Why Did the EU and the US Engage in an Eight-Year Dispute over the Banana Trade - Essay Example

1 Executive Summary 2 2 Context 2 3 Introduction 3 4 EU and US Trade and Decision-Making Theory 4 4 Determinants of EU Trade Policy 4 4.2 Theoretical Determinants of US Trade Policy 5 4.3 Comparison 6 5 EU and US Banana Trade 7 6 Assessment of Banana Trade War 12 7 Conclusion 13 8 Bibliography 14 Why did the EU and the US engage in an eight year dispute over the banana trade when neither grows nor exports the crop 1 Executive Summary The report covers the banana trade wars which erupted between the United States and the European Union in 1993 and lasted eight years before an agreement for settlement was reached. This particular transatlantic trade dispute is of unique importance because neither of the parties involved either produces nor exports the crop in question. The implication, therefore, is that the EU's imposition of protectionist agricultural policies should not have aroused retaliatory trade policies on the American side because it is not relevant to either their economy or their labour market. Following an analysis of the determinants of trade policy on either side, the trade war in question begins to assume a more logical form. The global banana trade is largely monopolized by three American and one British company and this, in itself, incited both policy and retaliatory policy. Indeed, as the report shows, trade policy is often influenced and shaped by a myriad of complicated factors and not necessarily by domestic economic interests. 2 Context As Ahearn (2001) explains, on January 1, 1993 the member states of the European Union created the Single European Market (SEM), at which time, a long list of customs, tariff, and non-tariff barriers were removed among the twelve European nations comprising the Union at the time. Many national laws and policies affecting trade were also removed and replaced with hundreds of new rules and regulations that were consistent in all member states. Among these new regulations was the CMO for bananas, which arose from a concern on the part of certain member states, most notably France and Britain to safeguard the position of banana producers in several small and fragile economies in Africa and the Caribbean that heavily rely on the production and export of bananas. Although the U.S. neither produces nor exports bananas, US-based multinational corporations such as Chiquita Brands International, Inc. (Chiquita) and Dole Foods Inc. (Dole) operate mostly in Central and Latin American countries that were disadvantaged by the EU's banana import system. In September 1994, the United States filed a format complaint under the General Agreement on Tariffs and Trade (GAIT). Despite repeated rulings under the GATT and later under the World Trade Organization (WTO) dispute settlement procedures in 1993 1994, 1997, and 1999 that the European banana import system was illegal under international trade law. The EU failed to make the CMO for bananas compliant with WTO rules. As a result, the WTO authorized the U.S. to impose retaliatory sanctions on $191 million worth of EU exports. The Clinton Administration began to impose 100 percent customs duties on selected European goods in March 1999 (Ahearn, 2001). It took another two yean before the EU and the U.S. eventually reached an agreement that included increased market access guarantees for Latin American producers and the establishment of a tariff-only system beginning in 2006. 3 Introduction Although they involve only a small portion of the transatlantic trade economy a series of persistent trade disputes have caused much antipathy for the United States - European Union trade relationship. It took almost eight years for the dispute over the EU's single banana market regime, generally referred to as the Common Market Organization (CMO) for bananas to be finally resolved in April 2001. The EU-US banana trade dispute emerges as an extremely interesting area of investigation for obvious reasons. The first is that neither the EU nor the US are banana growers or exporters, in which instance the trade in question could be defined as extremely marginal to their economic interests. In the second place, despite the mentioned, both parties escalated the banana trade dispute to the point where it adversely impacted transatlantic trade relations and by association, certain microeconomic indicators. This report has three objectives. These are (1) the analysis of EU-US trade decision-making processes and structures (2) identification of the determinants of the banana dispute and (3) the extent to which decision making a trade theory shed light on the reasons which motivated both the dispute and its later settlement. 4 EU and US Trade and Decision-Making Theory For the purpose of understanding the reasons why the EU and the United States engaged in a transatlantic trade dispute over bananas when neither is a banana producer nor exporter, it is imperative to review the determinants of EU and US trade policy decision making. These determinants shall be treated as theoretical' in the sense that their applicability to the trade dispute and agreement in question are, as yet, indeterminate. 