EU/ACP Countries Tariff Banana Wars Continue

Banana Wars Continue – Chiquita Once Again Tries to Work Its Omnipotent Will, Now Under New Management: Likely Big Losers Will Be CARICOM’s Windward Islands

• The transatlantic banana dispute over the European Union’s (EU) tariff and quota preferences which the trade bloc has granted for several decades to developing African, Caribbean and Pacific (ACP) countries, has been particularly devastating for the Caribbean’s Windward Islands. The issue is a likely agenda item for the upcoming World Trade Organization (WTO) talks set for Hong Kong in December.

• In light of the White House’s history of political pandering to Chiquita Brands International Inc. in its various banana disputes, one should expect that Washington will once again use its political muscle to strong-arm the fate of the EU/ACP banana regime at the WTO gathering. It seems that this time around, however, Latin America may manage its own counter attack.

• As was the case under the Clinton administration, the U.S. has no plans to help Caribbean Community (CARICOM) members sustain their economies through what has been a painful transition following the U.S.-led WTO attack on its Lomé agreement benefits.

• CARICOM is on the ropes: with no viable economic alternative for the Windwards, a turn to the inadequacies of the islands informal economies, stepped-up illegal immigration to the U.S. and further involvement in the drug trafficking trade is a foregone conclusion.

• Fair trade should be given due consideration and not dismissed off hand. Most of the Windward Islands’ banana crops are grown on small, family farms where workers are reasonably compensated and protected by rather enlightened labor laws.

Ever since the U.S. charged in 1999 that the European Union (EU) trade preferences given to developing African, Caribbean and Pacific (ACP) countries were not in accordance with World Trade Organization (WTO) regulations, the economies of many Caribbean Community (CARICOM) countries have been rendered incapable of competing on the world market and are teetering on the edge of bankruptcy. The U.S., on behalf of the powerful multinational corporation, Chiquita Brands International Inc., which has major banana interests in Central and South America, has argued that the favorable trade conditions that the EU has afforded developing ACP countries should cease according to WTO provisions.

Subsequently, in May 2001, the EU adopted a new banana import regime corresponding to a deal similar to the one that had been struck with the U.S. without any consultation with Caribbean leaders, whose countries undeniably would be the most affected in the process. The new system includes a phasing-out period aimed at dismantling the current quota and tariff systems that, since the 1970s, have kept the high cost banana industry alive in the Caribbean under provisions of the Lomé Convention. The agreement between the EU and the U.S. was part of the process toward progressively lower tariffs that will become fully effective 1 January 2006. As a result, this will trample the Caribbean islands, especially the islands of Martinique, Dominica, Grenada, St. Lucia and St. Vincent & the Grenadines, under the juggernaut of free trade. Former British Ambassador to Antigua and Barbuda Sir Ronald Sanders writes in his new book, Crumbled Small: The Commonwealth Caribbean in World Politics that “Caribbean countries are in a crisis and in urgent need of sympathetic treatment in global economic and trade arrangements to avoid economic decline and higher unemployment.”

Latin America Says No to EU Plan
Things had been relatively quiet over the last four years regarding WTO regulations of the banana trade – until recently. For the CARICOM islands, this year marks the final phase-out of Lomé-mandated preferential trade arrangement with the EU. In January 2005, the EU formally announced to the WTO that it planned to introduce a $296/ton (230 €) tariff on Latin American crops beginning in 2006. In a March 30 response, representatives of Colombia, Costa Rica, Guatemala, Honduras and Panama, and led by Ecuador (the world’s second largest banana producer next to India), launched another challenge against the new EU regime, calling on the WTO to arbitrate the dispute over the EU’s proposed tariffs on their bananas. In January 2005, leaders of the same six nations, along with Nicaragua filed a signed objection to the EU’s proposed plan, stating “Importation of bananas from Latin America to the European Union is of the utmost importance for political stability and economic and human development...to reduce poverty in our nations.”

Latin American nations instead are lobbying for the EU to grant a $98/ton tariff – a third of what the EU is proposing. The $296/ton tariff is the EU’s attempt to strike a balance between the demands of mainland large-scale dollar producers and a desire to continue to protect traditional ACP suppliers who, in most cases, are not able to achieve the economy of scale and other advantages available to Latin American plantation vendors. It is not surprising that ACP members are not satisfied with the new tariff either, since they would like it placed at the much higher rate of $354/ton (275€), which would better allow them to compete. Responding to the recent challenge by mainland Latin American nations at the WTO, the EU released a statement saying that “While the EU regrets the decision of these WTO members to request arbitration, it will defend its proposal before the arbitrator and remains open for constructive engagement with interested WTO members.” Currently, ACP and EU countries each hold roughly 20 percent of the EU banana market, while the remaining 60 percent is controlled by mainland Latin American producers.

