EU trade agreement could transform Ecuador into an agricultural powerhouse

By Jake Randolph

Ecuadorian exporters believe that the trade deal with the European Union could convert the country into an agricultural powerhouse, thanks to its geography and weather.

Ecuador is already the world’s largest banana exporter.

After almost 10 years of negotiations with the European Union (EU), Ecuador will finally sign the “protocol of accession” to the trade agreement that Colombia and Peru signed in 2012. The EU Parliament will approve the deal next week while the Ecuadorian National Assembly will give its final okay the following week.

The agreement is historic because it is the first of its kind for Ecuador, which has been lagging behind in a region, mostly for political reasons, that is increasingly more interconnected by trade. The country has trade agreements with different countries, such as Chile, Mexico, and Mercosur, but none of them compare in scale with the agreement with the EU, as it gives them access to a market of 513 million people. Ecuador already has exports of about 2.7 billion dollars a year to the EU, and this figure will quickly grow to nearly $1.4 billion. And the growth should continue.

Starting  January 1, 2017, Ecuadorian manufactured products will be able to enter Europe with zero tariffs. The country will also receive duty-free European products such as cosmetics and liquor, although luxury taxes, to be eliminated over a three to five year period, will still apply in some cases.

Cocoa production could have dramatic growth.

Other products will undergo a transition period; imported cured meats will pay no taxes in 15 years and the European cheese in 17 years. The agreement is most beneficial for Ecuadorian products that already had tariff preferences that were set to expire on the 31 of December of 2016 and that account for 85 percent of Ecuadorian exports to the EU: tuna, shrimp, fish, preserves, broccoli, roses, and fruit pulps, among others.

According to Luis Luna Osorio, a foreign trade analyst, some local industries that have been overprotected by the government, such as footwear, textiles, and the assembly of appliances, will face competition.

The entry of European pharmaceuticals and automobiles, which will have no tariffs in seven years, will also force the local industry to rethink.

Agreement will lessen reliance on oil and gold

A major benefit of the EU agreement for Ecuador is the reduction of reliance on non-renewable resources, such as oil, gold, silver and copper, all of which are environmentally harmful and politically controversial. Over the course of few years, agriculture could replace oil as the country’s major export.

The effects

Based on the experiences of Peru and Colombia, the effects of the treaty will have three stages. In the immediate future, there will be a growth in exports of traditional products such as bananas, shrimp, tuna, cocoa, and flowers. Non-oil exports, the category where these products are the flagship products, have grown between 2008 and 2015, from 7,098 million to 11,671 million. Colombia’s main sales to the EU, for example, continue to be oil, coal, bananas, coffee, flowers, palm oil, and tuna.

The second stage, Luna said, involves the development of added value products derived from the country’s flagship exports. The shrimp and tuna industry exports a variety of preparations, and there are 25 products derived from bananas, including wine, paper, flour, and extracts.

“Agribusiness can grow through clusters, they can export the core product and the products related to those main products. The banana industry, for example, generates a lot of research concerning its diseases, which could also generate revenues,” Luna said.

In a third phase there will be an increase in new Ecuadorian export products. Exotic tropical fruits, passion fruit, tree tomato, dragon fruit, and golden berries, already have niche markets in Europe, however, Luna sees a flaw in these exports: “We haven’t worked to have a bigger exportable supply. One of the problems we have with exotic products is that, if the markets demand a higher supply, we won’t be able to comply.”

One of the biggest boosts for Ecuador is opportunity to greatly expand agricultural exports of products considered to be among the world’s best. Specifically, these include cocoa, the base for chocolate products, and coffee, which is rapidly gaining an international reputation.

Currently, 70 percent of the exports to the EU are unprocessed primary products. One of the companies that adds value to its products is Biocolm, which is owned by Peter Bachmann and that exports golden berries covered in chocolate, as well as fruit vinegars. “Without the agreement with the EU, my products would have paid a 45 percent tariff. Now I can go find customers,” says Bachman. “We live in a paradise where there’s fruit all year round because of the direct sunlight and good soils we have. We could export much more.”

Alfredo Zeller, of Provefrut, the leading exporter of broccoli in the country, sells about 55 million dollars a year. Without the treaty, his products would have had to pay a 14.9 percent tariff. This company, which sells broccoli, cauliflower, and ready to eat Romanesco cabbages, employs 2,000 people in its three industrial plants, and creates another 2,000 indirect jobs. These jobs were in jeopardy without the agreement with the EU. “The agreement will allow us to make long-term contracts to increase our sales.” “Now is the time to seize the immense agricultural potential that Ecuador has,” Zeller said. “We are starting to export spinach, kale, and different kinds of beans.We can compete if we know the rules and have no tariffs,” he said.

If Peru can do it…

Christian Wahli, of the National Association of Manufacturers of Food and Beverages, is convinced that the treaty with the EU is the country’s biggest chance of becoming an agricultural power. Wahli bases this statement on the impressive expansion that Peruvian agricultural exports experienced after Peru signed trade agreements with the EU and the United States.

“Peru’s secret is its use of technology. I can’t believe that Ecuador, with all the water and fertile land it has, can’t compete with Peru, which grows its products in a desert, with artificial irrigation systems.”

While the economic activity in Latin America is contracting, Peru expects to grow 4.1 percent as a result of the expansion of two key sectors, agribusiness and mining.

Andres Espinosa Fenwarh, a Colombian analyst, has stated that Peruvian agriculture has great dynamism because of the development of the agricultural export sector, which has grown at a 14.5 percent annual rate since 2000. “As a result of the expansion of public investment in irrigation in the coastal desert region, Peruvian agricultural exports increased fivefold, from 1.3 billion dollars in 2004 to $ 6 billion in 2016; and according to projections they will amount to 10 billion dollars by 2021. Agricultural production reduced rural poverty by 16 percent and the average monthly income of this activity doubled.”

The Peruvian government and the private sector have invested millions in large irrigation works and in five years the country will have 300,000 new irrigated hectares. There are areas that used to be deserts and that already produce sugar cane, palm hearts, avocados, dates, and palm.

“This should be a state policy,” said Wahli, who is part of an advisory council set up to promote public-private partnership to promote agribusiness in Ecuador. “We want to create local and regional production associations, which allow us to transfer technology, collect the productions, perform post-harvest treatment, and deliver credits. My hope is that we can define two pilot regions next year, one on the coast and another one in the mountains,” he said.

“Ecuador is a country that can produce for niche markets. We won’t plant ten thousand hectares all of a sudden,” he said. “The agricultural businesses first mission is to ensure the country’s food supply, the second mission is to export to these niches.”