The Hindu Business Line : WTO may slip on banana peels, again

The enlargement of the EU in recent years has changed the context in a bizarre way. Its ten new members have been traditionally importing dollar bananas mainly from Ecuador but also from Colombia and Costa Rica. The question for the EU will be "How to compensate the Latin American countries for their loss of market share in the new member-countries?" Will the single-tariff ensure protection?

WHEN the World Trade Organisation (WTO) was established in 1995 to usher in a "rules-based" global trading system, it was expected to shower manna on developing countries. Trade, they argued, would lead to growth, development, higher incomes, poverty reduction and the whole chain described in successive World Development Reports. Sadly for the newly established agency, the earliest dispute it had to grapple with for some years was on banana wars. Successive WTO panels slipped on banana peels. Drums can be heard heralding another round and the WTO watchers predict slippage again.

Banana may seem a trivial item to fight for. For some countries, it is a matter of life or death. For some others, it is the stuff of corporate greed subsumed as trade politics. The early wars were within the European Union (EU). Later, it turned ferocious between the US and the EU. In recent years, there are surprising realignments and countries which worked together in the earlier rounds are in rival camps.

The roots of the clashes may be traced to the pre-War trading-cum-economic arrangements.

With the inauguration of a single, unified market or the EU in 1992, it became necessary to implement a separate banana regime. On July 1, 1993, the EU introduced the new "404/93 regime" favouring imports from domestic producers and ACP (Africa, Caribbean and the Pacific) countries covered under Lome-IV. The new regime had twin objectives: To harmonise different trading arrangements and create an integrated market for bananas; and to safeguard the interests of traditional ACP imports against cheap `dollar' imports.

The EU had obligations under successive Lome Conventions to ensure that no ACP country lost its advantage in the EU market. The UK had similar commitments to lift from Windward Islands, Jamaica, Belize and Surinam. Only Germany permitted duty free imports from any source. While harmonising the import arrangements, the EU had to take into account the cost-disadvantage of ACP fruit vis-à-vis the `dollar' bananas.

Dollar banana became a global phenomenon from the early 1970s and rose to new heights in the 1980s. When the EU was formed, it was the world's largest market for bananas (35-40 per cent). Dismantling various preferences became a contentious issue within the EU.

The protected market for bananas from former colonies constituted 38 per cent of EU imports. Free imports, as in Germany, Belgium, constituted 62 per cent. These were met by three US multinational corporations — Chiquita, Dole and Del Monte. The unified single EU market was highly attractive to them.

Chiquita had stepped up investments in new plantations in Latin American countries such as Colombia, Costa Rica, Nicaragua, Venezuela and Guatemala. It held a 40 per cent share of the German market and was aiming to grab the balance of the EU market. Dollar bananas had the advantage of lower costs compared with the ACP fruits.

The new regime tried to reconcile these elements. It provided tariff preferences to ACP fruit and no tariff for EU fruit. There were quotas and allocations for other sources and there was also an attempt to cross-subsidise ACP bananas with special `dollar' allocations to those handling traditional imports. It was, indeed, a complex and messy scheme. However, to its credit, it tried to balance the developmental and trading interests of ACP countries with the Lome obligations. The new EU regime was not acceptable to Latin American producers.

The first round of banana wars was fought in the GATT in 1994. The GATT Panel condemned it as discriminatory. The EU responded to it in two ways. It worked out a "Banana Framework Agreement" (BFA) providing higher allocations to dollar companies. All of them, except Guatemala, which was under the influence of Chiquita, accepted the offer. Alongside, it challenged the Panel ruling and succeeded in 1994 in getting a `waiver' for Lome arrangements from the GATT obligations. The waiver was until the expiry of Lome — February 28, 2000.

Chiquita could not wait that long. It had hedged all its bets on the EU market and was facing bankruptcy. It blamed the EU for all its adversities. Chiquita was not an ordinary corporation. It had enormous clout with the authorities in Washington D.C..

At Chiquita's behest, the US Trade Representative (USTR) initiated investigation under Section 301 of the Trade Act. It seemed that Chiquita would win. However, the EU signalled that any unilateral US measure would violate WTO's Dispute Settlement Understanding (DSU).

Thereafter, in February 1996, the US filed a complaint with the WTO along with Ecuador, Guatemala, Honduras and Mexico demanding larger quotas for dollar companies and changes in the EU licensing system. By now, it had turned into an open war between the US and the EU. Banana-producing countries in Latin America and the Caribbean were marginalised.

It is significant that the banana dispute, the earliest for the WTO, dealt with the complaint of one US corporation seeking access to the EU market. More surprisingly, ACP countries, dependent on banana for survival, were accorded `third party' status in the panel hearings.

WTO watchers reported how the panel members were dismissive of the arguments about the developmental impact of trade preferences and were obsessed with removing restrictions on trade. It emerged that the WTO was no longer concerned with larger issues of trade and development but applied narrow legalistic norms when dealing with trade disputes.

