The US-EU Banana Dispute
Richard Carew

Released: 01/22/02

     The European Union and the United States recently settled a trade dispute over access to the European Common Market for American banana producers. On February 5, 1996 the United States filed a complaint before the WTO concerning the EU’s banana import regime. The European’s banana import policy allowed 2 million bananas to be imported from Latin American countries and non-ACP (African Caribbean Pacific) producers. It allocated 857,700 bananas import licenses specifically to ACP suppliers. A duty of 85 Euros per ton on Latin American bananas imported was set and no duty was placed on ACP-imported bananas in accordance with the Lome Convention.¹ In retaliation for the import discrimination which favored former European colonies, the US levied 100% ad valorem tariff on European luxury goods such as handbags, bed linens, coffeemakers, and batteries amounting to an estimated $191 million dollars American banana suppliers lost due to the quota. This tariff was authorized by a WTO ruling in 1997.²

     To provide a context for the debate, I will provide some background concerning the parties involved in the dispute. In 1994, the EU was the world's second largest importer of bananas, after the United States (3.7 million tons). Interestingly enough one of the European Union’s defenses was that the United States should not have brought the case before the WTO, since according to data, it produced only 54,500 tons of bananas, a negligible amount of total world production. Of the nations which cosigned to the complaint, banana production in Ecuador was 5.4 million tons, in Mexico 2.1 million tons, in Honduras 0.8 million tons, in Guatemala 0.5 million tons and the United States (including Puerto Rico) 54,500 tons.3 It should also be noted that the United States did not export any bananas to the European Union.

     The European Union has several motivations and historical reasons for the trade policy. The European Union’s banana import regime only became a problem when the EU combined the trade policies of different countries. The policy adopted by the EU was generally more protectionist in the banana market than most countries had been prior to economic integration. The EU has allowed a significantly larger amount of imports from ACP producers because of a historical relationship between the exporting countries and European nations. The Lome Convention, signed on December 15, 1989 set up the preferential trading system designed to aid developing country producers. On October 10, 1994 the EU and ACP countries requested a waiver from the GATT and this was granted by the WTO.⁴

"[T]he provisions of paragraph 1 of Article I of the General Agreement shall be waived, until 29 February 2000, to the extent necessary to permit the European Communities to provide preferential treatment for products originating in ACP States as required by the relevant provisions of the Fourth Lomé Convention, without being required to extend the same preferential treatment to like products of any other contracting party."⁵

     It was also argued by the developing nations that preferences was necessary for ACP countries because banana production represented a significant proportion of their output and that the transportation of banana products on the trade routes allowed for other industries to develop and ship along with them (positive externalities). Besides the development of these countries, the EU has also argued (similar to anti-dumping rhetoric) that many of the large American multinational corporations which export from Latin American countries (Dole, Chiquita, and Del Monte) are vertically integrated and could possibly abuse their market power.⁵ The EU’s statements made the case that production in ACP countries is far less integrated and responded to local individualized market forces.

      Analyzing these motivations, the most plausible explanation for the quota restrictions and tariff is profit shifting. This is because of the oligopolistic nature of the banana market. By imposing a quota on Latin American banana production and not ACP production, the EU is shifting profits from EU producers to ACP producers. This would not seem to be in the national interest since it hurts EU consumers, but it is important to be aware of the historical context in which we operate in this example. The fact that the preference exists for ACP producers is a remnant of European colonial policy. The EU is bound to this policy by the Lome convention. The American interest in bringing the case before the WTO would seem to be the result of a domestic pressure group. Banana multinationals based in the US have a significant lobbying power as a result of political campaign contributions. In 1995 Chiquita contributed $5 million dollars to both the Democratic and Republican parties.⁶ This may be one reason the dispute was brought by the United States against the European Union, since an insignificant amount of US employment was effected by the import regime and the retaliatory tariffs on European imports did have a tangible negative effect on US consumers. The only explanation would be that American stockholders have interest in the success of these countries (but these stockholders represent a very small portion of the US population and it may be argued from a normative viewpoint that these are the individuals the government should be least concerned about). This is an example of how both governments acted in the interest of pressure groups as opposed their citizenry (both consumers and workers). Political motivations dominate economic motivations for both parties.

     In resolving the dispute, the EU and US agreed that until 2006, banana import licenses will continue to be distributed based on past trade, but after 2006 a tariff only system will be put into place.⁷


Endnotes
1. U.S. Mission to the European Union, 4.
2. BBC World, 2.
3. World Trade Organization, 12.
4. Ibid, 43.
5. Ibid, 45.
6. Global Exchange, 1.
7. Office of the U.S. Trade Representative, 1.

Sources:
World Trade Organization, “European Communities - Regime for the Importation, Sale and Distribution of Bananas - Complaint by the United States - Report of the Panel.” May 22, 1997. Online:http://www.wto.org/english/tratop_e/dispu_e/distabase_wto_members2_e.htm

The US Mission to the European Union, “Special File on U.S.-E.U. Banana Dispute.” Online: http://www.useu.be/issues/bananadossier.html

Global Exchange, “Bananas: Background.” Online:http://www.globalexchange.org/economy/bananas/background.html

BBC World, “US lifts sanctions on EU goods.” July 2, 2001.
Online: http://news.bbc.co.uk/hi/english/business/newsid_1417000/1417515.stm

Office of the US Trade Representative, “Joint US-EU Statement on Resolution of Banana Dispute.” April 11, 2001.
Online: http://www.ustr.gov/releases/2000/07/00-54.pdf
 

-Richard Carew
Economic Analyst
theshortrun.com