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The Banana War - a Case Study in Trade Restrictions

The current dispute between the EU and the US over banana imports from South America and the Carribean is a classic example of the difficulties arising from trade.

Some history. Immediately after WWII, Germany removed all import tariffs and restrictions on bananas (principally from South and Central America - the so called $ banana trade), which thus became a symbol of post-war freedom and plenty. Since 1900, the UK had been encouraging Jamaica and the West Indies to substitute banana production for sugar through the removal of import duties on these bananas. Post WWII, the UK imposed duties on $ bananas, though allowed limited imports of these, to protect the former dominions production. France imposed import quotas on all banana imports, but used special preferences for imports from French ex-colonies, though these were also subject to tariffs. Italy gave Somalia peference for the import of bananas, with $ bananas and those from the ACP (African, Carribean, & Pacific) countries allowed in to meet demand deficiencies. Spain, Portugal and Greece are essentially self-sufficient in bananas.

In 1975, the first Lome Convention included an agreement on bananas which provided EC preferences to ACP imports in a special protocol which (quote) guarantees traditional advantages - that is, enshrining the previous member state arrangements in the preferences. Subsequent Lome arrangements (now covering the period to the year 2000) have continued this special protocol, with Germany continuing to import $ bananas duty free while trying to honour the ACP preference embodied in Lome.

EU Single European Market - SEM: (1992) Under this EU legislation and associated policies, banana markets are supposed to be free of internal EC restriction. Given that this would mean duty free bananas being imported into Germany and then re-exported to other member states, thus undermining the ACP preferences, some policy re-negotiation was required.

The major constraints on this renogotiation were: ACP countries required that Lome be honoured somehow; Any new agreement had to honour the binding under GATT of banana tariffs at 20%; Any new agreement should avoid increasing duties as defined in the Blair House Accord between the US and the EC, as a preliminary Uruguay Round agreement for agriculture. The eventual EC agreement (Article 404 of the SEM), signed by all member states, provided for the following tariff rate-quota system:

ACP imports (including those from the Caribbean) are assured access to the EC market through fixed duty free import quotas, where the quotas are based on hisorical maximum import quantities;
Non ACP imports are subject to both import quotas and to a 100 ecu/tonne tarrif (which may be slightly more than the 20% binding), where the quotas are based on historic trading patterns under three distinct categories: A - historic banana trade flows (67.5% of total quota); B - other fruit exporters to the EU (30% of the quota); C - potential new suppliers, not otherwise covered (2.5% of the quota).

The Disputes

1. SEM Article 404 has been challenged in the European Court by Germany, with support from Belgium and the Netherlands as import duty free states; and by the trading companies. The companies action has been dismissed (with some compensation), while the member state action has now also been dismissed(?).

2. The Lome arrangements have been subject to a GATT Review Panel, with the charge that they contravene the conditions (GATT Article XI, section II) on quantitative restrictions in that they are discriminatory and are thus against the Generalised System of Preferences (GSP) provisions of the GATT.

3. SEM Article 404 has also been subject to a GATT review panel, on a complaint brought by Brazil, as an original party to the 20% tariff binding under GATT.

The GATT panels, supported by the Latin Americans, the US, Japan and the Cairns Group - alledgedly to embarass the EC as part of the Uruguay Round politics, ruled these Lome arrangements out of order (1994) under its fast-track procedure, and also ruled SEM404 out of order, but these rulings were challenged by the EC and thus became subject to the GATT appeals procedure.

The EU's case was as follows:

ACP (under the Lome Agreements) is a free-trade area under GATT, which would allow discriminatory import arrangements in favour of the free trade members (though the notion of free trade areas implies some reciprocal trade relationships which are not readily apparent in this case);
Other potentially damaged countries (the Latin Americans) have accepted (or at least put up with) these arrangements for a long time - since 1975, and thus that the arrangements can be considered grandfathered, which would allow them to continue in spite of being prima facae out of order;
Any excess imports over these quota limits are to be prohibited through a 200% tariff (which is not expected to be applied under any circumstances, thus can be argued as outside the GATT binding).

However, the appeals were denied (1997), and the EU stands in contravention of the GATT (WTO) rulings and the dispute is now centred on the appropriate actions to be taken. In essence, the EU will have to cease and desist from its Lome and SEM404 practices or fully compensate those damaged by those arrangements. The EU has modified its Lome agreements, and included a £250m aid package over 10 years to assist the Carribean countries to diversify out of banana production. According to the EU, the WTO has still to rule on these modifications.

Meanwhile, the EU imports about 1/3 of its total banana imports under the preferential agreements, with 2/3 coming in without such preferential agreements (that is, as $ imports from South America).

Commercial Background: Anticipating the effects of the SEM on the European banana market as providing for tariff-free imports of all bananas from whatever source, and also anticipating a demand growth in Eastern and Central Europe following liberalisation (which has yet to materialise), the major trading companies (Del Monte being a major one, with two other majors, all trans- or multi-nationals, with considerable suspicion of being oligopolistic) have been encouraging and investing in banana plantations in South and Central America. Geest have even developed a plantation in Costa Rica with the name Windward Islands! They have also been competing heavily for market share in the EC. These companies have been granted import quotas under SEM404.