According to WTO regulations, a WTO arbitrator must be appointed within 30 days of the complaint and will then have another 90 days to make a decision. WTO Director-General Supachai Panitchpakidi selected three arbitrators on May 3: former Canadian ambassador John Weekes, John Lockhart of Australia and Yasuhei Taniguchi of Japan. They should have a decision by the end of July. If the EU tariff is judged to be excessive, Brussels will be forced to propose another amount. Consequently, if Latin American banana exporting nations are not satisfied with the WTO-proposed tariff, they will most likely request a second round of WTO arbitration, which will spill into the scheduled December round of trade talks in Hong Kong.

Lomé Convention
The United Kingdom’s century-long relationship and protective arrangements with the Caribbean banana trade is based on a mix of historical moral, political and economic principles. When the UK acceded to the European Community (EC) in 1973, its policy on bananas had to be harmonized within in a larger European context. In forming the skeleton of a prospective single market regime, the EC had to take into consideration traditional treaty obligations involving a number of African, Caribbean and Pacific states that had historic links to some of the EU’s member nations. The Lomé Convention – an important community agreement between the EU and 77 developing countries in Africa, the Caribbean and the Pacific – was meant to regulate trade as well as allow most ACP agricultural exports to enter the EC duty free. Particularly, it provided protective measures for a few dominating commodities, such as bananas. Lomé came into effect in 1975 with a view to “create [a] model for relations between developed and developing states,” establishing a preferential treatment system that would last until 2000.

In 1986, Caribbean nations had reason to fear that their livelihoods provided for long duty free banana access into the EU, would soon face rough times. That same year, the EC instituted the Single Market Act, whereby the community would have to establish a single market for bananas and all other produce by 1 January 1993. There seemed to be no way to safeguard ACP bananas, particularly those coming from the Windward Islands, while having to compete with the Latin American “dollar bananas” in a single market. Although likely to face unrest from other member countries of the General Agreement on Tariffs and Trade (GATT), the European Commission nevertheless proposed that instead of continuing with a preferential tariff treatment, it would establish a new system of banana quotas, based on traditional supplies coming from both Latin America and ACP countries.

The proposed quota regime did not conform to GATT regulations, but returning to a tariff-based system in a single market would surely render the Caribbean banana producers incapable of competing with U.S. multinational companies located in Latin America. In response to GATT outcries, former UK Prime Minister John Mayor and the EC Commission formulated a clever solution: they developed a tariff quota, instead of a volume quota system. Therefore, the final proposal combined the tariff quota with a cross-subsidy (bananas, dollar quotas could be earned) that was believed to be enough of an effort to protect the vulnerable ACP banana industry. This newly-formed Common Market Organization for Bananas (CMOB), formed in 1993, seemed to meet both GATT and Lomé standards.

Round One of the Eight-year Showdown: Latin American Grievances
The CMOB was intensely disputed from its inception and in 1993, a panel of 5 Latin American banana-exporting countries (Colombia, Costa Rica, Guatemala, Nicaragua and Venezuela), requested an investigation into the CMOB’s compliance with GATT regulations. These exporting countries believed that both the quantitative restrictions on banana production and the tariff preferences granted to the ACP were inconsistent with various GATT rules. Although the ACP was allowed to continue receiving the benefits of the tariff quota/cross-subsidy system, the challenge by the Latin American mainland countries laid the groundwork for the soon-to-be instituted Framework Agreement on Bananas (BFA), which became a key component of the arrangement.

A quid pro quo system involving Colombia, Costa Rica, Nicaragua, Venezuela and the EU was agreed upon. The Latin American countries agreed to drop the GATT challenge, but the agreement only added more complexity to the CMOB in the form of a reduction of the in-quota tariff and an increase of the tariff quota on dollar bananas. Rewards for the Latin American signatories of the BFA included a methodology whereby the EU would buy the initial quota applications from the ACP countries (which were now less than before) and the remaining tranche from the four mainland countries. Yet, the ACP countries were never consulted on this new agreement – and it would not be the last time that they were left out of a negotiation process. The EU had now bought off four of the regional producers at the expense of other Latin American and Caribbean competitors. Moreover, the process had aggravated Chiquita Brands International, with its many key connections to Washington power brokers. Using the U.S. government as its echo chamber, Chiquita determinedly exercised its political muscle to not only bring down the BFA, but the entire banana imports system as well. What was originally instituted to solve the EU’s banana problems under GATT, the CMOB turned out to be an emphatically unsuccessful arrangement. Chiquita, although now under new management, remained true to its corporate heritage – buying influence in all directions.

