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Cablegate: Ecuador Rebuffs International Companies On Balance Of

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E.O. 12958: DECL: 2035/02/02
TAGS: ECON EINV ETRD EFIN COM USTR ECPS PREL EC
SUBJECT: Ecuador Rebuffs International Companies on Balance of
Payments Safeguards

REF: QUITO 96; 09 QUITO 5...


id: 246775
date: 2/2/2010 14:38
refid: 10QUITO53
origin: Embassy Quito
classification: CONFIDENTIAL
destination: 09QUITO509|10QUITO96
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C O N F I D E N T I A L QUITO 000053

SIPDIS

E.O. 12958: DECL: 2035/02/02
TAGS: ECON EINV ETRD EFIN COM USTR ECPS PREL EC
SUBJECT: Ecuador Rebuffs International Companies on Balance of
Payments Safeguards

REF: QUITO 96; 09 QUITO 509

CLASSIFIED BY: Christopher A. Landberg, Economic Counselor, U.S.
Department of State, Economic Section; REASON: 1.4(B), (D)

---------

Summary

----------

1. (C) Three of the most recognizable companies in the world,
Apple, RIM (Blackberry), and Nokia, concluded a three-day visit to
Ecuador in January with the impression that they have limited to no
ability to influence GoE trade and investment decisions. In
attempting to convince GoE officials to eliminate tariffs imposed
in January 2009 for balance of payments purposes, the companies
highlighted the broader benefits of mobile telephony and argued
that the tariffs had resulted in missed opportunities and lost
revenues for Ecuador. GoE officials confirmed they will stick to
the recently announced plan of gradually reducing the safeguards
over six months, rather than complying with the GoE's agreement
with the WTO to terminate them January 22, 2010. Furthermore, the
GoE is seeking other means to continue protection for key sectors,
mainly industries with local production such as textiles and
footwear. Several officials asserted that the GoE's overriding
economic policy was import substitution industrialization, and
pushed hard for the companies to open production facilities in
Ecuador. Embassy demarches on this issue reported in ref A. End
Summary.

--------------------------------------------- ------------

Theme of Visit: Missed Opportunities and Lost Revenues

--------------------------------------------- ------------

2. (C) Representatives of Apple, Blackberry maker RIM, and Nokia,
along with a representative of the Information Technology Industry
(ITI) Council, traveled to Ecuador January 18-21. The purpose of
the trip was to convince the GoE to eliminate the 35% tariff it had
imposed on all cell phone imports in January 2009. This tariff was
on top of the existing 15% tariff on most cell phone imports.
Ecuador imposed similar trade restrictions on 627 products in
January 2009, invoking the WTO's balance of payments (BoP)
provisions (see ref B and previous for background). U.S. and
Canadian Embassy officials helped the companies arrange meetings
with top GoE officials at the Ministry of Industry, MFA,
InvestEcuador, Telecommunications Ministry, as well as with the
AmCham in Quito. The Embassy also hosted a roundtable for the
companies with Canadian, Brazilian, Mexican, and EU officials.

3. (C) The company representatives told EmbOffs that they focused
during their meetings with GoE officials on the broader benefits of
IT, and mobile telephony in particular, and the negative impact the
higher tariffs were having on Ecuadorian consumers and businesses.
They pointed to a World Bank study that estimated that a 10%
increase in internet connectivity translates into a 1.3% real
increase in GDP. They also pointed out the possibilities for
improving access to banking services, real-time ag-sector
information, medical services (especially in remote areas), and
educational tools.

4. (C) According to the Apple and RIM reps, they also emphasized


during their meetings the available business opportunities in the
market for applications, noting that Ecuador already has several
small software companies involved in creating applications for both
Blackberry and iPhone. Apple's representative highlighted the
potential commercial and educational benefits of tapping into the
existing world market of 70 million iPhone users, and played a
Chilean news clip during all meetings showing how Chilean software
companies are sprouting up to develop iPhone apps - providing jobs
and paying taxes. Nokia briefed GoE officials on its program to
provide free email services, particularly in remote regions.

5. (C) The company reps also argued that, in the case of IT
products, the higher tariffs had not had a positive BoP impact and
had resulted in lower tax revenues for central and local
governments. While legal imports of mobile telephone devices
plunged 70% during 2009, local telecom companies' subscriptions for
mobile telephones increased 30% during the same period. This
implies that Ecuadorians are smuggling the devices into Ecuador,
probably at inflated prices. The result is an outflow of dollars,
the opposite of what the GoE had hoped to accomplish by imposing
trade restrictions. It also results in lost tax revenues and lost
jobs connected to legal device sales. The companies estimated the
value of illegal mobile telephones entering Ecuador in 2009 at
almost $211 million. Added to the legal imports in 2009 of over
$66 million, this easily exceeds total imports of $213 million in
2008, when no restrictions were in place.