They are (given this background) somewhat upset with the EU which denies them what they see as major opportunities for market expansion, which they had anticipated and are now suffering major over-capacity and consequent loss of capital value. The owner of one of the biggest of the three major traders is alledgedly seeking to sell his interest in the company, having purchased this interest at the time of anticipated expansion, and is currently facing a substantial capital loss. Ability to import tariff-free into the EU would increase the value of the company. This company is based in the US and is a substantial contributor to the political fudns of both the Republican and the Democrat parties.

Windward Islands Interests and conditions: The Windward Islands comprise Dominique, St. Vincent and St. Lucia, all ex- UK Colonies, and Martinique which is still a department of France and thus receives French income support and welfare assistance as part of France. The UK Windwards account for 1/3 of EU banana imports, which are a major foreign exchange earner for the Islands, accounting for some 80% of their exports. The plantations are high cost because of physical limitations (steep slopes and small scale plantations - small family farms typically of less than 5 acres - not suitable for irrigation or large scale production, and subject to significant transport costs and difficulties to the dockside). Yields are less than 1/2 those in the $ production areas, and the plantations are subject to drought and hurricains. Labour costs account for almost 70% of total production costs, and thus the production is a major income generator for the population.

Alternatives to bananas are said to be virtually non-existent in anything except the very long term, and failure to compete in the EC market would condemn the present producers in the Windward Islands to subsistence farming and considerable poverty. However, it is said by some that an obvious alternative is cannabis or hemp, and that elimination of the banana preferences would encourage these farmers to enter the drug trade.

Under market conditions since Article 404 of SEM came into force banana income in the Windward Islands has already fallen significantly from previous levels. In a sense, the Windward Islands could be said to have a comparative advantage in banana production, since they cannot to do much else, although their costs are considerably higher than those elsewhere (which have an absolute advantage) while the $ producers could produce a number of alternative crops (as they have in the past). If this is so, then a corrollary is that Windward Island production should survive genuinely free competition although there is little doubt that incomes would be substantially reduced if they are denied their preferential access to the EC market.

Some Issues and Questions:

The simple free-trade economics (enshrined in the GATT/WTO rulings) says that the EU must eliminate the preferential trade arrangements. The Windward islands will suffer and capital and income loss as a result, while the $ banana plantations and their companies will enjoy a capital gain.
GATT-WTO makes no concessions to equity. The issue of compensation is couched entirely in terms of compensating anyone (regardless of who or of how rich already) who is materially damaged by preferential trade restrictions, and takes no responsibility for the compensation or assistance to those who will be disadvantaged by any move to free-trade
But the world does not just work according to market economics - it also works according to politics, and more or less democratic interests - where equity and justice count. The implication appears to be that the World Bank and the IMF (as the other two international authorities) should try to take care of these issues - with World Bank aid to the Windward Islands to imporve their conditions and reosurces. Otherwise, the implication is that capital will leave the Windwards and seek alternative returns elsewhere in the world, leaving the residents of the Windwards to survive as best they can.
There is also an issue of international oversight of major company operations - international competition and company behaviour policy. It is not too extreme to consider the current banana dispute as being fueled by naked self-interest of large and rich companies seeking to minimise the damage of their over-enthusiastic investment decisions of the past. They may have the letter of the international law on their side, but do they also have the spirit of the law on their side?
There is also the suspicion that the US has become the champion of this case simply in order to: a) test and improve the WTO regulatory and penalising powers against those who break the WTO rules; b) to convince the EU that these rules and regulations are tight and meaningful in preparation for the review and continuation of the URAA; c) to get back at the EU for other past and posisble future misdemeanors in international trade.

In short, there is nothing on earth, however simple, that cannot be made extremely complicted with a little thought and a large helping of special interest.

Possible solutions:

Impose the WTO ruling and eliminate preferences forthwith (the US preferred outcome in this case, but perhaps establishing a precedent which might backfire on US interests in the future)
Delay implimentation of the elimination of preferences for a given and limited time to allow adjustment in the Carribean to the new reality (which the Cariibean countries would probably accept)
Seek to package the elimination of the preferences with a substantial aid package to the Carribean countries, to assist in adjustment, thus allowing the delay period above to be reduced

Meanwhile, could the Windward Islands perhaps run an advertising and marketing campaign promoting their products in the EU (and even the US) markets as being the products of deserving and hard working independent producers? Could they possibly command a market premium and ensure a continued market share for their products in rich (and possibly concerned) markets by exploiting common concern over the activities of multinational and hard-nosed capitalist companies with no real loyalty or comittment to the local populations they use as their work-forces? In other words, could a more sophisticated use of market mechanisms produce a more effective counterweight against international capital flows and concentrated capital accumulations than any conceivable international regulation and oversight?

Conclusion

Free trade might be the text-book answer to development of poorer regions and countries, but in practice it can only be argued as a necessary condition (on the grounds that without free-er trade the economic signals will not get through to producers and consumers), and not as sufficient, since more will have to be done to assist the poor of the world improve their lot, which is poor because of their extremely limited command over resources.

Trade might provide a satisfactory answer to the ALLOCATION problem, but does not necessarily solve the DISTRIBUTION problem, and hence will continue to bound up with politics, whatever form the WTO takes.

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