Banana Case (Fall 2003).

The Banana CaseMiguel Green, Arianne Confesor, James Lobo, and Brittany Whiting

Origin of BananasSource: The Guardian Newspaper, UK

Banana exporters & importers

Intl Banana EconomyBananas 3rd most important traded foodstuff by value Exports worth $4.7 billion in 1999 after wheat and coffee Production in tropics & largest consumption in US, EU & Japan60% of trade controlled by US MNCsDualistic structure of banana trade

Source: Robert Read, Department of Economics, University of Lancaster , The Anatomy of the EU-US WTO Banana Trade Dispute

US MNC Banana RegimeMNCs began the banana trade to U.S. in late 1800sHistorical US Gov. protection over banana tradeIn the 1960s began exporting to EuropeToday, control 60% of global banana production, shipping, ripening and retail distributionDole had total revenues of $4.4 billion in 2002Chiquita sales in 2002 of $1.4 billion; recently emerged from bankruptcy

EU Banana Trade Regime

Under the Lom Convention, preferential trade and quotas with former European colonies:Traditional ACP countries such as Cameroon, Cote dIvoire, Somalia, etc.Special protection for DOM (Departements dOutre Mer): French Caribbean, Madeira, Canary IslandsPrice support payments under CAP since 1993

Imports from other countries (Dollar Area) were subject to tariffs and licensing restrictions.

EU Import Regime ContdThis import regime was found to be illegal by the WTO in 1997.

The main criticisms were the setting aside of a quantity reserved solely for ACP imports, and the system of allocation of licenses which did not completely eliminate discrimination vis--vis third-country operators.

The Issues3 US MNCs Chiquita, Dole & Del Monte control 2/3 world trade in bananas

US estimated $520m in lost revenue

Nations InvolvedDollar Area siding with the USEcuador GuatemalaHondurasMexicoAccepting of EU quotasACP statesColombia Costa Rica Nicaragua VenezuelaCaribbean middle groundJamaicaSt. LuciaSt. VincentDominicaThe Dominican Republic

Banana Trade CasesComplaints against the EUEU preferential treatment to former colonies while discriminating against other countriesFirst GATT Complaint Feb 1993Second GATT Complaint July 1993WTO Complaints beginning Sep 1995

The First GATT ComplaintFeb 1993: EU vs. Complainants (supported by the U.S.): Colombia, Costa Rica, Guatemala, Nicaragua, and VenezuelaIssuesPreferential tariff violated GATT Article I.1 Most-Favored-Nation (MFN)Use of discriminatory tariff quotas contrary to GATT Article XIII.1OutcomePanel decided that Lom Waiver did not give the EU carte blanche in its use of discrimination. The panel required that the tariff quotas should be brought under the GATT rulesThe GATT panel was unenforceable because of the weakness of the GATT dispute settlement procedures.

The Second GATT Complaint July 1993: First complaint renewed after the expiry of the old regime of the EU. Issues Licences to import under general quota violated Article III .4 on national treatment. ( Discriminatory against non-EU banana distributors)The use of discriminatory tariff quotas in place of specific national quotas contravened Article XIII of discriminatory tariff quotas. OutcomeThe second GATT panel found against EU that the quotas were in contravention of Art XIIILicensing system found to be in contravention of Article X on National TreatmentThe GATT panel was unenforceable because of the weakness of the GATT dispute settlement procedures.

WTO Banana Disputes

The WTO ComplaintDS 16 filed in Sept 1995 and was subjected to the WTO dispute settlement proceduresUS participated as a lead plaintiff and supported by Guatemala, Honduras, Mexico and Ecuador. Tariff IssueEU regime contravened Article I.1 of GATT 1994 with regard to non-discrimination and application of MFN (discriminatory tariff favoring ACP countries)Tariff Quota Allocation Issue The EU regime contravened Article XIII.1 of the GATT 1994 with regard to non discriminatory quantitative restrictions Import Licensing Regime Issues Allocation of special distribution licences contravened GATT 1994 Articles I, III.4, XI and XIII; the agreement on Agricultural Agreement 4.2 and GATS Articles II and XVII.

The WTO Panel DecisionWTO Panel Conclusion: May 22nd 1997EU was in violation of the WTO commitments with regards to allocation of import licences and the use of tariff quotas. Same time acknowledged that the preferential tariff treatment of ACP exporting countries was permitted under the Lom waver.EU was requited to reform its banana regime by Jan 1999

Following DevelopmentsJuly 11th 1997: EU appeals to appellate body.Sept 9th 1997: Appellate body upholds panel finding of EUs Violations.Sept 25th 1997: WTO Dispute Settlement body (DSB) adopts panel and Appellate Body reports.WTO gives EU time (until Jan 1999) to comply with the WTO rules

Case Implications In response to this EU eases its licensing conditions and does very little to change the tariff quotas.Tariff Quota identified as recurring problem by plaintiff countries in Aug 1998 Dispute moves to Arbitration panel which finds modified regime non complaint with WTO rules.

