Is the US going to move factories from Asia to Ecuador?

Published on August 04, 2020

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A United States plan that could benefit the region, including Ecuador, stimulates debates, analysis, and expectations in economic experts and business leaders in the country.

The Trump administration is readying a new initiative that would use financial incentives to encourage U.S. firms to move production facilities out of Asia and into the United States, Latin America and the Caribbean, a senior White House adviser said on Wednesday.

The project could bring $30 billion to $50 billion in U.S. investment back to the Americas, with infrastructure, energy and transportation the first potential areas of focus.

This is according to Mauricio Claver-Carone, currently the senior director for Western Hemisphere affairs at the National Security Council and one of the main Latin American advisers to Trump. Claver-Carone is also a candidate for the presidency of the Inter-American Development Bank (IDB), whose elections will be next September, for which he has the support of fifteen countries in the region, including Ecuador.

“We’re essentially creating a ‘Back to the Americas’ initiative,” he said. That would include both returning some facilities outsourced to China back to the United States and basing others in Latin America and the Caribbean in a drive for more so-called nearshoring, Claver-Carone said.

According to the latest report by the Office of Economic Analysis of the United States Department of Commerce, there are some 35,000 large US companies (each with assets of $25 million or more) operating in other countries of the world. In total, they employ 14.3 million people.

More than 17,800 are in Europe. In Latin America and the Caribbean there are about 5,900, slightly less than in Asia, where there are about 6,500, of which 1,700 are in China.

Ecuador presents numerous obstacles

In the opinion of Alberto Acosta Burneo, editor of Weekly Analysis, the country would not be prepared to receive these companies and they would likely move to other countries with better environments and conditions that interest investors such as Colombia, Peru or Chile. Although he adds that first it is necessary to see if the initiative of the United States is carried out.

In 2019, Ecuador only attracted $966 million of foreign investment, while Peru and Colombia raised $5.5 billion and $14.5 billion, respectively.

Acosta sees an incentive problem in the country, pointing out that consumption is rewarded, and investment is punished through a tax schedule that is far from the rest of the region’s systems, which makes it costly to produce in Ecuador.

He indicated that the corporate burden in Ecuador reaches 42.6%, which exceeds the regional average of 31.6%. This corporate burden includes income tax, personal dividend tax and employee participation. There are other disincentives such as the currency exit tax (ISD), which according to the Acosta, blocks the free flow of capital and makes companies prefer to stay abroad.

Added to this is an excess of state regulation and the lack of competitiveness against other countries in the region, since Ecuador has fewer agreements with external markets, such as the United States, its main trading partner and promoter of the initiative.

“Companies want to locate in Ecuador to produce for the US market, but we have access surcharges, with penalties to that market, because we have not wanted to sign a trade agreement,” regrets the editor of Weekly Analysis.

Meanwhile, Pablo Arosemena, President of the Federation of Ecuador’s Chambers of Commerce and the Guayaquil Chamber of Commerce, said that in order to attract these investments, Ecuador must open its economy to take advantage of these opportunities.

For this, he adds, it is necessary to improve the regulatory environment and create competitive conditions. “The first thing a company will see when deciding where to put its factories is the stability of the rules for doing business, the labor cost and then the regulatory framework,” says Arosemena, who lists the four main barriers to attracting investment:

  • The high tax and tariff burden: the average tariff in Ecuador is 5%. In Colombia it is 3.2%, while in Peru 1.1%.
  • Obsolete and not very flexible labor code: Ecuador is the fifth worst country in the world with the labor contracting scheme; it also has the second highest minimum wage in the region.
  • Red Tape: Ecuador is ranked 137 outof 141 countries in prevalence of non-tariff barriers.
  • Regulatory framework: the imposition of taxes by the government drives away foreign companies and makes planning impossible.

Caterina Costa, President of the Ecuadorian Business Committee (EEC) and the Chamber of Industries of Guayaquil, says that beyond the policies applied from Washington to make this initiative happen, and that it undoubtedly has geopolitical purposes, it is important that in Ecuador, the necessary reforms are generated so that it becomes an important investment destination.

“Historically, less than 1% of all foreign investment that reaches South America has reached our country, therefore, improving this environment is essential,” says Costa, who points to much more substantive issues that involve prompt and timely actions by both the Executive and the Legislative.

Some are progress in the processes of trade agreements with Mexico, the Pacific Alliance and the United States, labor reform and social security; also from the stock market and the Monetary Code, which allow the arrival of capital from the rest of the world, reduce and / or eliminate tariffs for raw materials and capital goods, among others.

Chinese loans stifle Ecuador chances

Claver-Carone said the Trump administration had already been working with countries in Latin America and the Caribbean to help them attract U.S. investors, but the pandemic helped convince U.S. companies it was time to get on board.

He said the outbreak had clearly demonstrated the advantages of having suppliers based closer to the United States than in Asia.

The initiative would not focus on cheap labor costs but would build on provisions aimed at protecting workers that were included in the U.S.-Mexico-Canada trade agreement that entered into force in July, he added.

Claver-Carone also said there needed to be an improvement in transparency over Chinese lending in Latin America.

He said Ecuador in particular was “not being allowed to advance and move forward and kind of unshackle itself from that unfair, over-collateralized debt to China.”

Ecuador’s President Lenin Moreno has sought to renegotiate the terms of its debt to China, which totaled $6.5 billion in 2018.

China invests heavily in Latin America and has been responsible for more than $40 billion in lending to the region since 2015, according to Inter-American Dialogue data.

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