage of tariff lines

71.  According to WTO Secretariat calculations, which is based on the information provided by Ecuador, the share of Ecuador's tariff lines subject to the import surcharge is 39.1% of the total. The tariff surcharge is applied on 2,938 tariff lines and has five tiers: 5%, 15%, 20%, 25% or 45%.^[51] The majority of tariff lines face a surcharge of 45% or 25%: some 45.4% of lines are subject to a 45% surcharge, while 13.2% face a surcharge of 25%. On the other hand, 24% of tariff lines are subject to a surcharge of 5% (Table 7). In some cases, the same tariff line is subject to two rates (0 and 5%; 0 and 15%; 0 and 45%), according to the product. Those products have been identified by Ecuador in Annex I of its notification to the WTO.

Table 7 Frequency distribution of the tariff surcharge applied by Ecuador

Source:   WTO Secretariat calculations, based on information provided by the authorities.

72.  A comparison of average bound duties, applied tariff rates and applied tariff rates including the import surcharge, by WTO product categories is shown in Chart 3.

Chart 3 Average tariff rates, by WTO product categories, 2015

(%)

Note:       Calculations include AVEs (based on 2014 imports). For tariff lines without 2014 imports or with different quantity unit, bound rates were used as AVE.

Source:   WTO calculations, based on information provided by the authorities of Ecuador.

5.2.2  Effect on applied tariff level

73.  As a result of the imposition of the surcharge, Ecuador's average MFN applied rate increased by 10.8 percentage points, from 12% to 22.8%, including AVEs, or by 10 percentage points, from 10.7% to 20.7%, excluding them. Bindings are amply exceeded in the case of agricultural products (36.1% applied rate including surcharge compared to a 25.7% bound rate), while the gap is considerably smaller in the case of non-agricultural products (20.6% compared to 20.3%).

74.  After the imposition of the import surcharge, applied tariffs exceed bound levels for 28.0% of all tariff lines (2,101 HS tariff lines at a 10-digit level). In the case of products falling under the WTO definition of agriculture, bound rates are exceeded for 43.5% of the lines (6.0% of total lines), while for non-agricultural products, applied rates including the surcharge, exceed bindings for 25.5% of tariff lines (22.0% of total lines). Bindings are exceeded across all WTO product categories, except petroleum and cotton: They are exceeded only for five lines each in the case of oil seeds, fats and oils; and sugar and confectionery (0.1% of the total, but 4.5% and 17.9%, respectively of each category). Other categories were bound rates are exceeded for only a small percentage of lines include chemicals (3.9% of lines), and fish and fishery products (13.5%). Bound rates are exceeded across 100% of tariff lines in the case of clothing and on 97.3% of tariff lines for beverages, spirits and tobacco (Table 8). Other product categories where bindings are exceeded in a significant share of lines (above 40%) include: animal products; dairy products; fruits, vegetables and plants; coffee and tea; electric machinery; leather, rubber and footwear; and transport equipment sugars and confectionary, and cotton.

Table 8 Ecuador, applied tariffs vs bound tariffs