4.1 Determinants of EU Trade Policy Wallace (2000) identifies what he calls "governmental entrepreneurship" (p. 541) as a primary driving force behind EU trade policy decision-making. Member governments in the EU continue to ensure that their cultural roots and national economic interests are preserved within the Union and external negotiations. European Commission leadership and demands of transnational economic interests play a subordinate role. European trade policy, Wallace (2000) contends, is based on social market principles. Woolcock (2000) provides an overview of the determinants of the EU trade policy process and identifies four core issues in EU trade decision-making: (1) competence, (2) setting of objectives for negotiations, (3) conduct of negotiations, and (4) adoption of the results (p. 374). As both Woolcock (2000) and Peterson (1997) argue, the EU does not follow an established decision-making model and it is virtually impossible to detect a pattern in its trade policy decision-making. Instead, EU trade policy-making is, in essence, a process of bureaucratic decision making whose primary concern is adherence to EU guidelines and consensus (Peterson, 1997; Woolcock, 2000). The literature on EU trade policy decision-making, therefore, appears to argue that decision-making is driven by three primary concerns. These are adherence to social market ideology, abidance by EU guidelines and the attainment of consensus over policy among member states. The implication here is that the EU does not follow a rational model, with the question at this point being how any of this relates to the region's decision to engage and subsequently resolve, following eight years of negotiations, a transatlantic trade war over an agricultural product it neither grows nor exports. This question shall be answered at a later stage. 4.2 Theoretical Determinants of US Trade Policy Under the U.S. Constitution, Congress has the explicit powers "to lay and collect taxes, duties. imposts and excises, to pay the debts and provide for the common defence and general welfare of the United States" as well as "to regulate commerce with foreign nations and among the several states" (Constitution of the United States, Article 1, Section 8). In 1934, Congress turned over the task of managing and conducting trade policy to the executive branch (Zoellick, 2000). According to Destler (1995), this decision was based on the view that "the executive branch was better positioned to balance the competing pressures of domestic companies and workers producing goods sensitive to import competition against the interest of consumers and those producing goods primarily for the export market" (p. 11). In Congress, the central actors affecting trade negotiations and exports are the House Ways and Means Committee and the Senate Finance Committee. Jurisdiction over trade agreements, export policy, and agricultural trade is dispersed among the agriculture, appropriations, armed services, banking, commerce, international relations, and judiciary committees and subcommittees of both chambers (Ahearn 1999). The implication here is that the United States formulates trade policy in response, not to national interest but, to competing national interests. Its policies, therefore, are the outcome of one of the stakeholder group's great influence and authority over the others. Again, the extent to which this allows for a better understanding of the banana trade war and its later settlement will be answered later. 4.3 Comparison U.S. decision-making is a process between Congress and the Administration, on the one hand and between the two mentioned powerful business interests and lobbies, on the other. The European model of government functions according to the principles of pooled sovereignty and consensual policy solutions where the member states give themselves a common set of rules and are obliged to follow these. The main actor on trade policy in the EU is the European Commission. This decision-making process is different from the American model. Added to that, there are also significant differences in the ways the EU and the US address economic policies. While U.S. governments historically have pushed for trade and commercial policy based on free trade principles with no governmental intervention in the private sector, the EU places more importance on social market principles that are aimed at creating social cohesion (Peterson 1994). 5 EU and US Banana Trade According to Roche (1998), the latter half of the 1980s and early 1990s was a period of prosperity and expanding production for the global banana industry. World imports rose by 28% in the 1980s with the greatest increase in Europe (39 percent in the EU, 66 percent in the rest of Western Europe) and North America at 33%. World imports increased further during the early 1990s reaching 11.5 million tons in 1996 (pp. 96-97). In addition to their importance to world trade, bananas have contributed to the economic development of several producing countries in Latin America, in the Caribbean, and Africa. Evolution or world production and international trade in bananas in thousands of tons (1961-2004) Source: FAO (Primary Axis: Import; Secondary Axis: Production) Until the 1960s, the U.S. banana market was essentially divided between the UFC and the Standard Fruit and Steamship Company (SFSC). This lasted until the 1960s when the banana industry began to experience some fundamental changes when the number of producing countries and national companies entering the international banana market increased (Taylor 2000. 