Econ 290: The World Economy Professor Riera-Crichton 14 December 2010 Free Trade vs. Fair Trade: An Examination of the EU Banana Wars

Transcription

1 Gruber 1 Blake J Gruber Econ 290: The World Economy Professor Riera-Crichton 14 December 2010 Free Trade vs. Fair Trade: An Examination of the EU Banana Wars Over the last century the processes of globalization have exponentially increased the interdependency of the world economy. This newfound reliance on trade has had both positive and negative effects on developing and developed nations, and has impacted markets from automobiles to agriculture. In order to mitigate controversies between states in this ever-sointertwined international market, intermediaries such as the GATT and WTO have been constructed to help ensure free and fair world trade. A particularly paramount case in one of the more recent WTO hearings was on world banana trade. This is for good reason as, Bananas are the fourth highest exported food product in the world with $4.6 billion total export in 1999 (Wilson, 135). The following will examine the WTO banana dispute between the EU, US, Latin America, and African Caribbean and Pacific countries from 1993 up until 2009 when the dispute was finally settled. This examination will shed light on the functionality of the WTO, its powers of enforceability, and its overall capacity to settle disputes. A further analysis will exemplify the disparities between developed and undeveloped countries in terms of free trade. To fully understand the banana disputes a well established background must be set. First, the banana market will be discussed, followed by the major players in the WTO case, and finally a brief historization of the relationships between the given players and market conditions will provide a sufficient context to unravel the complexities of the banana wars. Bananas are the fourth most exported food product in the world, with roughly $4.6 billion traded annually. It s also important to note, developing countries share of the world banana

2 Gruber 2 trade is 68% (Wilson, 135). This market is certainly significant in world exports, and furthermore a fundamental export to the economies of many developing countries. The United States and European Union, each [account] for about 35% of world [banana] imports, but in terms of value the EU share of the trade is appreciably greater (about 44%) because of higher prices (Myers, 42). The players in the market, for the purposes of discussing the WTO case, can be divided into two groups the developed importers, The US and EU, and the developing exporters, Latin America (LA) and the Afro-Caribbean and Pacific countries (ACP). The United States and European Union are the largest block of banana importers in the world. The United States is the complainant in the WTO case, attacking unlawful trade sanctions in the EU. Although the United States produces no bananas for export domestically it is home to Chiquita, Dole, and Del Monte; fruit intermediaries that account for 64% of the world market (Myers, 43). Thus, The United States interest focused more on effects on its service providers (intermediaries in the fruit trade) than on producers (Salas, 145). The European Union acts as the defendant in this case because of the protective trade community it created to foster banana exports from its former colonies, mainly ACP economies. LA and ACP countries are the developing nations that represent the banana exporters in the case. By far the largest [banana] exporting region in the world is Latin America, primarily Ecuador, Costa Rica, Colombia, Guatemala, Honduras and Panama accounting for over 80% of world exports (Myers, 42). Chiquita, Dole, and Del Monte ran highly integrated operations in Latin America, either owning or controlling by contract much of the plantation production, except in Ecuador, as well as organizing the shipping and marketing operations (Myers, 45). Resultantly, America backed the LA community in the WTO, providing these developing countries argument with more weight and significance throughout negotiations.

3 Gruber 3 The ACP countries, on the other hand, are former colonies of the European Union. The main players are the Windward Islands, Jamaica, the Ivory Coast, and Cameroon. These former EU colonies have always enjoyed preferential treatment from the EU in the form of banana exports. For example, While the Windward Islands account for only 3% of world banana trade, they supply 20% of EU imports (Hanrahan, 5). However, Ecuador, the world s largest producer and exporter of bananas produces bananas at a cost of $162 per metric ton, while ACP costs can be as high as $515 per ton (Hanrahan, 3). Clearly there is an argument for a need for freer trade here: while the LA countries tend to produce bananas at a much cheaper cost they are prohibited by tariffs imposed by the EU to offset their comparative advantage in production at the benefit of the ACP countries. The European Community began adopting community wide trade regimes, and In 1993, the EU implemented a single EU-wide regime to regulate banana imports. The regime gave preferential entry to bananas from the overseas territories and former colonies of EU member countries and restricted entry from other countries, including several in Latin America where US companies predominate (Hanrahan, 2). The proposal allowed for ACP bananas to enter the EU market, duty-free up to a specified traditional quantity for each traditional supplier (Myers, 58). Essentially, the allocation of the tariff quotas, as well as a system of import licenses foreseen in regulation 404/93 benefited ACP countries, to the detriment of non-acp exporters, imposing new restrictions on the import of bananas into EU member states (Salas, 147). Thus, this further leaning from the already asymmetrical trade preferences of EU banana imports led the United States to bring the initial challenge before the GATT in Now, the proceedings of the multiple challenges will be explored. The banana case was initially brought to the world forum in the GATT, where the panel found the EU, in breach of the GATT general agreements, and added insult to injury in

