RS20130: The U.S.-European Union Banana Dispute

Charles E. Hanrahan
Senior Specialist in Agricultural Policy
Resources, Science, and Industry Division

Updated December 9, 1999

Summary

A World Trade Organization (WTO) dispute arbitration panel has ruled that the European Union's (EU's) preferential regime for importing bananas is not in compliance with WTO rules and obligations and that the United States has the right to retaliate against the EU by imposing prohibitive duties on $191.4 million in EU imports. The EU has indicated that it will not exercise its right to appeal the compliance ruling (it may not appeal the retaliation ruling). Attention thus has turned to negotiating a settlement of this contentious issue. Options for resolving this long-running dispute include setting up a tariff-only banana import regime (which appears unlikely) or revising the existing tariff-rate quotas and licensing procedures which regulate the EU's $5 billion banana import market. Compensation or adjustment assistance (which is likely to be dealt with outside of the WTO) for developing country exporters for the withdrawal or reduction of banana trade preferences may also be a consideration.

Introduction

A WTO arbitration panel has ruled that the EU's banana regime continues to be inconsistent with WTO rules and that compensation in the amount of $191.4 million is due the United States for lost banana sales. The United States imposed tariffs of 100% on $192 million worth of EU imports into the United States, none of which are agricultural products. The amount of compensation authorized is less than the $520 million the United States originally announced. The United States refrained from collecting the duties until the arbitration panel ruled on the level of compensation due. Following that decision, the United States collected the duties retroactive to March 3, 1999. The EU, foregoing its right to appeal the compliance ruling, indicated that it will abide by the decision.

With the WTO arbitration rulings and the EU indication that it will abide by the decisions, the stage is set for a negotiated solution to this long-running dispute. Trade policy experts expressed the views that negotiations between the United States and the EU could accelerate in an effort to reach a settlement that might permit the EU to comply with WTO rules, enable the United States to withdraw its retaliation, and establish confidence in WTO dispute settlement procedures. A compromise solution may also likely take into consideration interests of other parties to the dispute, notably the banana exporting countries in Latin America who have joined with the United States in challenging the EU regime (and some who have not), and developing countries, especially in the Caribbean, who benefit from EU banana trade preferences.

Background to the Dispute

The EU Banana Import Regime. In July 1993, the EU implemented a single EU-wide regime on banana imports. The regime gave preferential entry to bananas from the EU's overseas territories and former colonies and restricted entry from other countries, including several in Latin America where U.S. companies predominate.

The EU implemented the banana regime as part of its move toward a single, unified market which was inaugurated in 1992. Before the regime, individual countries imported bananas under an assortment of national practices. For example, France imported bananas from its Overseas Departments of Guadeloupe and Martinique and from former colonies, Cote d' Ivoire and Cameroon; Spain was supplied exclusively by domestic production in the Canary Islands; other EU countries imposed a 20% tariff; and Germany (with the world's highest per capita consumption of bananas) allowed tariff-free entry.

The EU regime entered into force on July 1, 1993, and established a multilayered system of quotas for banana imports. Imports from EU or overseas territories' producers were unrestricted. Imports from traditional suppliers in the African, Caribbean, and Pacific (ACP) countries, former colonies of EU countries, were tariff-free up to 857,000 tons. Imports from nontraditional ACP suppliers were assessed a tariff of 150% ad valorem. Imports from third countries (including Latin American countries) were assigned a tariff-rate quota (TRQ) of 2.2 million tons, with in-quota tariffs of about 20% ad valorem for countries that had signed a framework agreement with the EU (Colombia and Costa Rica, Nicaragua, and Venezuela) and 30% ad valorem for non-framework countries. Above the quotas, there was a 250% ad valorem tariff. In addition to the quotas and tariffs under the regime, the EU also issued licenses which allocated the quotas among banana distributors. Import licenses were distributed to traditional importers from third countries (approximately two-thirds of the TRQ) and to European and ACP importers and new importers in the market since 1992 (about one-third of the TRQ).