9). Since then, the industry has experienced a dramatic change in composition as new producer countries and companies entered the world market. At the same time, banana companies underwent drastic change in structure and ownership. UFC, for example, lost its dominance in the world banana market. Today it is known as Chiquita Brands International. Inc. (Chiquita). SFSC became Dole Food Company, Inc. (Dole). Del Monte, which had been in the banana business since the late 1800s, established itself as a third major competitor to these two multinational companies. Today, most of the bananas grown in Central and Latin American countries are marketed by these three US multinational corporations which, taken together, control about 60% of the global banana trade and over 40% of the European (Roche, 1998). Geographical distribution of USA banana imports, 1990-2005 Source: COMTRADE (Code SITC Rev 2: 0573 Banana, plaintains (fresh or dried)) In Europe, British-owned Fyffes established itself as one of the leading European importers of bananas primarily from the British West Indies. In addition, the company heavily expanded its West African plantations in Ivory Coast and Cameron. By contrast, the Irish-owned company Geest focused on its banana production on the Windward Islands as well as in Trinidad and Tobago. Today, trade in bananas from the EU overseas territories and former Caribbean colonies is dominated by Fyffes/Geest which merged in 1995 (Roche 1998). Geographical distribution of bananas imported in the European Union, 1991-2004 Source: COMTRADE (Code SITC Rev 2: 0573 Banana, plaintains (fresh or dried)) The global banana industry remains divided between three American multinationals and Fyffes/Geest. These companies have achieved an almost compete vertical integration from plantation production through the importation of unripe fruit and its distribution to wholesale ripeners. According to Read (2001), "this integration is facilitated by significant economies of scale in both technological inputs for cultivation and shipping that takes into account the inherent perishability of bananas. Vertical control is a critical source of competitive advantage that has enabled the [MNCs] to assure consistent supplies of high quality, low-cost, brand-differentiated bananas that command price premium in the main consuming markets" (p. 258). The vertically integrated system of production minimizes the cost of harvesting, conditioning, packaging and transport. This allows these companies to achieve considerable economies of scale and enables them to continuously supply quality products at a relatively low price (Read, 2001). Distribution of the world Banana imports Average on the 2000-2004 period Source: FAO It is evident that even though European Union member states and the United States are not, in themselves, banana producers and exporters, they have a powerful economic and business interest in the trade. As earlier noted, the banana trade is an extremely lucrative one on the international level and, as also noted, it is primarily dominated by four companies, three of which are American and one of which is British/EU. This indicates that even though the EU and the US do not produce or export bananas, they are heavily invested in the banana trade. It is from this perspective that one must evaluate the reasons why the EU and the US engaged in a banana trade war; quite simply stated, policies which threaten the trade are cause for retaliatory policies. 6 Assessment of Banana Trade War Cadot and Webber (2001) trace the origin of the banana trade war between 1992 and 2000 to changing organisation of agricultural trade policy-making processes in the U.S. and the EU. As Cadot and Weber (20010 argue, the division of labour between the external affairs, agriculture, and trade, a high degree of sectoral segmentation, and the practice of "'package deal-making" in the EU trade policy-making process explains the trade dispute , in question (p. 8-9). They further contend that Congress' intervention and corporate interests' ability to intervene in U.S. trade policy-making are also responsible for the escalation of the trade row. In their view, the dispute over the EU's banana regulation resembles the "interest-group politics model" that Wilson (1980) developed to explain regulatory conflicts in which he observed that when both costs and benefits are narrowly concentrated, conditions are ripe for interest-group politics. According to Cadot and Webber (2001), banana policy-making on both sides of the Atlantic had