WTO Rulings April 1999, WTO gives clearance to United States to impose trade sanctions worth 191.4 million US dollarsSanction were in form of suspension of trade concession Ecuador gets authorization to impose sanctions of worth 201.6 million dollars

Current RegimeIn response to the sanctions EU made number of changes to its banana import regime April 11 2001, US and the EU reach on an agreement The new regime will provide transition to tariff only system by 2006. (effect from Jan 1st 2006)During this transition, bananas will be imported into the EU through import licences based on past trade. July 1st 2001 US Suspends Trade Sanctions imposed on EU since 1999.

What Were the Impacts?

Exporting countriesUncertainty Due to DependencyDollar Area Producers and ACP Countries

Impacts ContinuedEU Imports Per Country

What about the MNCs? Loss of Market Presence Great Revenue Loss Chiquita $1.5 bDoleDel Monte

EU Market Shares of Banana Companies (%)

UNCTAD: //r0.unctad.org/infocomm/anglais/banana

Sheet1

1992199419951997

Chiquita>3018.51915-16

Dole121515-1618-19

Del Monte7-88810-11

Sheet2

Sheet3

Banana Imports Worldwide 1961 2000 Trajectory

World Imports Today

Bananas Commodity notes: final results of 2002: fao.org

In ConclusionStatus of Regime changesTransition to tariff only system by 2006

Changes Implications on ACP and MNCsMarket access loss overall

And the WTO. . .

Any Questions????

Introduction of Team

Introduction of CaseThe Banana Case is a very significant case for the WTO, the US and EU and developing countries. It illustrates Dispute Settlement Mechanism and the improved enforcement under WTO versus GATT. The case opened the way for serious competition issues in the WTO to be more readily addressed.

Outline of PresentationBackground on Banana TradeOverview of various complaints and actions under GATT and WTOConclusions and the Banana Trade todayBananas flourish in tropical regions such as the Caribbean and Central America where the average temperature is 80 F (27 C) and the yearly rainfall is 78-98 inches (198-249 centimeters). In fact, most bananas you buy are grown within 10 degrees either side of the equator. Iceland is an exception, where banana plants are grown in soil heated by geysers.

Bananas actually grow on plants, not trees. In fact, they are really giant herbs, related to the orchid, lily and palm family. The plant is a perennial which grows again and again from the same root system. Bananas are harvested green and sweeten as they ripen. As soon as the banana stem is cut from the plant, ripening starts. Within 36 hours, the fruit, packed in boxes, is loaded onto refrigerated ships. The cool temperatures put the bananas to sleep and temporarily stops them from ripening. The whole trip, from plantation to grocery store, takes about two weeks. Today there are about 400 varieties of bananas. North American and Europeans are most familiar with the Cavendish banana.(Source Chiquita)Bananas are produced around the world in Africa, Asia and Latin America. In terms of Banana production, Ecuador and Costa Rica are the largest producers with many farms owned by Chiquita and Dole.

Many European countries buy their bananas from their former colonies in Africa, the Caribbean or Asia. Bananas are a critical cash crop for many developing countries. A large number of smaller scale firms grower organizations and individual s continue to be engaged in export-oriented banana cultivation. While these producers cant supply the large quantities of high quality fruit on a regular basis they compete with the MNCs in many markets based on lower prices for their smaller, less standardized, but wider varietal range of bananas.

The average American eats 27 pounds of them every year. Europeans also love bananas. Consumption of bananas in Sweden is 35 pounds per capita. Only recently have bananas become widely available in Eastern Europe, but consumption is already 10 pounds per capita. (Source Chiquita website)

Wheat (14.4 bil) and Coffee (11.2 bil)

The Banana Economy has a dualistic structure in terms of cultivation, technology, and distribution networks. Major US MNCs incorporate a chain of control from production, specialized refrigeration shipping and ripening facilities to retail distribution. This allows the MNCs a tremendous economy of scale.The majority of world trade in Bananas is controlled by Multinational Corporations, the 3 largest are all familiar names to us, Dole, Chiquita and Del monte. They control 60 percent of the market.

