Bloomberg News

Assange Asylum Wins Correa Anti-U.S. Cachet as Trade to Suffer

August 28, 2012

Ecuador President Rafael Correa is emerging from the shadow of Venezuelan mentor Hugo Chavez as his decision to grant asylum to WikiLeaks’ founder Julian Assange plunges relations with the U.S. to new lows.

While such a tactic may boost his chances of re-election in February, the political gain may spell economic loss for Ecuador, as harboring Assange sparks reprisals from the South American nation’s top trade partner, said Cynthia Arnson, Latin America program director at the Woodrow Wilson International Center for Scholars.

Ecuador’s economy, about the size of Nebraska’s, benefitted from $1.7 billion in duty-free exports to the U.S. last year under the Andean Trade Promotion and Drug Eradication Act. Protecting Assange, who published classified U.S. military cables over the internet, is the latest in a series of conflicts with the U.S., including ties with Iran, which top U.S. lawmakers say justify re-imposing tariffs when the trade preferences expire in July.

“This latest move completely undermines the relationship with the U.S. and virtually guarantees that Ecuador will be removed from the Andean trade preference benefits,” Arnson said in a phone interview from Washington.

A State Department official in Washington, who declined to be named, citing agency policy, said the U.S. relationship with the upper levels of Ecuador’s government is very difficult. The renewal of the trade deal is a Congressional decision, he said.

Antagonizing the U.S.

Assange, 41, took refuge in Ecuador’s embassy in London on June 19 to avert extradition to Sweden, where he faces questioning on allegations of rape and sexual molestation.

Correa, in an April interview with the Australian hacker- activist by video link, welcomed Assange to the “club of the persecuted,” in a nod to the global criticism both have faced. Correa expelled the U.S. ambassador to Quito, Heather Hodges, last year in protest over allegations she made in a classified diplomatic cable released by WikiLeaks that Correa had knowingly appointed a corrupt police chief. He is the only head of state to have expelled a U.S. ambassador over WikiLeaks revelations.

Ecuador’s trade preferences with the U.S., set up in 1991 to promote democracy and fight cocaine trafficking, support about 400,000 jobs in the nation of 14.5 million people, according to the Ecuadorean-American Chamber of Commerce in Quito. The workers who harvest the flowers, shrimp and fresh produce exported under the program would feel the most impact, with 40,000 jobs immediately at risk, Nathalie Cely Ecuador’s ambassador to the U.S., said in a May interview.

Oil Refinery

The threat of reprisals from the U.S. comes at a difficult time as Ecuador’s biggest refinery is set to shut down for a year in October for repairs. Losing the refinery’s output will force the government to spend more on subsidized fuel imports in the Organization of Petroleum Exporting Countries’ smallest producer. Oil products also accounted for 93 percent of Ecuador’s duty-free exports to the U.S. under the Andean preferences last year, according to a June report from the U.S. Trade Representative’s office.

The shutdown threatens to spark a liquidity crunch for the nation that adopted the U.S. dollar as its official currency 12 years ago, Economic Policy Minister Jeannette Sanchez said in a July interview. Ecuador, which defaulted on $3.2 billion of bonds in 2008 and 2009, sought a $515 million loan from the Latin American Reserve Fund in July to avoid a balance-of- payments crisis.

“That’s the underlying concern,” Daniel Legarda, executive vice president of the Ecuadorean exporters’ federation, said in a telephone interview from Quito on Aug. 21. “The sources of liquidity for the economy from the private side are exports, remittances, which are falling, and debt.”

Growth Forecast

Ecuador’s central bank last month lowered its forecast for growth this year to 4.8 percent from 5.35 percent, and its estimate for next year to 4 percent from 4.37 percent. As part of its response to the potential liquidity crunch, Ecuador’s government said July 18 that it is in talks to buy $400 million of fuel from Iran, which faces U.S. sanctions aimed at convincing the Islamic republic to curb its nuclear program.

Representative Ileana Ros-Lehtinen, a Florida Republican and chairwoman of the House Committee on Foreign Affairs, has condemned Ecuador’s ties with Iran and its decision to grant Assange asylum.

“This recent action by Correa is just another reason why the United States needs to reexamine our relationship with Ecuador, deny Ecuador its trade preferences with the U.S., and hold Rafael Correa accountable to the injustices he has perpetrated,” she said on Aug. 17.

‘Blackmail’

Correa has labeled the threats to end trade preferences as “blackmail.”

