As G-20 battles protectionism, a cautionary tale in Ecuador

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.

"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.

Its policy, which was implemented in January, makes products anywhere from 5 to 20 percent more expensive than they were last year. In supermarkets across the country, labels on items from laundry detergent to toilet paper urge shoppers to "buy the national product."

President Correa has said that the restrictions, which also include quota restrictions, will keep $1.46 billion circulating in the economy.

Manuel Chiriboga, Ecuador's former free-trade negotiator, says that the policy has received a mix response. Some in the industrial sector say it is a critical safeguard, especially as neighboring countries have devalued their currencies, which Ecuador cannot do. But he sees it as an ominous sign for the health of the economy.

"I think it was an emergency decision.... What it really reveals is the lack of trade policy by the country. Ecuador has increasingly isolated itself," he says, adding that the government has done little to increase foreign exchange. "I don't really criticize the measure, I criticize the reason we got there in the first place."

As a lower-middle-class woman, Espinoza says she sees the value in protecting domestic producers, but shudders at anything that makes her cost of living higher, which she says continues to increase and today is her top concern as a citizen.

"We don't make ends meet each month anymore," says the mother, who works as a cook and whose husband is a taxi driver. "We can't buy what we used to in the grocery store."

Ecuador's experience is not representative of the region. According to a research report by the Council on Hemispheric Affairs in Washington, Latin America has responded in a hodge-podge manner to the crisis.

Peru and Chile, for example, have continued forward with free-trade policies and diversified their trading partners across the globe. Not unlike the policies the US is pursuing, Colombia has increased spending for infrastructure while Brazil has offered a stimulus package, particularly in energy and transportation sectors. Argentina has slapped on licensing restrictions on its imports, and Paraguay responded with tariffs on certain imports in retaliation, the report says, but no country has gone as far as Ecuador.

So far, says Mr. Gresser, the reactions around the globe have been insular, each country dealing with the response in its own way without retaliation being a driving force. "Governments are not working together, but they are not working at odds against each other either," he says.

The meeting Thursday could be an opportunity for unity.

"Trade can be a potent tool in lifting the world from these economic doldrums. In London G-20 leaders will have a unique opportunity to unite in moving from pledges to action and refrain from any further protectionist measure which will render global recovery efforts less effective," said WTO director general Pascal Lamy in a press release.

Earlier this week, British Prime Minister Gordon Brown and Mexican President Felipe Calderón said in a joint statement that they wish to work together to prevent new trade barriers from coming up even as both economies slow: "We recognize that such interventions should promote job creation, protect the interests of taxpayers and savers, and avoid undermining the principles of free trade and open markets."

But accord can unravel quickly. After the US suspended a pilot program last month for Mexican truckers to use US highways, Mexico responded by slapping $2.4 billion of tariffs on some 90 US products in retaliation – in a growing trade dispute that shows how tenuous promises can be.