Founded in Hawaii in 1851, Dole Food Company, Inc., with 2002 revenues of $4.4 billion, is the world's largest producer and marketer of high-quality fresh fruit, fresh vegetables. They got into the banana business by purchasing Standard Fruit and Steam Shop Company in 1968, the second largest producer and importer of bananas at that time. The Company does business in more than 90 countries and employs, on average, 33,000 full-time permanent employees and 24,000 full-time seasonal or temporary employees, worldwide.

Chiquita was founded in 1870, formerly known as United Fruit Company, of Panama Canal fame. In 1903 it began using refrigerated ships for the bananas. In 1966 Chiquita arrived in Europe. In 1993 Chiquita claimed that European Union imposed illegal quotas and tariffs on bananas imported from Latin America, took away over half of their most profitable market.

The Lome Convention stipulated that ACP exporters would continue to be treated no less favorably in its traditional European markets than it has been used to in the past. In other words, ACP exporters would continue to be favored since in the past their relationship to Europe was as such.

ACP = African, Caribbean, and Pacific states = former European colonies. This particularly includes the French Caribbean islands (Martinique and Guadeloupe) and CFA Franc Zone nations in Africa (like Cameroon and Cote dIvoire).Dollar Area = Latin American banana producing nations; large US firms (such as Del Monte, Dole, and Chiquita) control regional output and can produce much cheaper than in Caribbean nations without MNC producers.This import regime was found to be illegal by the WTO in 1997. A revised scheme was implemented on 1 January 1999, also based on a 2.553 million tonnes tariff quota with an additional quantity assigned globally to the ACP. This was also found to be WTO-illegal. The main criticisms were the setting aside of a quantity reserved solely for ACP imports, and the system of allocation of licences which did not completely eliminate discrimination vis--vis third-country operators. In April 1999, the WTO authorized the US to impose trade sanctions for an annual value of $191 million. The US carried this out by setting 100% customs duties on an equivalent amount of trade. The US has now been applying these prohibitive duties to a number of products from EC Member States (excluding Netherlands and Denmark) since 3 March 1999. The MNCs lobbied the US govt (namely the USTR under section 319) to take action against the EU trade regimes. For example, Chiquita contributed over $800,000 in total to the Democratic and Republican parties in this effort.Nations involved in addition to the aforementioned disputing parties. In addition, Japan joined in the consultations when the EU brought its case against the US (DS165), citing that [s]ince the United States is a major trading partner of Japan, the measures taken by the US against the EC will again affect the substantial trade interest of Japan.

In attempting to break into the European market, US firms also had production operations in preferred ACP countries, namely, Costa Rica, Belize, Cameroon, and Suriname; prior to filing complaints, this was a strategy of the US firms to circumvent EU restrictions.

Caribbean nations hold an especially difficult middle ground because most do not have their production controlled by the US firms. Without preferences and special treatment, such independently producing countries will lose out in the face of such competition from the US firms. However, at the same time, these same island nations are pushing for greater market access into the US. In other words, they too are demanding more competition similar to what the US firms aim to do in bringing these disputes against the EUs discriminatory trade regime.The first complaint made in Feb 1993. It had two distinct elements the temporary regime was contrary to GATT Art. L.1 on the application of the MFN principle. This was because the it incorporated a preferential tariff which discriminated between imports from ACP states and other developing countries. The restrictive tariff quotas were contrary to GATT Art XIII.1

The Lome waiver meant that GATT still recognized the previous regional agreement to have preferential trade for the ACP countries; this ran counter to the intentions of GATT to enable total market access and free trade.EU new regime was primarily established (1st July 1993) to satisfy the legal requirement (right of third country imports to circulate freely without restriction) to establish a single market for bananas. The tariff quotas were restrictive to dollar area because it was set in excess of the best levels of ACP banana exports. These disputes follow the previous two complaints that fell under the GATT scheme. With WTO formation, a new and improved way of addressing complaints now falls under its dispute resolution system, the DSU (Dispute Settlement Understanding).

SPS = Sanitary and Phytosanitary --- food safety and animal and plant health measures

Here are the cases involving banana trade brought before the WTO. Evidently, most of the cases were brought against the EU/EC in trying to gain market access for US firms (large MNCs) operating in these countries.Date indicated represent beginning of consultations as the step in the DSU processThe EU regime violated the principles of MFN (Most Favored Nations) and National Treatment according the complaining parties. The implementation of restrictive tariff quotas has an adverse impact on the market share of MNCs.Licenses largely discriminated against exporters.