The U.S. Challenge to the Banana Import Regime. Chiquita Brands International, Inc., a U.S.-owned marketing company that operates in Latin America, claims it has lost millions of dollars in sales because of the EU regime. Chiquita, in September 1994, filed a section 301⁽¹⁾ petition with the U.S. Trade Representative (USTR) arguing that the EU banana import regime unfairly restricted its entry into the EU market. Dole Foods, Chiquita's principal competitor, did not join in the petition. In September 1995, USTR terminated this investigation, filed a self-initiated 301 and began another investigation. Following the investigation, USTR requested consultations with the EU and on April 11, 1996, the United States along with Ecuador, Guatemala, Honduras, and Mexico (the G5) filed a request for the establishment of a WTO dispute settlement panel which was established on May 8, 1996.

The United States and the associated Latin American banana producers argued that the EU's banana regime violated several of the trade agreements administered by the WTO, namely the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade in Services (GATS), and the Agreement on Import Licensing Procedures. The United States complaint focused not on the preferential access accorded the ACP countries but on the licensing arrangements and on preferential tariffs provided to the Latin American "framework countries"who had signed banana trade agreements with the EU.

The EU Position. The EU argued that the banana regime is protected by a waiver extended to the EU in the Uruguay Round Agreements. That waiver, the EU argued, covers not only preferential tariff treatment for bananas, under the Lome Convention, an agreement which provides both trade preferences and development aid to former European colonies, but also measures necessary to fulfill obligations. Thus, EU and ACP defenders of the banana regime held that the waiver covered not only the tariff-rate quotas for Latin American bananas, but also the import licensing requirements for those bananas, and the preferential TRQs accorded framework countries.

The WTO Panel's Ruling. The WTO banana panel issued its ruling on April 30, 1997. The panel found that certain aspects of the banana regime, especially the system for allocating import licenses, discriminated against growers and marketing companies in Honduras, Guatemala, Ecuador, Mexico, and the United States. The panel did not find that the preferential tariffs accorded ACP banana exporting countries were discriminatory. The EU appealed the WTO panel's decision, but on September 9, 1997, the WTO's appeals body essentially reaffirmed its earlier judgement that aspects of the EU banana regime were discriminatory and that they violated both the General Agreement on Tariffs and Trade and the General Agreement on Trade in Services.

The WTO ruling did not require the EU to eliminate Lome Convention preferences to traditional ACP exporting countries. Nevertheless, the ruling was viewed negatively by ACP exporters. Caribbean governments, particularly those in the Eastern Caribbean (the Windward Islands of Dominica, Grenada, and St. Vincent) believe their economies, which are heavily dependent on the export of bananas to Europe, will be damaged if the EU preferences are changed. Some argue that if the preferences must be changed, a long transition period would be required to enable Caribbean countries to develop alternatives to banana production. Some have expressed fears that, if the regime were to be discontinued abruptly, Caribbean banana growers might turn to drug production and smuggling as the most profitable alternative activities.

The EU Response to WTO Rulings. Following adoption of the appeals decision, the EU requested arbitration concerning the time period during which it would come into compliance with the WTO rulings. A WTO arbitrator gave the EU until January 1, 1999 to comply with WTO rulings and the EU subsequently announced changes in its banana import regime that it said would bring its system into line with WTO requirements. The new system maintains the preferential treatment of ACP bananas. The banana quota available to Latin American countries continues at 2.2 million metric tons at a tariff of 75 ECU per ton (one ECU, or European Currency Unit, is equal to $0.92). In addition, the EU established another quota of 353,000 tons to take into account consumption of Latin American bananas in Austria, Finland and Sweden, countries that joined the EU in 1995. The EU abolished the import licensing system and replaced it with one it says is WTO-compatible. The licensing system will use 1994-96 as a base year and distribute licenses to importers based on the amount of bananas they can demonstrate they have imported. This figure can be based on previous import licenses or other documentation. The EU changes took effect on January 1, 1999.