Round Two: Chiquita and the U.S.
In 1995 a U.S. packaged coalition composed of Guatemala, Honduras and Mexico, and later Ecuador brought a new dispute was brought before the newly-formed WTO. But the real driving force behind the alliance was the U.S.-owned banana powerhouse, Chiquita (originally the United Fruit Company). At the time, Chiquita was not only the biggest producer of bananas in the world and had heavily invested in land, machinery and workers in Latin America, but its loose pockets heavily financed key political figures’ election campaigns both in the U.S. and elsewhere where banana production could be found. When Chiquita recorded a $52 million loss in Europe in 1992, it blamed the EU banana system for its woes. In the past, Chiquita had supported every attempt to change the EU-ACP banana import regime, and in its perspective, the installment of the BFA came to be seen as the straw that broke the camel’s back. Interestingly enough, the losses that Chiquita blamed on the BFA were incurred before the agreement even came into effect. Chiquita’s financial difficulties date back to the late 1980s, when it expanded its production but sold off much of its land, in expectation that it would benefit from the EU single market economy – however it also risked overproduction. The company passionately, if erroneously, believed that the single market could bring about a free market for their bananas. Moreover, Dole Food Company, Inc., another U.S. powerhouse banana producer, did not join the dispute – neither, at this time, had the U.S. government.

The U.S. stayed on the sidelines until the political arm of Chiquita flexed its muscle during the early 1990s, when then Chiquita CEO Carl Lindner stepped up his contributions to political parties and individual candidates, making sizeable donations to both the Republican and Democratic state committees. A Washington-based public interest group, Common Cause, reported that over $1 million was contributed to the parties in 1993 and 1994 – one of the largest “soft” contributions made that year. In return, Mr. Lindner was invited to lodge in the Lincoln bedroom of the White House during the Clinton presidency. It is also important to note that former senate majority leader and presidential candidate Bob Dole introduced a series of amendments advocating Chiquita's special interests, for which a grateful company awarded the use of its corporate jet for his campaign appearances during the primary elections.

With the help of its allies in Washington, Chiquita petitioned the United States Trade Representative (USTR) to investigate and take action if indeed U.S. trade was being damaged. The Section 301 case filed by Chiquita and the Hawaiian Banana Industry Association set a precedent as the first case to be investigated whereby the product was not a U.S. export, since not a single U.S. citizen was actually picking bananas. Most importantly, the case sparked a direct battle between the U.S. and the EU. Once again, Caribbean nations were not able to use their voice during the entire dispute. Although representatives on behalf of the tiny islands would rebut by appealing to public opinion, the Clinton administration remained unyielding and unsympathetic to any pleas from the Caribbean. While the U.S. claimed that its intentions were not to hurt the Caribbean nations, it was adamant that the Lomé Conventions could not continue at the expense of American commercial interests.

In 1996, the WTO Dispute Settlement Body ruled in favor of the plaintiffs – the U.S., Honduras, Guatemala, Mexico and Ecuador – making significant changes to the CMOB. The EU was no longer allowed to grant ACP countries the cross-subsidy that it had benefited from for almost three years. The import licensing system was simplified, but it continued to receive scrutiny from opposing states and multinational corporations. Once again, the WTO viewed the dispute exclusively as one between the U.S. and the EU, even though the decision could mean economic life or death for many Caribbean islands.

Knockout
The U.S. and Ecuador were not satisfied with the WTO rulings and insisted that all preferential trade agreements between the EU and ACP should cease, claiming that the new reforms were not compatible with WTO rules. The WTO Dispute Settlement Body established another panel in January 1999 and concluded that the EU-ACP banana regime was not fully compatible with WTO regulations. In response, the EU proposed new reforms aimed at meeting both WTO and Lomé Accord regulations, as well as appeasing the U.S. and Latin American banana producing nations. Although the ACP countries, particularly the Windward Islands of the Caribbean, would suffer the most from the outcome of final negotiations, an agreement was reached between the EU and the U.S. in 2001. Keeping some semblance of a tariff quota system for a transitional period seemed acceptable to all parties. However, the system unquestionably would render the already vulnerable Caribbean nations completely defenseless, now having lost their previous preferences and the sense of security accorded to them under Lomé.

