As G-20 battles protectionism, a cautionary tale in Ecuador
The country has put steep tariffs on an array of goods. Seventeen of the world's 20 largest economies have broken recent promises not to take protectionist measures.
Lucia Espinoza walks through an aisle of her local supermarket in Quito with her one-year-old daughter slung on her hip, perusing the shelf of shampoo bottles. She eyes Johnson & Johnson, but then chooses a brand with a label that reads "Ecuador First": It is half the price.Skip to next paragraph
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"They shouldn't force us to buy products just because they are national," says Ms. Espinoza, shaking her head. "It's not always the best quality."
Her complaint centers on her country's reply to the global financial crisis – steep new tariffs on some 630 imports, from cellphones to soap, which have effectively put anything but Ecuadorian-made goods out of reach for the nation's consumers. The policy, which President Rafael Correa says is necessary to safeguard the Ecuadorian economy, is believed to be the world's most protectionist response since the financial crisis unfolded.
"Ecuador is really the outlier here, it's been the most enthusiastic," says Gary Hufbauer, a trade policy expert at the Peterson Institute for International Economics in Washington. "From what I've heard, it's been the most dramatic example of protectionism."
Guidelines to prevent such barriers from going up are a centerpiece of the Group of 20 summit today in London. But it will be no easy task. While Ecuador's policy stands as a dramatic example, governments around the globe have put in place nearly 100 such measures since August, says Mr. Hufbauer.
The World Trade Organization estimates that the volume of global trade will shrink by 9 percent this year – the largest contraction since World War II. And if the recession continues to deepen, the political pressures on governments to prop up their domestic markets will only grow.
"Up to now, there have not been major [protectionist] policy decisions by governments.… [T]here is a powerful lesson from the 1930s, and we don't want to go there," says Edward Gresser, trade director at the Progressive Policy Institute in Washington. "But I think there is a pretty widely held feeling that if a major country decided to begin closing its markets, others might quickly follow. You'd get a quick chain reaction."
That is why analysts say the G-20 members will have to take a firm stance that goes beyond simple pledges to promote free trade. According to the World Bank, of the world's 20 largest economies, 17 have applied some type of protectionist rule, such as dairy subsidies in Europe, since explicitly promising not to do so during their last meeting in November. No action has been overly dramatic, says Hufbauer, but can quickly add up, particularly if things worsen.
Hufbauer says he feels hopeful that stronger commitment will be taken Thursday because of draft language that was published in the British media.
He says ideas include condemning policies that are protectionist even if they are permissible under WTO guidelines, as well as putting in place a surveillance mechanism to ensure that countries fulfill their obligations. "You can have all these declarations but then don't have any follow-up," he says. "This would be stronger than anything that has been done befote."
Countries from the US to India to Argentina have been faulted for new policies in recent months, from stimulus packages to blocking access to markets. In Latin America, many economies are vulnerable because of their dependence on natural-resource exports, diminishing demand for commodities, and a drop in foreign remittances. Ecuador is particularly at risk because its official currency is the US dollar: The country cannot print new money in the face of declining exports.