Who won the banana dispute?

Published on: The Financial Express, 26 May, 2001

By Pradeep S Mehta, Pranav Kumar & Olivia Jensen

CUTS Centre for International Trade, Economics and Environment

Last month, the eight-year old EC-US banana dispute came to a swift end with the signing of a bilateral agreement between the two parties. Under the new agreements, big marketing companies like Chiquita of USA and Noboa of Ecuador will get licenses to export bananas to the European Union (EU).

The surprising thing about this trade dispute is that neither the EU nor the US produces bananas. The trade dispute dates back to 1993 when the national markets of the EU countries were merged to form a common market for bananas. The US alleged that the system favoured growers in EU territories and former European colonies in the Caribbean over Latin American producers and US marketing companies such as Chiquita brands and Dole Food Co.

Under the agreement, the EC will scrap its contentious ‘first-come first-served’ import system, strongly opposed by Washington, most Latin American countries and Chiquita, which recently sued the Commission for $525 million in damages it claimed to have suffered as a result of EU import restrictions. The system will be replaced by a tariff-only regime to be implemented by 2006. From July 2001, the licenses will be allotted according to a historical reference period of 1994-1996 but a share of the EU market will still be guaranteed for African, Caribbean and Pacific origin bananas.

Ecuador, the world’s largest banana exporter, initially reacted strongly to this accord. It alleged that the EC-US accord contravened global trade rules. Ecuadorian officials threatened to take the dispute back to the World Trade Organisation (WTO) if the EC didn’t amend its proposals. But on April 30, the EC and Ecuador announced they had reached an agreement to resolve the impasse over the EC’s proposed banana import regime, bringing an end to the longstanding dispute over bananas in the WTO.

The EC-Ecuador agreement provides Ecuadorian producers with a sizeable part of the 17 per cent of the market reserved for newcomers. In return, the dispute settlement body (DSB) of the WTO will eventually withdraw the authorisation Ecuador has to impose trade sanctions against the EC. This whole episode demonstrates the lobbying power held by the intermediaries involved in export of bananas to the EU. The US government has not acted in national interest: it is a well-known fact the US does not produce bananas. The US has acted at the behest of Chiquita Brands International.

The agreement means that Chiquita will be able to buy cheap bananas from poor farmers in Africa/ Latin America and reap huge profits selling them in the European market. Ecuador also acted more in the interests of major banana exporting companies like Noboa and Costa Trading rather than its farmers.

Not only have the farmers’ interests been overlooked, the agreement also exposes a fundamental flaw in the operation of the DSB. In spite of the authorisation that Ecuador was given to levy sanctions amounting to $201.6million, including the right to suspend concessions under the Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS), it signed on to an unfavourable treaty without ever exercising this power.

The cost of sanctions may be higher for the developing country imposing them than for the target country of the sanctions. Losing the Ecuadorian market has a negligible impact on the European economy, but European markets are vital for Ecuador’s exporters. Sanctions have little chance of bringing about the desired change in trade policy. This imbalance means that winning a dispute before the DSB can be meaningless for developing countries, leaving them unable to defend their trade rights.

Ecuador was well aware of the risks it was taking in pursuing a dispute settlement case at the WTO. It was difficult for Ecuador as a small developing country with severe economic problems to resist major pressure from the US and the EC on the banana issue. Under the new scheme, the only Ecuadorian company to retain access to its license is Noboa, and it is still unclear whether another politically important operator, Costa Trading, will be able to export bananas into the EC market.

Copyright © pradeepsmehta. All rights reserved.