4 Gruber 4 extending the tariff preferences to some ACP countries that were not even GATT members (Myers, 66). However, the extreme lack of enforceability within the GATT rendered no consequences for its decision, and the case was brought up again with similar findings. Following the rulings, the EU and ACP countries had jointly requested a waiver so that provisions of the Lome Convention conferring preferences on the ACP would no longer be in breach of the GATT (Myers, 84). This waiver provided immunity in the EU until But, the focus of this paper is on the WTO, which arose in the midst of these first two banana disputes (Bananas I and II). Subsequently, the case entered the newly arranged World Trade Organization, and acted as one of the first pivotal cases in food and agriculture legislation. With the inception of the WTO, and its induction of more LA countries, the US led another attack (bananas III) in the new world forum backed by Ecuador, Guatemala, Honduras, and Mexico. The WTO found the import regime illegal in 1997 on grounds that its system of allocating licenses discriminated against growers and marketers in the complaining countries subsequently a WTO arbitration panel ruled that compensation of about $192 million was due to the united states for lost banana sales (Hanrahan, 2). The tariff sanction awarded to the US demonstrated the new capabilities the WTO had to help enforce trade regulations, measured retaliation. The US applied tariffs to a variety of EU goods, none of which fell in the agriculture industry. Thus, communication between the US and EU continued and became more expedient with the given trade sanctions in place. Multiple trade proposals provided by the EU were rejected by the group of complainants, until, In April, 2001, the United States and the EU reached an agreement on their longstanding dispute over banana imports (Hanrahan, 3). The agreement established a single tariff only regime for banana imports by January 2006 (from the tariff-quota system), but still allowed for duty free entry from ACP countries. This system provided a single tariff for all nations, of

5 Gruber 5 176pounds/tonne which in effect only applied to Latin American imports, as duty-free entry for ACP imports was maintained for a volume which effectively covered all their EU exports (Fairtrade, 6). This drop in tariff and quota regulation made LA countries bananas cheaper than ACP bananas despite the ACP duty-free imports because the Latin American countries can produce at such a significantly lower cost. Still, Ecuador continued the fight, and moved to lower tariffs even further with the help of Pascal Lamy, the WTO director. Although Lamy s initiative wasn t able to resolve the case, parties continued to work in search of a solution, until the announcement of a comprehensive agreement on Tuesday, 15, December 2009 (WTO). The settlement lowers tariffs yearly, keeping all other parameters constant, until a final tariff of 114pounds/tonne is reached in The trade settlement, means less-expensive bananas for Europeans, more profit for US fruit companies and lower revenue for some former EU colonies [ACP countries] (Miller, 1). The decisions made in this case will be important to settling similar disputes, Bananas III is considered a landmark case in WTO jurisprudence for several reasons. Its treatment of substantive legal question is indeed very relevant, but the case has come to be crucial mostly because of the precedents being set in the procedural case-law of the WTO (Salas, 165). Beyond legislative precedents, this case set precedents for numerous food regulation hearings, such as that in the beef dispute between America and Japan. The settlement of the banana war has indeed opened the world to freer trade, but at what cost? The successfulness of the WTO in terms of its ability to settle disputes and enforce settlements will be extrapolated from this case study of the banana wars. Furthermore, some analysis on the social aspects of this decision will be discussed in terms of winners, losers, and overall welfare for the parties involved. This case displays two important components of the WTO, measurable retaliation and overall expediency. It is evident from the shift of the GATT to the WTO that there is now more

6 Gruber 6 enforceability in international trade law. Because the WTO includes more nations, and has parameters to enforce in the form of measurable retaliation, it is a more successful mediator than the GATT was. Measurable sanctions allow a hurt nation to immediately compensate itself by taxing other industries in the defendant nation. This is important given the expediency of the WTO, which is still rather lacking. This case took over 16 years to settle from its initial dispute in the GATT. This timeframe is not unique for the case of bananas, and can be observed in most WTO cases. New tariff regimes take time to implement, but added to the length of negotiations, it often takes a number of years to see any improvements in free trade. This is likely an issue that won t be resolved any time soon, as is evident with the stagnation of the Doha round in general. Now, What is crucial for the continued success of the WTO dispute settlement system is to have credible implementation provisions. These provisions have to balance the needs of complainants seeking prompt redress, with the interests of respondents wary of the ghost of unilateralism (Salas, 166). Clearly the WTO is a useful tool in negotiating world trade disputes, despite its tendency to take long periods of time and its moderate level of enforceability. However, there are other sociological issues at hand when arguing for free trade. In this case in particular, the US banana marketing companies, Chiquita Brands International and the Dole Food Company will be the primary beneficiaries of the banana agreement (Hanrahan, 5). Furthermore, For some ACP states this trade was a matter of economic life or death. Yet the WTO regarded the dispute as exclusively between the USA and the four Latin American complainants on one side and the European Community on the other This meant that the ACP countries were seriously handicapped in their attempts to present their case (Myers, 89). Thus we see the developing countries on both sides disenfranchised. For the ACP countries the ruling will have dire consequences on their economies as a whole, although they did receive some aide, a one-time