U.S. Response to the EU Changes. USTR declared its opposition to the EU changes, detailing its complaints against the revised banana import regime when it announced the U.S. intention, on December 28, 1998, to impose punitive duties on U.S. imports of EU products. According to USTR, the revised banana regime is not in compliance with WTO rules because: 1) the EU's assignment of import licenses for Latin American bananas to French and British companies (whose previous business had been limited to the distribution of European, Caribbean and African bananas only) took away a major part of the banana distribution business that U.S. companies had developed over the past century; 2) the EU's assignment of import licenses for Latin American bananas to European banana ripening firms (which historically did not import bananas) further deprives U.S. companies of market access; 3) the EU imposes more burdensome licensing requirements on banana imports from the Latin American co-complainants than for other countries; and 4) the EU's allocation of access to its market for bananas is discriminatory and trade-distorting because it departs from the fair share standard of the WTO which should be based on past levels of trade.

The Environment for a Compromise Solution

The United States. U.S. negotiators have been under considerable pressure from agricultural interest groups to pursue aggressively the banana case in the WTO. U.S. agricultural interests are concerned not only about bananas but about the precedents that they fear might be established in the banana case. There are many in Congress who, along with farm groups, see the banana issue as a challenge to WTO dispute settlement and the ability of the WTO to enforce its decisions. These Members of Congress and farm groups see the EU as employing dilatory tactics to postpone or even evade implementing decisions by WTO's Dispute Settlement Body that go against domestic political interests. Of most immediate concern is the impact of decisions on bananas on the U.S.-EU meat hormone dispute now in WTO dispute settlement and on possible future cases involving genetically modified foods. In the meat hormone case, the EU did not meet a May 13, 1999 deadline to comply with WTO panel rulings that its ban on imports of meat produced using growth hormones is inconsistent with WTO rules and obligations. The United States has requested WTO authorization to retaliate. (See CRS Report RS20142, The European Union's Ban on Hormone-Treated Meat.)

Some international lawyers and trade policy experts, although they find the EU's use of WTO legal devices dilatory, also found it not sufficient to justify retaliation by the United States in advance of WTO determinations of compliance. Others argued that without strong U.S. pursuit of its WTO rights, such as that to retaliate when a country does not comply with WTO rules, the EU would not be willing to change its banana import regime. The WTO arbitration ruling on retaliation establishes a principle, according to U.S. trade policy officials, that a WTO member may retaliate (in this case with punitive tariffs) if a losing party does not come into compliance with WTO decisions by the end of a "reasonable period of time."

Latin American Countries. The United States has been joined in opposition to the revised banana regime by its co-complainants, Ecuador, Guatemala, Honduras, and Mexico. As banana exporters they want greater access to the EU market and a share in the growth in European demand. However, this group of five countries does not display a solid front about possible resolutions of the banana dispute. Some co-complainants have expressed concern about possible outcomes that would discriminate against their banana exports. Ecuador, for example, the largest banana exporter to the EU, has expressed fears that the United States was advocating changes in the EU regime that would favor Chiquita, which distributes more bananas from other countries in Central America than from Ecuador. (Statement of Ecuador's Ambassador to the WTO February 1, 1999.)

The European Union. Experts on EU trade policy point to the historical relationship between EU countries and their former colonies as a basis for continued EU support for banana preferences. These historical relationships between EU countries, especially France and Britain, and the ACP countries are reflected in, among other things, preferential trading arrangements under the Lome Convention. Such preferences, including those for bananas, are an important component of overall policy toward former colonies which also includes financial aid and technical assistance. Also, however, French and British banana importing firms, who have enjoyed economic rents (i.e., economic benefits that accrue to license-holders) associated with the preferential licensing arrangements, are important supporters of continuing the EU banana regime as revised. Some, e.g., the World Bank, Australia's Bureau of Agricultural and Resource Economics, and the Economist magazine in various editorials, argue that European banana traders--not the Caribbean or other ACP countries-- have been the major beneficiaries of the banana import regime.

EU member countries have not always maintained a common front in support of the EU's banana regime. Germany, for example, challenged the 1993 version of the preference system in the European Court of Justice. Denmark also has opposed the preferential system. Presumably German and Danish consumers would prefer to import cheaper, higher quality bananas from Latin America. However, faced with a U.S. challenge, EU support appeared to have solidified against the U.S. threat to impose retaliation before compliance has been adjudicated.

