When US Firms Benefited From A 20-Year-Old Banana Trade War

M R Subramani

Apr 03, 2018, 07:23 PM | Updated 07:22 PM IST

A worker checks bananas at a warehouse. (China Photos/Getty Images)
A worker checks bananas at a warehouse. (China Photos/Getty Images)
  • The US is not new to a trade war. It fought an EU rule on banana imports for 20 years, resulting in gains for US firms.
  • The United States (US) and China look set for a prolonged trade war. On Monday (2 April), the Xi Jinping government imposed retaliatory duties of 25 per cent on 128 US products, including pork and wine. The annual value of exports of these products is nearly $3 billion.

    Though China said the move was intended to safeguard its interests, it is obvious that the measure was to counter US moves to slap punitive tariffs on steel and aluminium imports to protect its manufacturers. The US has imposed 25 per cent duties on aluminium imports and a 10 per cent levy on steel imports. Besides, US President Donald Trump has said that he plans to impose tariffs on a range of products whose export value from China was worth over $50 billion.

    Amidst the tariff war, US Treasury Secretary Steven Mnuchin said both countries are in talks to prevent an escalation of the trade war. Analysts and experts warn that both nations, particularly the US, could be affected adversely by it. That said, here are some interesting facts of a trade dispute that the US had with the European Union (EU) over the latter’s banana import regime. The dispute started before the World Trade Organization (WTO) was established in 1995 and culminated in a couple of US companies ending up winners.

    The US-EU banana war lasted for nearly 20 years, starting in 1993 when the General Agreement on Tariffs and Trade (GATT) was in place before the WTO came into existence. The EU came up with a new two-tier regime in 1993 for the import of bananas based on the country of origin. Under this regime, imports from African, Caribbean, and Pacific (ACP) under-developed countries were allowed duty-free bananas with a cap of 857,700 tonnes. Each ACP country had a quota based on its export records to the EU. Beyond the cap, the imports attracted a duty of 750 European currency unit (ECU) per tonne. In the case of non-ACP countries, the EU imposed a tariff of 100 ECU per tonne up to two million tonnes. Shipments beyond that attracted a duty of 850 ECU a tonne. But in the non-ACP shipments up to two million tonnes, 33.5 per cent quota was marked for European-based marketing firms that had historically marketed ACP bananas.

    The US protested, but in June 1993, it was a block of five Latin American countries – Colombia, Costa Rica, Guatemala, Nicaragua, and Venezuela – that filed for a dispute settlement with GATT. In January 1994, the GATT panel ruled that the EU’s new tariff regime for bananas was illegal.

    Under the GATT system, countries can block rulings against them when the rulings come up for adoption. The EU was able to block the adoption of the ruling by negotiating a new agreement with four of the five complainants, leaving out Guatemala. As per the negotiation, the EU agreed to increase their export quota in return for an assurance that they would not challenge the regime until 31 December 2002. As per the agreement, the EU cut the tariff to 75 ECU per tonne to these four countries and raised the non-ACP quota by 100,000 tonnes in 1994 to 2.1 million tonnes and further to 2.2 million tonnes in 1995.

    The new agreement affected US companies that produced bananas in Latin American nations. In September 1994, Chiquita Brands International and the Hawaii Banana Industry Association filed a petition with the US Commerce Department to initiate an investigation against the EU for unfair trade practice with its banana import regime. The complainants claimed that their share in the EU market had taken a 50 per cent hit. However, Common Cause, a watchdog organisation, questioned the recommendations of a Congress panel and the findings to take action. It argued that Chiquita facilities hit by the EU regime were outside of the US, largely with workers who were not US citizens. In January 1995, the US Trade Representative concluded that the EU banana regime hurt the US and the losses ran into millions of dollars. This led to protests from the EU and Caribbean producers. The US tried to reach a settlement with the EU in vain.

    As a change of strategy, the US joined hands with Guatemala, Honduras, and Mexico to move the WTO for dispute settlement in September 1995. Ecuador joined the petitioners in 1996. The EU argued that its preferential treatment to ACP nations was per agreement under the Lome convention, while the US contended that the banana was not covered by the pact. In May 1997, the WTO disputes panel, too, found fault with the EU tariff regime for bananas. However, the EU decided to petition the appellate body of the WTO disputes panel on certain findings by the dispute panel. Much to its chagrin, the appellate body not only upheld the panel’s findings, but found more violations, particularly in implementing the Lome convention. With the appellate report being adopted in September 1997, the EU was given 15 months’ time to implement and comply with WTO rules by January 1999.

    In January 1998, the EU came up with a new banana import regime, claiming it to be compatible with WTO norms. The US, however, was unconvinced as it found the EU using two separate norms for allowing imports from Latin American and ACP nations. The US and Ecuador sought a review by the WTO dispute panel that heard the original plea, but the EU sought the setting up of a new panel. Unable to get its way, the US announced a preliminary list of EU products in November 1998 that would attract a penal tariff. These products were to attract 100 per cent tariff to make up for the $520 million loss if the EU failed to implement the WTO ruling by January 1999. The US followed up with the request to the WTO to impose the punitive tariffs since the EU had not implemented the ruling.

    The WTO’s dispute settlement body was to adopt the US request on its agenda on 28 January 1999, but St Lucia and Dominica blocked its adoption – first in WTO’s history. The EU contested US arguments forcing the then WTO Director-General Renato Ruggiero to establish an arbitration process. The US agreed to the arbitration on the condition that the process be completed by 2 March 1999 – a deadline that could not be met due to insufficient information. On 3 March, the US said it would start imposing the levies, forcing the EU to seek consultation on the issue. The arbitrators submitted their report on 9 April 1999, saying the EU banana import regime was not WTO-compliant and the US suffered losses to the tune of $191.4 million. The US was allowed to impose the punitive tariffs retrospectively from 3 March 1999.

    The EU again amended its banana import regime in November 1999 by coming up with a transitional tariff quota that would be replaced by 1 January 2006 with a new system that would only impose customs duties and not have any quotas. This was rejected by the US again and it began considering a novel way of imposing a punitive tariff on the list of products that would be periodically altered. With Bill Clinton leaving the scene, the US never got to implement this novel method of imposing tariffs.

    By January 2001, another drama was enacted wherein a WTO appellate body struck down the dispute panel’s ruling on compliance assessment. The body said the panel had overstepped its jurisdiction and hence its ruling was not legally binding.

    The dispute kept stretching on with the WTO saddled with eight banana disputes. Finally, the EU and the Latin American countries signed a mutually agreed solution on 8 November 2012. The solution reportedly favoured big producers as the tariff was cut. The EU had to mobilise 200 million euros to help the ACB nations face stiffer competition in its market. The money was to be distributed over several years. But in the final analysis, US firms Chiquita, Dale, and Del Monte had their way, gaining the most from the dispute.

    M.R. Subramani is Executive Editor, Swarajya. He tweets @mrsubramani

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