Poverty impacts of trade integration with the European Union: lessons for Ecuador

Abstract

This research proposes to quantify the effects of a trade agreement with the European Union on poverty in Ecuador. Both poverty and the signing of a trade agreement with the EU are issues under discussion in Ecuador. Ecuador seeks to sign a trade agreement with the EU given their complementarities in trade: the EU is a major market for Ecuadorian agricultural and fish products, and Ecuador imports mainly manufacturing goods from the EU. In particular, the EU is the main market for the main agricultural export product of Ecuador: bananas.

The transmission mechanisms to study these issues include changes in commodity prices, wages and earnings, and labor market demands. This research combines a reduced-form micro household income and occupational choice model with a standard single-country computable general equilibrium model (CGE); for Ecuador. This study highlights that a trade agreement with the EU may have a different impact on poverty depending on the degree of initial tariff reduction, on labor market considerations, and on whether better access to Ecuadorian bananas is granted by the negotiations or not. Through trade liberalization there is a significant increase in imports from the EU, particularly in protected sectors. With better access for bananas to the EU market, investment constraints may mean that increasing export and production of bananas can be achieved by pulling resources (namely production and labor); out from other sectors. Nearly every scenario of trade agreement leads to a decline in extreme poverty in rural regions. In contrast, extreme poverty in urban regions may increase.