Ecuador - The China problem

China, the fastest growing economy in recent history, has been spreading its influence around the world. Their influence is most prominent in Latin America, one of the countries with the most Chinese influence is Ecuador. Here it enjoys a near - monopoly of crude exports. Critics of the 2007 – 2017 former president (Rafael Correa) say china’s influence threatens Ecuador’s national sovereignty, indigenous people’s rights, standard of living and biodiversity.

This article will be exploring the potentially negative economic impacts of Ecuador’s trade & economic relations with China.

As mentioned earlier China enjoys a near – monopoly control of Ecuador’s crude exports, but how did that come to be exactly? Well according to the financial post, the GM of Ecuador’s state owned PetroEcuador (Marco Calvopiña) was dispatched to China to commence negotiations. These negotiations included the selling of millions of barrels of oil to Chinese government – run firms. In order for some speedy short-run economic growth, Ecuadorian officials were adamant in making this trade deal happen. And as expected enough PetroEcuador signed a $2bn loan with state oil company Sinopec. On top of that, Ecuador have been seeking $9bn in financing from china to build an oil refinery that will process 200,000 barrels of oil a day. Almost all of these barrels will be exported to china. From 2007 – 2014 an average of 15.97 million barrels crude oil had been produced, which have varied 0.91% in production. This means that Ecuador as mentioned has an almost stable production rate during this period.

Previously, high import tariffs on European car manufacturers has led to a big fall in the supply of European cars in Ecuador. Pair this with low import prices from China due to subsidies given to domestic firms, car companies such as “Great wall motors” have boomed from exporting to countries such as Ecuador. Showing an example of how china took control at even the consumer level, let alone the macro level.

The Guardian on the 6th of August 2020 released a statement saying that Chinese fishing fleet is raising fear of Galápagos sea life. A vast fishing Armada off Ecuador’s biodiverse Pacific islands has stirred alarm over ‘indiscriminate’ fishing practices. In territories they were not permitted to be in, they are taking away the natural resource of fish that accounted for $116 of exports in 2012. A number that has been growing in recent years.

Oil trading has also led to the exponential amount of domestic drilling to take place, causing a harmful effect on Ecuador’s natural environment.

How has this damaged Ecuador?

Well, the Los Angeles Times reported on the 10th of December 2020 that whilst President Correa was in charge of the Ecuadorian government, one of his main priorities was to fast track economics development. In order to build things such as Chinese oil refineries in Ecuador, schools, roads and Dams (which has created many other economic problems in it’s own right). Ecuador borrowed billions of dollars from China leading them to have a large budget deficit.

But the main effects of this deal, the Crude Oil problem. By shipping so many crude oil barrels to China for such low prices slows Ecuador’s potential export-led economics growth. Through to 2024, Ecuador would have shipped 90% of exportable crude oil to China. This serious exploitation of natural resources can lower exports and destroy the livelihoods of those working in oil rigs in Ecuador, a large employer, thus lowering living standards. To most Ecuadorians, the social-economic costs are too high. These practices by china has put Ecuadorian firms at risk of failure, and many people out of work, and damages local communities.

Financially, Ecuador has borrowed $11bn from China since 2008 and as a result of this situation is about to borrow $1.5bn more from Beijing, contributing even more to the governments national debt. This has led to Ecuador shipping half of its gold reserves to New York.

Critiques of the governments practices argue that Ecuador’s growing dependency on China is unhealthy and will result in an unstable economy (possibly reducing the potential for foreign direct investment). And this is one of the many reasons President Correa’s reputation among Ecuadorian citizens and voters.