been "captured by two sets of antagonistic particularistic interests" (p. 35). These are the EU's determined adherence to EU guidelines and consensus, on the one hand, and the influence of big business and lobby groups on US trade policy, on the other. What this means is that the EU's agricultural import protectionist strategy incited the reaction which it did from US policy makers, not because the EU's restrictions had the potential to adversely affect the US economy or labour market but, because the three multinational in question lobbied for retaliatory policies. Similar to Cadot and Webber (2001), Bhala (2000) argues that big business and interest group politics were at the heart of the banana wars. As Bhala (2000) writes, pressure by interest groups " caused international agreements and statutes to contain trade liberalizations followed by pages and pages of exceptions thereto, plus a host of remedies to combat unfair and sometimes fair import competition" (p. 89). In other words, interest group pressures on trade officials are at the core of the banana controversy. The above evaluation indicates that the theoretical determinants of US trade policy hold true. The United States retaliated against European exports, not because, as just mentioned, the EU's policy posed as a threat to US national economic interest but because it threatened the interests of corporations which were powerful enough to exercise pressure on policy makers to retaliate. Added to that, the determinants of EU trade policy, as earlier presented, also explain why it took the EU eight years of negotiations and an official complaint to the WTO, to settle the dispute. As indicated in the theoretical determinants of EU trade policy, policies are ultimately bureaucratic decisions which are designed to satisfy three purposes. These are adherence to social market ideology, abidance by EU guidelines and consensus among member states. The EU, in other words, instigated the banana transatlantic trade wars, not as a conscious or rational decision but as a by-product of bureaucratic policy. 7 Conclusion As may have been determined from the foregoing report, the EU and US banana trade wars constitutes a very unique case. Its uniqueness stems from the fact that the trade dispute revolved around an agricultural produced which was neither produced nor important by either of the conflicting parties. Nevertheless, upon consideration of two facts, the first being the scope of the global banana trade and the second being its virtual monopolisation by four corporations, three of which are American and one British, the trade dispute begins to acquire a logic of its own. That logic, quite simply, stems from the fact of EU regulations concerning agricultural imports and its potential to harm the economic interests of the named three US multinational corporations which, between them, provided the EU with almost one half of its total banana imports. These companies, responding to what they perceived of as a direct threat to their business interests, poled their resources and influence to lobby Congress for the passage of retaliatory policies. They succeeded and, hence, a trade dispute over a product which neither party produced nor exported erupted. Despite the fact that the case, as initially presented, appeared to escape logic, it assumes logic when it is interpreted according to the determinants of trade policy outlined in the report. These determinants explain why the US retaliated against the EU and why the EU implemented the policy in the first place. Indeed, this case, while a business and economic one, establishes the extent to which trade policy can be influenced by political considerations. 8 Bibliography Ahearn, R. J. 1999. Trade Legislation in the 106" Congress: An Overview. CRS Report for Congress, RL30227. Ahearn, R. J. 2001. Trade Conflict and the U.S -European Union Economic Relationship. CRS Report for Congress. RL30732. Bhala. R. 2000. 'The Banana War." McGeorge Law Review 31 (839): 1-9 1. Cadot, O. and Webber, D. 2001. Banana Splits and Slipping over Banana Skins: .The European and Transatlantic Politics of Bananas. EUI Working Paper. Peterson, J. 1994. 'Europe and America in the Clinton Era." Journal of Common Market Studies 32 (3): 4 1 1-426. Peterson, J. 1997. "States, Societies and the European Union." West European Politics 20 (October): 1 -23. Read, R. 2001. 'The Anatomy of the EU-US WTO Banana Trade Dispute." The Estey Journal of International Law and Trade Policy 2 Ahearn: 257-282. Roche, J.. 1998. The International Banana Trade. Cambridge: Woodhead. Wallace, W. 2000. "Collective Governance." In Policy-Making in the European Union, eds. Helen Wallace and William Wallace. 4h ed. Oxford: Oxford University Press, 523-542. Wilson, J. Q. 1980. The Politics of Regulation. New York: Basic Books. Woolcock, Stephen. 2000. "European Trade Policy" In Policy-Making in the European Union, eds. Helen Wallace and William Wallace. 4h ed. Oxford: Oxford University Press, 373-399. Zoellick. R. B. 2000. "Congress and the Making of U.S. Foreign Policy." Survival 41 (Winter): 20-4 1. Read More