6. (C) While a few GoE interlocutors sympathized with the broader
argument of the benefits of opening up to IT, most, and
particularly those involved in trade policy decisions, reacted
defensively to the companies' arguments against the safeguard
provisions. However, the arguments related to lost revenues
resonated, to the point where the companies felt the need to
clarify that all original sales of these devices were legal and the
companies were not in a position to help the GoE determine how the
devices were entering illegally.

7. (C) At the end of the three days of meetings, the company reps
had come to the conclusion that their arguments were not working
with government officials focused on protecting existing local jobs
and complying with President Correa's orders to eliminate Ecuador's
BoP deficit. (RIM/Blackberry reps received a similar reception
from GoE officials during a solo trip to Ecuador in October 2009.)
The Apple and RIM reps in particular concluded their visit with the
impression that stories of how private individuals and
entrepreneurs can get rich writing applications do not resonate
with an openly socialist government that regularly calls for wealth
redistribution and advocates a much greater government role in the
economy.

--------------------------------------------- -------

Ecuador Plans on Gradual Elimination of Safeguards

--------------------------------------------- --------

8. (C) GoE officials disputed the tech companies' conclusions,
arguing that the safeguards had largely succeeded in their main
purpose: to turn around the BoP deficit the country experienced
between the fourth quarter of 2008 and second quarter of 2009.
(Due to a large BoP surplus in third quarter of 2009, the BoP
balance was marginally positive through the first nine months of


last year.) These GoE officials were adamant in supporting the
plan that Ecuador's Foreign Trade and Investments Council (COMEXI)
announced December 22, 2009, to reduce the tariff safeguards by an
initial 10% (across the board on all 627 products) starting January
2010 and eliminate them altogether in stages by June 2010. In
public comments, Coordinating Minister for Production, Natalie
Cely, who is also the President of COMEXI, explained that the
reason for the gradual decrease in safeguard levels was to avoid an
"avalanche of imports" into the market.

9. (C) Telecommunications Minister Jorge Glass, among the most
supportive of the multinational companies' position, informed them
that COMEXI had agreed on the following rough schedule for tariff
reductions: 10% on January 23, 23% on February 23, 33% on April 23,
and 33% on June 23. Ref A reports key GoE officials giving
assurances that COMEXI will publish this schedule "to ensure
maximum transparency" in the process, despite concerns that this
could cause supply disruptions as suppliers delay sales to take
advantage of lower tariff levels in the future. (This may, in
fact, be the GoE intent.)

10. (C) Several GoE officials informed the companies that the
government was searching for means to continue protections for
sensitive sectors. President Correa has reaffirmed this policy in
public, arguing that the GoE needed to protect vulnerable sectors
from "unfair competition, such as from China, where the monthly
salary is $30." Correa and other GoE officials have publicly
provided assurances that the GoE will eliminate the BoP safeguards
and in their place impose more specific protective measures that
are WTO-consistent. U.S. and Ecuadoran private sector
representatives tell Econ and FCS officers that the GoE is mostly
concerned with protecting the textile and footwear industries, both
of which have benefitted enormously from the high tariffs of the
last year.

-------------------------------

Other Embassies' Perspectives

-------------------------------

11. (C) The Embassy hosted a roundtable January 19 with EU,
Brazilian, Mexican, and Canadian officials. (This represents the
three visiting companies' home countries, U.S., Canada, Finland, as
well as RIM's Mexico manufacturing site and Nokia's Mexican and
Brazilian manufacturing sites.) Given the GoE's complicated
relationship with the U.S., the companies were eager to get support
from Brazil, Mexico, and the EU in both Ecuador and Geneva.
Officials from the Brazilian, Mexican, and EU missions noted that
their focus was on talks in Geneva. The EU rep said she could not
intervene locally until she received instructions from Brussels.
Mexico's rep said her Embassy had not received instructions, but
commented that Mexico was in the middle of negotiating a bilateral
commercial treaty with Ecuador (under ALADI). While the next round
of talks had been postponed until March due to the turmoil in
Ecuador's MFA, she noted that the GoM was developing a list of
specific products and sectors for preferential access and suggested
IT products could be considered for inclusion. (The companies will
follow up directly with the GoM.)

