Idealex – COVID-19 and international trade

The world is facing a health, human and economic crisis without precedent. The measures taken to reduce the effects of the pandemic, such as isolations and social distancing, have direct impacts on the supply and demand. The suspension of commercial and productive activities generates a global recession and higher unemployment.

In 2019, the global economy recorded its worst performance since 2009, with a grow rate of 2.5% and with global GDP grow projections for 2020 revised downwards. In 2019, the volume of world trade goods fell by 0.4% against 2018 and it is projected that in 2020 it would contract even more. COVID-19 appeared in this scenario.

According to the Economic Commission for Latin America and the Caribbean (ECLAC), COVID-19 is affecting the region for the following reasons:

1. The decline in the economic activity of the region’s main trading partners.
2. The drop in commodity prices.
3. The interruption of global value chains.
4. Lower demand for tourism services.
5. Greater risk aversion and worsening global financial conditions.

According with ECLAC, the value of Latin America and the Caribbean exports will fall at least 10.7% by 2020 due to lower prices by 8.2% and volume in 2.5%.

In the case of Ecuador, given that its main commercial partners China and the United States are the countries with the most infections, it is foreseeable that the value of non-oil exports reduces. This fact added to the fall of the oil prices will generate a significant fall on the value of Ecuadorian exports.

Under these circumstances, the country’s trade policy must facilitate a prompt answer to this crisis. The reduction of non-tariff barriers to import and exports, especial procedures for the release and clearance of goods, simplified mechanisms for the reimbursement of taxes and payment facilities for taxes on foreign trade are measures that would allow companies to overcome the challenges derived from the pandemic.

The Ecuadorian Customs Authority has made and efficient work in order to facilitate foreign trade operations during the state of emergency, it has maintained its services in all customs districts through electronic channels, it has implements specific procedures for the inspection of goods and it has suspended the terms applicable for the abandonment of good through the duration of the emergency.

However, the following measures are needed urgently:

1. The Law for Simplification and Tax Progressivity issued on December 31, 2019 amended the Production, Commerce and Investment Code adding article 157.1. This article establishes a simplified procedure for reimbursing any taxes applicable to foreign trade (drawback). The amount of the reimbursement is equal to a percentage of the FOB value of the export and must be done automatically after the export customs forms are definitive. This process must be put into place in an effective and immediate manner.
2. The Law for Tax Equity establishes that the foreign exchange tax (ISD) paid on the import of raw materials, capital goods and other goods to be incorporated in production processes may be regarded as tax credit for the payment of the importer’s income tax within the following five years. The importer is able to request a reimbursement of the foreign exchange tax that has not been credited against its income tax. However, the reimbursement request procedure is slow and bureaucratic. It is necessary to adopt simplified reimbursement processes that are effective and resolved on a timely manner.
3. Article 116 of the Production, Commerce and Investment Code establishes that the importers are able to request payment facilities on foreign trade taxes derived from the import of capital goods. This benefit must by applicable to the payment of foreign trade taxes on the import of raw material and similar goods.
4. The third general provision of the Law for the Development of Production, Investment Attraction, Employment Generation and Fiscal Stability establishes that the investment incentives included in such law will be applicable for 24 months, this deadline expires in August 21, 2020. The President is able to extend this deadline for 24 additional months. It is importer to extend this deadline in order to stimulate local and foreign investment which may generate employment. It is also important to simplify the processes needed to access certain benefits such as the exemption of tariffs and foreign exchange tax on the import of raw material and capital goods needed for the development of investment projects.

These measures will contribute to protect the cash flow of the taxpayers which is a fundamental issue in order to keep companies’ operating and avoid, to the extent possible, its closure and the subsequent loss of jobs and default with its creditors.

This crisis has worsened the country’s fragile economy, particularly for the fiscal imbalance that has been occurring for several years, and the lack of contingency funds to be injected in an economic recession. The alternative is not the “deglobalization”, but an international cooperation policy that allows each country to develop its best capacities. Ecuador urgently requires structural changes in the labor and tax areas, along with a clear foreign trade policy.

If you want to read this article in Spanish, click here

Table’s source: Special Report COVID-19 issued by the Economic Commission for Latin America and the Caribbean (ECLAC) – https://repositorio.cepal.org/bitstream/handle/11362/45351/1/S2000263_en.pdf