“They can do whatever they want, Ecuador doesn’t sell its sovereignty,” Correa said Aug. 22. “They can keep their tariff preferences.”

Ecuador is the last remaining beneficiary of the Andean trade preferences, which originally included Colombia, Peru and Bolivia. Colombia and Peru have since signed free-trade agreements with the U.S., and Bolivia was suspended in 2008 for failure to cooperate with the U.S. on anti-drug efforts.

The expiration of the trade preferences won’t push Ecuador into recession because the nation can still export oil to the U.S. and Asia, said Eric Farnsworth, vice president of the Council of the Americas in Washington. Many of Ecuador’s exports under the Andean preferences are also eligible for the Generalized System of Preferences, another tariff exemption program, he said, although the U.S. could rescind those benefits, too, as it did this year for Argentina in retaliation for their failure to pay damages owed U.S. companies.

‘Pile of Oil’

“Correa’s sitting on a pile of oil that he’ll continue to sell into world markets, particularly China,” Farnsworth said in an interview. “Will Ecuador’s economy collapse? No, but there will be people that will lose their jobs.”

Since coming to power in 2007, Correa, a 49-year-old former economics professor, has shuttered a U.S. military base used to disrupt drug runners, expelled the American ambassador, pursued closer ties with Iran amid heightened Western sanctions and this year boycotted a hemispheric summit to protest the U.S. trade embargo against Cuba. In antagonizing the U.S., Correa is following in the footsteps of his friend Chavez.

The policy of baiting the U.S. may prove as politically successful for Correa as it has for Venezuela’s leader.

Correa’s popularity rose to 54 percent this month from 50 percent in July, even as 86 percent of Ecuadoreans said the loss of the trade agreement would cost jobs, according to a poll by Quito-based Habitus. The survey of 800 adults had a margin of error of four percentage points and was conducted Aug. 9-11, before Ecuador granted Assange asylum.

Trade Office

“The decision to grant Assange asylum may provide Correa with some small political gains at home,” Eurasia Group analyst Risa Grais-Targow said in an Aug. 20 research note. Still, “Correa’s decision will likely undermine Ecuador’s efforts to restart stalled trade deal negotiations with the European Union, as well as the extension of U.S. trade preferences.”

The U.S. Trade Representative’s office is currently accepting petitions from people and companies that want to see Ecuador’s benefits continued or ended, and no decision has been made, said spokeswoman Nkenge Harmon. The benefits expire in July and would need an act of Congress to continue. The Obama administration could also decide to suspend them earlier.

The agreement to grant asylum to Assange has made Ecuador’s relations with the U.S. “much more difficult,” New York Representative Eliot Engel, the top Democrat on the Western Hemisphere panel of the House Committee on Foreign Affairs, said in an Aug. 16 interview.

Oil Rally

For now, markets are paying more attention to the price of oil than the political spat. The yield on Ecuador’s benchmark dollar bonds due in 2015 has declined 66 basis points, or 0.66 percentage point, to 8.62 percent this year as of yesterday as oil rebounded from lows in June, according to data compiled by Bloomberg.

Correa’s allegation that Assange faces political persecution stems in part from the fact the Swedish claims against him became public around the same time he posted classified U.S. military and diplomatic cables on WikiLeaks. Assange argues Sweden fabricated the warrant to assist the U.S. in punishing him and refuses to go to Sweden on concern he will then be extradited to the U.S.

No ‘Persecution’

U.S. State Department spokeswoman Victoria Nuland said on Aug. 20 that Assange doesn’t face any “persecution” in the U.S. and that his asylum request was an issue for the U.K., Sweden and Ecuador.

The other State Department official, who declined to be named, said the expulsion of Obama’s ambassador was unjustified and the administration is monitoring Iran’s ties with the region for any violations of U.S. or international sanctions, particularly oil sales.

Now, as the dispute over Assange drags on, Ecuador is being left out of the Trans-Pacific Partnership trade agreement that the U.S. is negotiating with eight other nations, Farnsworth said. The talks include Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam. Mexico and Canada were invited to join in June.

“You can fiddle around with Assange at your embassy in London,” Farnsworth said, “but you’re giving up trade in Asia.”

To contact the reporters on this story: Nathan Gill in Quito at ngill4@bloomberg.net; Eric Martin in Mexico City at emartin21@bloomberg.net

To contact the editor responsible for this story: Philip Sanders at psanders@bloomberg.net.


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