Ecuador’s Latest Free Trade Agreements Aim for Economic Growth

This year, Ecuador has attempted to steer its economy in a more promising direction by solidifying trade agreements with South Korea, China, and Costa Rica. These agreements reshape the country’s economic dynamics and aim at substantial advances for progress toward sustainable development.

The agreements aim to foster confidence for foreign investors and create a network of opportunities to attract investment. Foreign companies are expected to contribute to job creation and technology transfer, catalyzing economic growth and development.

The cornerstone of the free trade agreements is the principle of non-discrimination, especially regarding tax matters. In general terms, the trade agreements seek to establish minimal or even zero tariffs for imports and exports, promoting a free and efficient flow of goods and services.

Tax Benefits and Challenges

It is essential to consider the tax impact of these agreements when opening to new markets. Free trade agreements seek to streamline and facilitate the exchange of products between participating states, which entails a nearly complete reduction or elimination of the applicable customs tariffs for imported goods.

The reduction of tariffs, one of the most significant changes, stimulates an increase in imports and exports, directly impacting value-added tax collection.

Additionally, Ecuadorian tax law establishes fiscal benefits for exporters. Regular exporters can benefit from a reduction of up to 3 percentage points in income tax, reducing their tax rate to 22%. This incentive aims to encourage more individuals and companies to take advantage of this opportunity, especially as exports from Ecuador increase.

However, free trade agreements also raise challenges for domestic businesses. Competition with foreign products that enter with minimal or zero tariffs presents obstacles for Ecuadorian producers. Overcoming these challenges involves reducing costs, improving quality, and enhancing efficiency in all services offered.

South Korea. On Oct. 10, the Ecuadorian government announced the “pre-signing” of a trade agreement with South Korea, a leader in innovation and technology and strategic partner with valuable development opportunities.

This agreement is the broadest and most modern that Ecuador has negotiated and translates into a 27% growth projection for non-oil exports.

The country will also benefit from South Korea’s cooperation in areas such as efficient production, innovative methods and machinery for product recycling, and establishment of a technological plant for developing Ecuador’s food industry.

The trade agreement doesn’t establish tariff benefits for the importation of Korean products into Ecuador in the metal-mechanical, textile, and white goods sectors. However, televisions and automobiles were included in the agreement, which implies a gradual reduction in tariffs until reaching 0%.

The most favored Ecuadorian products are shrimp, roses, broccoli, bananas, pineapples, and mangoes. Prior to the agreement, the tariff for Ecuadorian shrimp entering South Korea was 20%, while for roses and flowers it was 25%, broccoli 27%, and bananas 30%. Thanks to the agreement, these products will enjoy a 0% tariff.

China. The trade agreement with China, signed on May 11, marks a milestone for Ecuador by providing preferential access to one of the world’s largest markets. With a population of 1.4 billion, China becomes a strategic destination for Ecuadorian exports. Access for 99.6% of Ecuador’s exports to China, either immediately or within a 10-year period, places Ecuador on equal footing with neighboring countries.

Ecuador will grant tariff preferences equivalent to 89.98% of the national tariff lines, which represent approximately 92% of the value of imports from China.

Ecuador excluded imports from the industrial, agricultural, and aquaculture and fisheries sectors. China excluded products related to metal waste, among other items. Both countries mutually excluded the following items that are highly sensitive for national production: fresh meats, liquid milk, palm oil, rice, and sugar.

The new products benefiting from tariff preferences include tropical fruits, frozen cuts of beef, pork, and poultry, dairy products, cocoa and coffee derivatives, flowers and roses, fruit juices and concentrates, alcoholic and non-alcoholic beverages, wood and furniture.

Costa Rica. The agreement signed with Costa Rica on March 1 strengthens cultural and geographical ties and enhances cooperation in various areas, including technology and logistics. The impact on Ecuadorian exports is significant, as 96% of current Ecuadorian export products will enjoy immediate tariff benefits. This agreement represents a significant advantage, with 84% of products entering Costa Rica with a 0% tariff. Ecuador’s exports to Costa Rica currently face an average tariff of 12%.

Among the list of Ecuadorian products that will enjoy an immediate complete tariff reduction are stoves, wooden boards, iron or steel wire, shrimp, canned tuna, textiles and clothing, car batteries, medicines, fruit juices, and black tobacco.

Ecuador will benefit from importing tariff-free products from Costa Rica such as medical supplies and devices, medicines, batteries, agricultural inputs, and syrup for soft drink production.

Moving Forward

Effective legislative and constitutional oversight of the agreements and their tax implications is imperative to maximize their benefits. Ecuador wants to move forward, and these agreements are a step in the right direction.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Diego Andrés Almeida is the managing partner, Marco Moya is director, and Ignacio Jijón is a tax associate with Almeida Guzmán & Asociados.

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