12. (C) The Brazilian EmbOff said he had met with GoE officials
over the safeguards issue, which violated Ecuador's trade agreement


with MERCOSUR, but argued that the GoE is short-term focused and
the safeguards support political objectives. (MERCOSUR mobile
devices enter duty free, so only face a 35% tariff rather than the
50% tariff facing non-MERCOSUR imports.) Canada's EmbOff stated
that the GoC is working closely with colleagues in Geneva and also
raising the issue with GoE officials in Ecuador. She commented
that COMEXI's initial 10% reduction appeared to be a violation of
WTO rules, and speculated that the GoE might need to dismantle the
current measures and request another WTO exception in order to
reinstate new safeguards. ITI's rep pointed out that the WTO was
already questioning the process with which Ecuador applied
safeguards on 627 products, and speculated the WTO would therefore
view critically the GoE's efforts to continue protections.
(Normally countries apply safeguards to all imports and then exempt
specific products. Ecuador did the opposite. EmbOffs have heard
that GoE officials haphazardly picked products until they reached
President Correa's specific target for reducing imports by $1.5
billion.)

--------------------------------------------- ----------------

"Ecuador is a Socialist Nation...Pursuing Import Substitution"

--------------------------------------------- -----------------

13. (C) The GoE does not appear to be specifically targeting IT or
mobile telephony products for the long-term, since there is no
local production. Therefore, the companies were fairly confident
that the GoE would most likely follow through on eliminating the
35% safeguards tariff by the GoE's new June/July deadline.
However, Nicholas Trujillo, the Director of InvestEcuador (the
GoE's investment promotion agency), pushed hard in his meeting with
the companies for them to consider opening production facilities in
Ecuador. Trujillo waved off the companies' standard presentation
on the benefits of mobile telephony, saying that "Ecuador is a
socialist nation...its guiding economic policy is import
substitution industrialization." He also disregarded the
companies' explanations that their manufacturing facilities are
already established for the region, stating emphatically that, "the
President wants cell phones produced here."

14. (C) Trujillo liked the arguments related to the development of
Ecuador's software industry, but showed his bias in supporting
ideas that maintained a significant government role, such as having
the GoE and provincial governments establish incubators for
software startups. Some of Trujillo's other ideas were for the GoE
to start an Ecuadoran site similar to Amazon.com to market
Ecuadoran products and to market Panama Hats through the internet,
in order to educate the world that "Panama Hats" actually originate
in Ecuador. In all three cases, he saw the GoE as the driving
force, rather than having the government establish the right
conditions to promote private sector innovation and risk-taking.

15. (C) Hector Rodriguez, a top official at SENPLADES (the
Secretariat for Planning and Development), who participates on
COMEXI's board and is one of the main architects of GoE trade
policies, reiterated many of Trujillo's arguments during a January
21 meeting with EconCouns. While sympathetic to arguments on the
benefits of opening up to IT, Rodriguez emphasized that Ecuador
needs value-added industries that provided employment. He asked
the Embassy to pass the message to Apple and RIM that not only is
the GoE ready to eliminate the 35% safeguard tariffs on mobile
telephone imports, but if these companies open production
facilities in Ecuador, the GoE will eliminate the normal 15% tariff


for their products and even provide financial incentives.

----------

Comment

----------

16. (C) Apple and RIM are among the most iconic companies in the
world, and their products are synonymous with technological
innovation and economic progress. Their products are ubiquitous
within the GoE; in fact, the government virtually operates on
Blackberries, with the President and most other Ministers and
high-level officials sporting two of them at a time. Therefore the
reception these companies received in Ecuador was disappointing.
While we did not expect GoE officials to alter their six-month
timeframe for dismantling the safeguards, we did expect them to use
the visit as an opportunity to develop relationships with the
companies that are driving next generation economic growth.
Instead of welcoming these companies with open arms, GoE officials
met them with arguments in favor of import substitution and demands
for local production, demonstrating that the current government is
short-term focused and lacks the vision necessary to make sure this
country of only 14 million people remains economically competitive
in the coming decades. As the companies figured out for
themselves, GoE leaders are not looking to unleash the
entrepreneurial spirit in Ecuador, rather are more interested in
leveling society, protecting what they have, and allowing foreign
companies into Ecuador on their terms.
HODGES

=======================CABLE ENDS============================

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