7 Gruber 7 cash payment of 200 million Euros the EU will [continue] to do its best to help (Miller, 2). Regardless, they could not even represent themselves during the case given WTO formalities. For the LA countries their welfare will only improve slightly, if at all, because profits from their exports tend to go to the intermediaries, ultimately the profits will be seen in the US economy. So, although this WTO dispute did open the world up to freer trade, this freer trade essentially means cheaper bananas for Europeans, more profits for American countries, all at the huge blows to the economies of banana exporters, the developing economies that need the most help. Perhaps the motives behind these negotiations weren t in the spirit of improving international welfare. The case left Prime Minister Edison James of Dominica stating, We feel betrayed by the WTO What we find is that the WTO has ended up being a system in which the legitimate interests of small countries will always be sacrificed once they conflict with those of the major players (Myers, 159). This case study has demonstrated the capabilities of the WTO in terms of dispute settlement on trade issues, and has exemplified some of the disparities between developed and developing nations within multi-lateral trade negotiations. When the GATT evolved into the WTO it was endowed with more capable enforcement tools in the form of measured retaliation. As demonstrated in the banana dispute, WTO sanctioned tariff concessions help expedite negotiations. However, these sanctions can be controversial in that there are no restrictions where the damaged nation can apply the tariff, thus they often affect industries that are not even related to the trade dispute at hand. Still time-frame issues are particularly difficult to resolve, and without these tariff retaliations many negotiations would proceed at a much slower pace. Beyond logistical issues within the WTO legal-framework, bigger problems can be seen within WTO negotiations.

8 Gruber 8 Although the aims of the WTO s free trade agreements may be improving the welfare of all nations, this is clearly not always the case. The treatment of the ACP countries reflects some prejudice, or at the very least problems, in the WTO s negotiation system, as these countries couldn t represent themselves in a case pivotal to their livelihood. Furthermore, Latin American countries received no benefits (in fact banana worker wages actually dropped) from the agreement due to US corporation s pillaging of banana crops throughout LA in the early 1900 s, except Ecuador who s crop is not owned by the US. Intricacies like this make the playing field of free trade far more complicated to balance. Although the WTO does attempt to assist developing nations with special and differential treatment provisions, these provisions are currently considered guidelines by developed nations. Given the variety of economic issues within developing nations, it is nearly impossible to write special and differential treatment clauses in any sort of binding legal language that can be universally applied to the WTO and all its member-nations. The issue really comes down to conflicting economic principles on how to integrate developing nations into the World Economy: Should developing nations receive special treatment and be allowed to disregard WTO principles due to their economic disadvantages which could halt their full integration into world markets, or should they be forced to comply to all WTO rules despite their lack of competitiveness because the rules are the only way to open up an economy enough to reap all the benefits from free trade. This question is certainly one that should be considered closely if free trade is to ever be equated with fair trade.

9 Gruber 9 Bibliography Castle, Stephen. "EU Relents and Lets a Banana be a Banana." New York Times 12 Nov 2008, Print. Commission Regulation (EC) No 2257/94 of 16 September 1994 laying down quality standards for bananas (Text with EEA relevance) Official Journal L 245, 20/09/1994 P Frundt, Henry. "Toward a Hegemonic Resolution in the Banana Trade." International Political Science Review 26.2 (2005): n. pag. Web. Hanrahan, Charles. "The US-European Union Banana Dispute." CRS Report for Congress (2001): n. pag. Web. Marquardt, Steve. ""Green Havoc": Panama Disease, Environmental Change, and Labor Process in the Central American Banana Industry." American Historical Review (2001): n. pag. Web. Maskus, Keith E, Tsunehiro Otsuki, and John S Wilson. "The Cost of Compliance with Product Standards for Firms in Developing Countries: an Econometric Study." Policy Research Working Papers Study (2001): n. pag. Web. Miller, John W. "EU Ends 16-Year Banana Trade Battle." Wall Street Journal 16 Dec 2009, Print. Myers, Gordon. Banana Wars: The Price of Free Trade. New York: Zed Books Ltd, Print. Salas, Mauricio. "Procedural Overview of the WTO EC- Banana Dispute." Journal of International Economic Law (2000): Web. Wilson, John, and Tsunehiro Otsuki. "To Spray or not to Spray: Pesticides, Banana Exports, and Food Safety." Food Policy 29. (2004): Web all rights reserved.