Ecuador—a New Commercial Relationship with U.S.

A new beginning for the commercial relationship between the U.S. and Ecuador was marked on December 8, 2020. After months of negotiations, the two governments signed the Protocol on Trade Rules and Transparency for the Trade and Investment Council Agreement between the Government of the United States and the Government of the Republic of Ecuador (the Protocol).

This Protocol updates the U.S.–Ecuador Trade and Investment Council Agreement originally signed on July 23, 1990, with four new annexes comprising state-of-the-art provisions on customs administration and trade facilitation, good regulatory practices, anti-corruption, and small and medium-sized enterprises (SMEs).

The purpose of the original agreement was to enhance the bilateral economic partnership between the two countries by:

• facilitating trade, stimulating investment, and promoting good regulatory practices;
• ensuring efficient and transparent customs procedures that reduce costs and ensure predictability for importers and exporters;
• encouraging cooperation in the area of trade facilitation and customs enforcement;
• minimizing unnecessary formalities at the border;
• improving regulatory processes;
• promoting anti-corruption measures;
• providing transparency to the public and traders of all sizes and in all sectors; and
• fostering cooperation in promoting jobs and growth in SMEs.

Key Facts of the Protocol

The recently signed Protocol consists of four annexes:

• Customs Administration and Trade Facilitation;
• Good Regulatory Practices;
• Anti-corruption Measures, and
• Small and Medium-Sized Enterprises.

Annex I of the Protocol is intended to expand on the multilateral World Trade Organization Trade Facilitation Agreement, thus incentivizing the publication of customs and other border information. The data that will be available includes taxes and fees imposed at the border as well as relevant information of interest for importers and exporters.

Among other provisions, the Annex also provides for the acceptance of electronic documents under specific international standards, including electronic phyto-sanitary certificates and mechanisms to help ensure consistent customs treatment from port to port.

Annex II deals with good regulatory practices. It is important to take into consideration that it is only the third U.S. trade agreement of its kind, and will provide greater transparency regarding Ecuador’s regulatory procedures. The Annex provides for the option to receive assessment from U.S. authorities of relevant draft regulations prepared by the Ecuadorian authorities. Future regulations will be carefully reviewed to assure their effectiveness and to identify opportunities to reduce regulatory burdens.

Annex III establishes anti-corruption commitments that include good practices to prevent and combat bribery and corruption. Authorities will be required to impede the tax deductibility of funds used in corrupt practices, and to develop and implement measures to recover the proceeds of corruption. The Annex requires compliance with rules on integrity in maintaining financial records, including financial statement disclosure and auditing requirements in accordance with international standards.

Annex IV addresses SMEs, and how to encourage their development and boost their operations. It will promote cooperation to increase trade and investment opportunities for SMEs by providing information for those doing business and trading between the U.S. and Ecuador.

Tax, Tariffs and Fees

Several Ecuadorian products benefit from the U.S. Generalized System of Preferences, originally authorized under the Fifth Title of the Commerce Act enacted by the U.S. Congress on 1974 (the System). The System provides minimal or no tariffs on such Ecuadorian products. The System is not an agreement, so its renewal depends solely on the will of U.S. government authorities. In 2018, President Trump renewed the System as a part of the Omnibus Spending Bill, extending its validity until December 31, 2020.

The Protocol does not imply modifications to taxes, customs, tariffs or other related matters. Nevertheless, further discussions on trade facilitation and improving the two countries’ trade relationship are expected in 2021.

Several sectors of the Ecuadorian economy have raised awareness of the relevance of the Protocol in prompting the negotiation of a trade agreement with the U.S. The agreement may well have similar characteristics as the one Ecuador recently signed with the EU, which provides for reduced tariffs on a considerable number of products, among other provisions. In general terms, the agreement could foster trade of significantly more products from both countries, as customs expenses would be reduced.

Such agreement would also support Ecuadorian producers and exporters, helping them to compete with their competitors in Peru and Colombia, which have had full trade agreements with the U.S. in place since 2009 and 2011, respectively. The presence of Ecuadorian products in the U.S. market, relative to those from Colombia and Peru, has decreased significantly in recent years.

Tax Treatment

It is evident that the access of Ecuadorian products to the U.S. market demands competitive prices. Some Ecuadorian commercial sectors consider that competitiveness is directly related to the fiscal regime that applies. However, despite some specific cases, such as the 5% capital overflow tax which is technically inconvenient for industrial and commercial agents, the Ecuadorian tax regime is overall suitable for businesses performing activities in national territory.

The calls for the expediting of new preferential tax treatment, made by representatives from some industrial sectors in Ecuador, lack technical grounds. At this point, the reduction of production costs, which are not necessarily related to local tax tariffs, is far more important in increasing the competitiveness of Ecuadorian products. It is also important to note that the profit margins of Ecuadorian industrial sectors are higher than those identified internationally. Due to the effects of the Covid-19 pandemic, the year 2020 is not reflective of reality, thus analysis should not consider this particular fiscal year.

Moreover, the existence of indiscriminate tax benefits creates a false sense of competitiveness. Over the last decade, Ecuador has implemented several tax benefits that have not incentivized new national and international investment. This has also been to the detriment of good tax practice by going against the principles of generality and equality that should be present in any tax regime.

Finally, Ecuadorian roses have begun to benefit from a cut in the U.S. tariff from 6.8% to 0% as of November 1, 2020. This represents a considerable opportunity for the sector especially due to the upcoming Valentine’s Day, which represents the largest export period for Ecuadorian rose producers. At the present time, roses are the only Ecuadorian product that the U.S. Generalized System of Preferences will be extended for beyond December 31, 2020.

The Future

The U.S. is one of Ecuador’s largest trading partners. As a dollarized economy, the inflow of dollars represents a key element in the stability of the nation. According to the latest information provided by the Central Bank of Ecuador, between January and November 2020, Ecuador’s non-petroleum trading balance with the U.S. was positive by approximately $682 million. In the same time range, Ecuador’s main exports to the U.S. include petroleum-based products at a free-on-board value of $1.43 billion, fish and shrimp at about $1 billion, bananas at approximately $551 million and roses at $303 million. U.S. import products include petroleum-based products, phones, machinery and soy-based products.

In the upcoming months, the parties will schedule and plan a commercial agenda.

The U.S. International Development Finance Corporation (DFC) and Ecuadorian officials met on January 14, 2021, to sign a framework agreement to refinance debt and support private sector investment in the country.

The framework provides criteria for future investments to be considered by the DFC for financing, with the proceeds supporting the refinancing of preexisting debt and development in Ecuador. Each project will require individual approval by the DFC and be subject to the agency’s extensive review process and due diligence. Under the framework, up to $2.8 billion is available for projects. Loans under this framework would be directly linked to promoting sustainable economic growth.

The agreement also establishes a long-term cooperative relationship between the DFC and Ecuador’s Ministry of Economy and Finance.

In order to incentivize foreign trade, Ecuador has also entered into new trade agreements with large trading partners including the U.K., the European Free Trade Association (EFTA) (Iceland, Liechtenstein, Norway and Switzerland), and Chile.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Diego Andrés Almeida is a Senior Consultant and Cesar Molina is a Tax Associate with Almeida Guzmán & Asociados.

The authors may be contacted at: daa@almeidaguzman.com and cmolina@almeidaguzman.com