For more than five years, the USTR tried all means at his command to subdue the EU, including through sanctions under Section 301 and tariff wars. Unfortunately, in the intervening months, there were other WTO rulings as in Foreign Sales Corporations (FSCs) which went against the US and enabled the EU to impose heavier penalties on the US. It would have led to interminable trade wars between `two elephants' and damaged global trade.

The US realised the limits to its power, when, to its consternation, even tiny states such as Dominica and St. Lucia could block its agenda before the WTO and prevent unilateral action. The US opted to settle the matter bilaterally with the EU. A stronger reason was that, by then, Chiquita had declared insolvency and had to be salvaged.

The bilateral agreement was signed in April 2001. The ACP quota was reduced by 100,000 tonnes and other quotas were based on historic referrals. There was a graded scheme of tariffs. Dollar companies, Chiquita especially, recovered lost markets. The most troublesome part of the settlement was that the EU was committed to adopt a tariff-only system after 2006. The seeds of the coming war were sown in this clause. Developing countries, shut out of the settlement, would revolt and, fortunately for them, the Doha Round was not far.

The ACP countries refused to agree to the launch of the Doha Round unless there was a waiver from WTO rules for tariff preferences covered under the Cotonou Agreement 2001, successor to Lome. The waiver was held up by the Latin American countries which insisted that the EU should first detail its reform plans for the banana regime. The spat between the two groups was resolved by the EU introducing an annexe to the Doha waiver.

The EU promised that any change in the regime would ``at least maintain'' market access for Latin American supplies. They were also assured that if market access was not maintained through the single tariff, they could seek WTO arbitration to settle claims. Doha could have been wrecked in the absence of these assurances.

The EU took a long time to announce the scheme. It unveiled its proposal on October 27, 2004. The WTO was formally notified on January 31, 2005. The new scheme has upset all the banana-producing countries and set the stage for another banana war. What is the scheme and what are the implications?

The regime, which is in force may be summarised thus: There is a quota of 2,653,000 tonnes for imports by Latin American and non-ACP importers carrying a duty of euro 75/tonne; there is a quota of 750,000 tonnes for ACP imports with no tariff; imports outside of quotas carry a duty of euro 680/tonne. The new scheme introduces an across-the-board tariff of euro 230 ($300)/tonne for all imports without any quota for any group.

The Commission claims that it proposes the scheme, "under the terms agreed in Doha in 2001" and it will "maintain market access to the EU (for) banana producing countries." The EU also adds, "The new level aims to prevent banana producers in ACP countries from losing to larger growers in Latin America." In his press conference. Mr Pascal Lamy said that the tariff figure was put on the table "as a basis for negotiations." It does not seem that the EU will succeed in settling its proposal with the rival groups.

Latin American countries have rejected the EU's scheme. In a joint statement issued on February 3, the WTO Ambassadors from Colombia, Costa Rica, Ecuador, Guatemala, Honduras and Panama said that the EU tariff would "seriously limit" the ability of their producers to continue exporting to Europe and "severely unbalance" their economies.

On the other hand, for the ACP, the tariff level is not high. They would prefer a higher rate of around euro 275/tonne. The net result is that, once again, the ACP, the EU and the Latin American producers are preparing for a confrontation on bananas. In the earlier round, the ACP countries had the support of the EU when the battle-cry was raised by the US and the Latin American producers. Now, the EU pits the ACP against the Latin Americans. There is also a painful awareness among many analysts and ACP governments that Europe's commitment to the ACP is waning. Europe may bid goodbye to Lome/Cotonou.

The EU argues that the uniform tariff and a growing demand for bananas in the EU would provide ACP producers higher export volumes which would safeguard their earnings. This is rather theoretical. Several studies by voluntary agencies such as Oxfam have shown that there is not much scope for expansion in these countries.

Under the single tariff system, dollar companies would naturally have a higher share in the enlarged EU market and the ACP share would shrink. Thus, any computation of ACP share for compensation is not going to be easy.

The Latin American Governments have questioned the computations assumed by the EU in proposing the scheme. Further, there is no indication how the EU proposes to honour its obligations under Cotonou and affirmed in Doha. There are other grounds for worry.

The enlargement of the EU in recent years has changed the context in a bizarre way. Its ten new members have been traditionally importing dollar bananas mainly from Ecuador but also from Colombia and Costa Rica. Ecuador supplied 70 per cent of Poland's market. The question for the EU will be "How to compensate the Latin American countries for their loss of market share in the new member-countries?" Will the single-tariff ensure protection?

Very soon, the world will witness arbitration proceedings galore in the WTO, instituted by the Latin American countries against the EU for loss of export markets.

It will also witness another batch of cases against the EU filed by the ACP countries. The newly emerging African exporters will be third parties to the cases. To its humiliation, the US will also be a third party if it wishes to join the fray.

These proceedings may last long if the earlier history of banana disputes has any lesson. The disputants may not agree to participate in the Hong Kong Meeting of the next Doha Round slated for this December until the disputes are finally settled to their satisfaction.

(The author, a former Finance Ministry official, has experience in international, financial and trade issues.)

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