RThis case was appealed by the EU to the Appellate body. Appellate body upholds the panel findings. The DSB adopts the panel and appellate body reports and gives EU one year to comply. **Tariff quotas still remained a big problem for the plaintiff countries. A new arbitration panel established to deal with the tariff quota issue.In April 1999, the WTO authorized the US to impose trade sanctions for an annual value of $191 million. The US carried this out by setting 100% customs duties on an equivalent amount of trade. The US has now been applying these prohibitive duties to a number of products from EC Member States (excluding Netherlands and Denmark) since 3 March 1999. US wanted authorization for 520 million dollars in trade sanctions but was awarded 191.4 million. Sanctions were in form of suspension of trade concessions on variety of imports.

Tariff only system meant abolishing of quotas by 1st Jan 2006. It is important to note the majority of the exporting nations are developing countries. The ACP countries as well as the Latin American nations all have a clear dependence on the dualistic nature of the banana product. (From employment to nourishment)Banana exporting countries suffered periods of anticipation and uncertainty which resulted from the expectations of the regime modifications following the dispute. This level of uncertainty affected banana producers at different levels, with different reactions from the dollar area bananas, ACP and EU producers. At the level of these producers, expectation of further liberalization of the EU banana market and anticipation of new market opportunities, banana producers expanded their production which resulted in oversupply and subsequent falling of international banana prices during the early nineties. Thus, the change in the EU market to a new regime had quite an impact on these developing nations exports.

In this bar graph, we can note the percentage difference per country per year. For example in the early nineties Ecuador, which is the largest Latin American exporter of bananas today, fluctuated from 12%, approximately, to 23% between 1990-1992. When the EU announced its new regime change in 1993, Ecuadors exports to the EU dropped from 23% to 17% between1993-1995, followed by yearly percentage fluctuations. As mentioned in the beginning of this presentation, the WTO authorized Ecuador to apply sanctions against the EU valued at $201 million in order to compensate for the losses. Ecuador opted not to implement sanctions as it would adversely affect its own economic stability. In the case of the Windward Islands (St. Lucia, St. Vincent, Grenadines, Dominica, Grenada), even though these countries had preferential treatment in the EU market, one can see significant percentage decrease per country from 1990 thru 2000 (St. Vincent and Grenadines 1990 at 7%, 1992 at 9%, 1993 at 7%, 1994 1% and so on..) which indicates a direct effect since the majority of the produce imported from these ACP countries are bananas (approximate total value of 49% of market share according to UNCTAD Info Communication web site on commodities)During the early stages of the EU banana regime, we can note the significant drop in market share experienced primarily by Chiquita Banana, which at this point was the largest exporter of the three major MNCs.

These companies accounted for more than 80% of the world market in 1999. Chiquitas market shares have substantially decreased during the nineties, mainly due to the introduction of the EU Banana Regime in 1993, while Dole increased its market share, both in the world and in the EU. Dole has recently overcame Chiquita and has become the premier banana company in the world. The loss of market share for Chiquita seems to be much more important in the European Union market, showing the adverse effect of the EU Regime on the company.

The combination of unfortunate market circumstances and inadequate market strategies put Chiquita in a very difficult situation, suffering continuous financial problems that obliged the company to file for bankruptcy in November 2001. According to the WTO calculations, every year that the EU policies regarding banana market was in effect, Chiquita has experienced damages amounting to $200 million, totaling over $1.5 billion in damages since 1993. (www.twnside.org.sg/title/woes.htm)

Imports within this graph clearly display the decline that occurred within the European Union within the first year after the regime change, with a slow increase towards the latter part of the nineties early 2000. Imports in North America increased by 1.7 per cent, and in the EC by 2.6 per cent in 2002 relative to 2001. EC imports from ACP traditional exporters contracted marginally (2 per cent), while those from the Dominican Republic (non-traditional ACP) expanded by 13 per cent. EC domestic production increased 3 per cent, in particular Martinique and Guadeloupe, while imports of dollar area bananas were up 3.5 per cent.

Main point of these two slides is to show the clear difference in market access during the mid to late nineties in the EU resulting from the aftermath of the banana regime as well as the market instability and insecurity that resulted in decline in the latter part of the decade.

The new regime will provide transition to tariff only system by 2006. (effect from Jan 1st 2006)

These changes will have a great impact on consumers and some producers (Estey Journal of International Law and Trade Policy (vol 2-2). Both, ACP and MNCs will experience loss, since in 2006, with the EU market change quota rents will be eliminated through the introduction of a flat-rate tariff. The result will likely be the long-term profitability of Chiquita and Dole in the EU market as a result of the forthcoming introduction of flat-rate tariff system, probably opposite their original objective of enhanced market power in a still heavily protected market.

The Banana dispute has allowed for improved workings and efficiency of the WTOs DSU compared with the previous GATT system, even though the EU has dragged its feet with regards to bringing its policies to compliance.