The Caribbean Countries. As major beneficiaries of the banana import regime, the Caribbean countries have sided with the EU. The main exporters in the Caribbean are the Windward Islands of the eastern Caribbean. While they account for only 3% of world banana trade, they supply 20% of EU imports. Ambassador Bernal of Jamaica, writing in the Journal of Commerce on February 3, 1999, stressed the critical importance of bananas to Caribbean economies and stated that ending preferences would result in disastrous economic and socio-political repercussions.

Many think that ending preferences abruptly or modifying them substantially would result in significant losses in export earnings. Members of the congressional African-American Caucus have expressed this view. In the 106^th Congress, a bill (H.R. 1361) has been introduced that would bar the United States from retaliating against the EU because of its failure to comply with the WTO's decision. Jagdish Bhagwati, professor of economics at Columbia University and a former WTO official, has suggested (Financial Times, March 9, 1999) that the WTO, the World Bank, and the International Monetary Fund (IMF) should "come up with a compensation and adjustment program that would, at a small fraction of their resources, adequately help the small banana exporters at risk from...dismantling the EU regime."

Possible Options for a Compromise Resolution

Two possible options for a compromise resolution of the banana dispute have been under discussion. One proposal is to shift entirely to a tariff-only regime. The essence of such an approach would be to continue preferential treatment of ACP suppliers but apply some level of tariff on imports (not limited by a quota) from other WTO member countries. U.S. negotiators have suggested that some portion of the tariff revenues collected on Latin American bananas could be used to provide direct assistance to vulnerable Caribbean countries. A tariff-only system would be transparent and simple to administer; there would be, for example, no need for complicated import licensing schemes as under the current revised regime. Consumers would likely benefit from the availability of bananas from competing suppliers.

An alternative to a tariff-only system would be a new tariff-rate quota (TRQ) system. Under WTO rules there are two methods of allocating shares in a TRQ system: 1) by agreement with all members "having a substantial interest" in supplying the product; and 2) by historical shares during a representative period. Chiquita, for example, reportedly maintains that the current allocations of market share are inequitable because they are based on a period when ACP imports were increasing and Latin American share was decreasing. Ecuador, a co-complainant with the United States, wants to ensure that allocation formulas not discriminate against its exporters in favor of Chiquita and exports from other Latin American countries. For the U.S. firms, it would appear essential for any TRQ scheme to increase market access for Latin American bananas and to increase the licenses allocated to U.S. firms. Equity in allocating a TRQ among U.S. firms, e.g., Chiquita and Dole, likely would be an important consideration as would equity in allocating a quota among the co-complainants and the framework countries.

An EU Commission proposal to modify its banana import rules and bring them into compliance with WTO requirements would establish two separate tariff-rate quotas for Latin American and African, Caribbean and Pacific bananas, and change to a system based on tariffs only by January 1, 2006. Ecuador, one of the Latin American co-complainants, charged that the TRQ for Latin American bananas is inadequate and requested WTO approval to retaliate against the EU for failure to comply with WTO rulings. The United States has criticized the EU proposal for continuing to discriminate against Latin American bananas in terms of allocating licenses and tariff preferences.

Adjustment and Compensation Assistance for Caribbean and Other ACP Countries. The Caribbean and other ACP countries are unanimous in wanting to maintain the present system of preferences. ACP producers fear that they would be driven out of business if quotas for Latin American bananas were eliminated since it would force them to compete with more efficient suppliers. Ecuador, for example, produces bananas at a cost of about $162 per metric ton, while ACP costs can be as high as $515 per ton. The United States has called for the use of EU tariff revenues on bananas to assist vulnerable Caribbean economies adversely affected by changes in the banana import regime. On the other hand, the EU might well try to persuade the United States to increase its financial and technical assistance to banana-producing Caribbean countries. Compensation might also take the form of reduced tariffs for exports from Caribbean countries.

Footnotes

1. ^(back)Section 301 is a provision of the Trade Act of 1974, as amended, which empowers the President to take all appropriate action, including retaliation, to obtain the removal of any act, policy, or practice of a foreign government which violates an international agreement or is unjustified, unreasonable, or discriminatory, and which burdens or restricts U.S. commerce.