Although the Lomé Convention was succeeded by another similar agreement, the Cotonou Partnership, the latter was far less specific than Lomé’s trade provisions. Cotonou stresses that EU assistance to the ACP should be in accordance with WTO regulations. The premise of the agreement, which replaces Lomé, involves Economic Partnership Agreements (EPAs) that features reciprocal trade obligations. Although the agreement implies EU “responsibility to ensure the survival of the ACP banana export trade, including that of the Caribbean,” the European Commission nonetheless had to propose a two-step process that would provide a transitional tariff quota system until being replaced by a tariff-only system 1 January 2006. It is therefore only recently that the EU has considered the option of moving towards a tariff-only regime, which will automatically go into effect next year. Even now, however, the amount of the flat tariff still has to be negotiated under GATT’s Article XXVIII (which takes into consideration the needs of less-developed countries on a product by product basis for a more flexible use of tariff protection to assist their economic development).

A Long, Quiet Four Years (2001-2005)
The survival of the Windward Islands depends on some form of preferential trade agreement. Bananas are the livelihood of many of the Caribbean islands, especially the Windward Islands of Dominica, St. Lucia and St. Vincent & the Grenadines, where banana exports account on average for more than one-third of all jobs and between 50-70 percent of export earnings. The lack of U.S. concern for the Caribbean nations has already led to the corrosion of political processes on the various islands and a rise in common crime and corruption. Considering the unpredictability of the tourism industry, the previous trade agreements were a secure source of revenue. Tourism wavered after 9/11, but has since picked up as travelers, wary of visiting Indonesia and Thailand following the recent tsunami, are now heading to the Caribbean. However, it is uncertain how long this surge in tourism will last or when the next hurricane will come, and a move toward an informal economy is inevitable.

With no viable or dependable alternative source of revenue, drug manufacturing, trading and trafficking are tempting alternatives. Where banana trees can grow, so too can marijuana plants. The region’s historic marijuana industry has been booming recently; countries like St. Vincent and Jamaica have even graduated into the transshipment of cocaine. After all, the Caribbean serves as a strategic geographic middleman between the world’s largest illegal drug producing region, South America, and the world’s largest consumer, the U.S. Since 2001, there has been a massive exodus from the industry in the Windward Islands after the banana price fall of 2000 and the drought of 2001. Nearly 4000 farmers gave up because of declining returns and diminishing prospects. Although it is unknown what happened to this category of farmers and the many unrecorded who have dropped out, the cultivation of marijuana is becoming an increasing problem in the Caribbean. Moreover, at least 45 percent of the Jamaican economy is informal – a polite way to say that the drug industry is thriving.

A recent estimate by the United Nations Drug Control Programme reports that the net regional earnings of the Caribbean drug industry is in the neighborhood of $3.3 billion. This number is nearly half of Jamaica’s GDP – a giant in the Caribbean but with a mere 2.6 million people. Drugs do for Jamaicans what bananas cannot: provide an income. The U.S. only created a bigger problem when it lobbied on behalf of Chiquita, increasing the prospects of social and political unrest in the U.S.’ own backyard and bringing in the risk of illegal immigration and illicit drug trafficking.

Reflections on the WTO: What Will Happen Next?
Unlike Europe, the U.S. system does not have colonial obligations to the Caribbean islands. It is within this context, that the WTO is setting the stage for a clash between the EU post-colonial system that appears to favor its former colonies and current U.S. policies. The WTO claims that its primary purpose is to improve living standards and equity in international trade. It seems, however, that the reasonable interests of smaller countries will always be sacrificed on the international market when the major players whine as manifested when the U.S. successfully used the WTO Dispute Panel as a substitute for unilateral action. Even though granting non-reciprocal trade preferences is discriminatory and normally requires a waiver under WTO law, the trade policies of many countries rely upon these types of relationships and the long-term acceptability of them. If members of the WTO want to limit these types of arrangements, then they should do so consistently and transparently and now.

The banana case evidences that the WTO is not an organization of particular value to small vulnerable economies, but rather a playing field for powerful countries to wage commercial and political combat. Although consensus within the WTO has not been reached regarding the future of trade preferences, the banana case, sadly, may not have clarified this debate. Surely the Windward Islands are doubtful about the WTO’s ability to protect them against the dominant powers, like Chiquita, on the world market.

