President of Ecuador Rafael Correa in Veracruz, Mexico, December 8, 2014. Miguel Tovar/STF/LatinContent/Getty Images
On Wednesday, Ecuador’s President Rafael Correa said that the country is seriously considering leaving the Andean Community of Nations (CAN). This economic bloc comprised of Colombia, Ecuador, Peru, and Bolivia “serves very little,” he said.
Correa’s comments come as Ecuador is embroiled in a trade dispute with its neighboring members. On January 5, following recent devaluations in the currencies of Colombia and Peru, Ecuador instated “safeguard” tariffs of 21% on Colombian goods and 7% on Peruvian goods in order to protect domestic industries. Colombia and Peru immediately criticized the actions, both for their effect as well as for the unilateral way they were implemented (this despite article 98 of the CAN’s Cartagena agreement, which encourages a country adversely affected by a member state’s devaluation to bring the case before the CAN General Secretariat).
On February 6, the CAN General Secretariat passed a resolution denying Ecuador the authorization to enact safeguard tariffs, but Quito shot back that the CAN could only recommend measures, not issue mandatory orders. In any case, the safeguard tariffs were always meant to be temporary, and Ecuador had already announced the previous day that they would be scrapped by February 27 at the latest. While denying that the safeguard tariffs were a mistake, Correa said that they will be replaced with other multilateral tariff measures affecting the broader external markets, not just Colombia and Peru. The new measures, which will be “equally legitimate,” according to the president, will supposedly fall under World Trade Organization provisions as Ecuador continues to shelter domestic production from foreign manufacturers.
These financial problems stem from Ecuador’s decision to permanently replace its unstable currency with U.S. dollars in 2000. Doing so brought stability, but at the cost of losing control of monetary policy (the U.S. Federal Reserve turns a blind eye to Ecuador’s use of the dollar, but it does not give Ecuador any say in crafting policy). Therefore, Ecuador cannot devalue its currency to stay competitive with its neighbors, so when the U.S. dollar is relatively strong, Ecuador resorts to contentious protectionist measures. “We have problems in the balance of payments due to the collapse of oil prices; the U.S. dollar has appreciated, and our neighbors’ currencies are depreciating. It’s absurd; I cannot stand idly by,” said Correa on February 7. Correa also claimed that the free trade agreements that the U.S. signed with Colombia and Peru in 2005 had beat the CAN to death, echoing a similar claim by the late Hugo Chávez, who withdrew Venezuela from the CAN afterwards.
However, Ecuador’s business community is united against leaving the CAN. Representatives from chambers of commerce all throughout Ecuador signed a unanimous declaration on February 7 supporting the CAN as a “natural and adequate forum for resolving disputes.” They recognized that exchange rate fluctuations occur, but said that they correct themselves automatically without the need for government interference chasing illusory competitive advantages. Blasco Peñaherrera, president of the Quito Chamber of Commerce, said on Wednesday that leaving the CAN would be an “enormous error” that would only isolate Ecuador further, thanks to Correa’s “erratic leadership” in setting the nation’s political economy. The economic effects of abandoning the CAN are unknown, but it would certainly harm Ecuador’s political ties with its neighbors.