Fair Trade Should be Given Just Consideration
Fair trade, an alternative to free trade, enables and encourages consumers to buy manufactured goods that are produced in a socially and environmentally friendly setting. Workers are guaranteed certain social benefits and profit returns. Also, the use of pesticides and other forms of environmental pollution are proscribed. As the prospect for directly competing with Latin American dollar bananas looms, many farmers have embraced fair trade as their alternative marketing strategy. Certified fair trade farmers receive higher prices than do conventional farmers, but must conform to extensive social and environmental standards, which are outlined by the Fair Trade Labeling Organization International. As the number of consumers who are willing to pay more for fair trade items increases, it is a lucrative alternative for Caribbean farmers (many of whom have already turned to fair trade bananas) who may not otherwise be able to continue cultivating bananas due to mainland Latin America competition.

Most of the Windward Islands’ bananas are grown on small, family farms where workers are reasonably compensated and protected by well-observed labor laws. Moreover, Caribbean bananas are not excessively sprayed with environmentally and physically injurious pesticides. In 2000, the Windward Islands began exporting their fair trade bananas to the UK and by 2003 were supplying over half of the UK’s fair trade banana supply. In addition to the UK, the Caribbean also supplies the Netherlands and Switzerland. “Put it this way,” observes St. Vincent’s Deputy Prime Minister Lewis Straker, “a Latin American plantation is bigger than the whole of St. Vincent. If this new banana regime goes ahead, we can be reduced to poverty overnight.” He continues, “Buy sweet, well-produced Windward bananas from decently paid workers, or bananas from multinational corporations reaping profits on the back of slave labour.”

Lessons Learned
On behalf of U.S. corporate interests, as represented by the Clinton and Bush administrations, the practice of allowing former European colonies preferential trade benefits was ruled to be against current WTO rules. Nevertheless, the EU realized that it had a duty to guarantee access to its market for the simple reason that most banana farmers would not even be living in the Caribbean had the Europeans not enslaved their ancestors. However, once begun, these preferential treatments become more and more difficult to relinquish and, over time, those developing countries become increasingly dependent on the banana trade. Therefore, aside from the banana dispute, there continues to be a debate over whether or not such preferences are in the interest of the developing nations. Some argue that there exists less incentive to diversify and develop more competitive technology in the presence of such benefits, while others argue that the economies of these countries would crumble without preferential trade agreements. Perhaps one way that the WTO could have handled this case (and might do in the future) would have been to grant the EU’s Lomé Accords an Article XIII Waiver, which protects small, vulnerable economies – something that the WTO claims to do.

The dominance of powerful multinational agricultural firms will likely persist. The Latin American industry grew as a result of market forces, whereas the Caribbean industry grew under a protective colonial system. Because multinational firms operate under market trends, the ability to develop technology, better compete and create economies of scale led to their current dominance – not to mention that they are operating on huge plantations and underpaying their workers. Without similar capabilities, it is not likely that the Caribbean banana industry will survive unless fare trade initiatives are put into place. Because large companies like Chiquita are able to advance their company’s prospects at the world policy level, the implications for the small vulnerable economies are ominous. The only possible solution to this problem is to establish protective measures and exemptions through the WTO.

The international conduct of trade policy lies at the very heart of the banana dispute. One of the primary reasons that the Caribbean islands will soon experience stepped-up suffering is because the U.S. allowed domestic electoral politics and a dispute with the EU to influence trade policy. The actors of this dispute did not even allow the Caribbean to enter the theater – much less onto the stage. How is it possible that small farmers can compete with enormous private corporations? And why would the U.S. have caused such an international ruckus, considering that the Caribbean only constitutes one percent of banana trade worldwide? Clearly, the U.S. legally got away with launching a unilateral attack on behalf of Chiquita against the EU’s trade policies – all under the guise of bringing its displeasure to a WTO dispute settlement panel.

The strife over bananas has not yet gone away, evidenced by the fact that it will likely spill into the December WTO talks in Hong Kong. The WTO would be wise to take into special consideration the needs of small, vulnerable economies. In the end, the banana issue will stand to be a litmus test that measures the international community’s dedication to finally put rationality into action and temper the numbers and bottom lines with a pinch of mercy.

This analysis was prepared by COHA Research Associate, Rebecca Rush.

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