The EU Banana Regime: History and Interests

Commissioned by Banana Link for EUROBAN

Anna K. Dickson Department of Politics University of Durham 48 Old Elvet Durham DH1 3LZ E-mail: Anna.Dickson@durham.ac.uk The EU consumes 4 million tonnes of bananas per year and produces only 20% of this amount. The remainder is imported from mainly Latin America (62-3%) and the African Caribbean and Pacific (ACP) group of states. The EU import market is the second largest in the world (approximately 26% of world exports in 2000) and access to it is thus highly lucrative. 1. Historical Background
Prior to 1993 the EU banana market was Box 1: Pre 1993 Preferential Regimes characterised by its disconnected nature. Different member states operated different import controls. Spain imported bananas from the For example some member states had preferential Canary Islands import regimes (see box 1), Germany operated a Portugal from Madeira duty-free market largely supplied by Latin France from its overseas American bananas (other wise know as dollar departments Martinique and bananas), while Belgium, Denmark, Ireland, Guadeloupe, and from ACP states Luxembourg and the Netherlands had a 20% tariff Cameroon and Cte dIvoire. on all non-ACP imports. The creation of a single market (the SEM) meant that different national UK mainly from ACP states: Windward Islands (Dominica, policies had to be replaced by a common policy. The significance of this lies in the transfer of Grenada, St. Lucia, St. Vincent and policy making powers from national to union the Grenadines) Jamaica, Belize, Suriname, Ivory Coast and level, thereby decreasing the ability of governments to have independent policies Cameroon reflecting national rather than community interests. This also meant that those seeking to influence banana policy through lobbying (for example the Windward Islands) have to contend with a more complex set of decision making apparatus. The proposals for creating a Banana Regime in 1993 need to be set in the context of: 1. 2. 3. Commitments under the GATT to liberalise trade in tropical products and not to raise average tariffs. The reaffirmation made in Lom IV (1990) of continued market access for ACP banana producers in the European market. The desire to protect existing banana production in member states (mainly France and Spain) and supply European consumers with reasonably priced bananas.

Important players in lobbying for the preservation of ACP special preferences included Geest on behalf of the Windward Islands and the newly created (1988) Caribbean Banana Exporters Association (CBEA). The ACP/CBEA were successful in getting the European Parliament (both the External Relations and the Development Committees) and the ECOSOC to consider their position, and present a favourable report before the Commission had tabled its proposals. By so doing the Commission was

obliged to take into account the defence of continued preferences. A close relationship between the UK government (supported by France and Italy) and Caribbean interests helped to preserve ACP preferences despite opposition from some member states (Germany and Belgium). Thus the ACP were able to secure an unchanged Banana Protocol in the Lome IV. 1

2. The 1993 Banana Regime (CEC 404/93)

The Banana Regime of 1993: Established a Common Market Organisation (CMO) for bananas Preserved duty free access for ACP bananas up to 857,700 tonnes (the C quota), divided amongst the ACP supplying states party to the Banana Protocol of the Lom Convention. Imposed a tariff quota on all other banana imports (including additional ACP non-traditional imports) in excess of this up to 2 m. tonnes (increased in 1994 to 2.1 m. tonnes, then to 2.2 m.t. in 1995). Within this quota the tariff for dollar bananas was ECU 100 per tonne but the ACP bananas would enter duty free. Any imports in excess of the 2.m. tonne quota would be subject to tariffs of: ~ ECU 850 per tonne for dollar bananas ~ ECU 750 per tonne for ACP bananas EC production was covered by internal mechanisms, including deficiency payments up to their share of the market of 854,000 tonnes.

Alongside the creation of quotas the EU established a controversial system of licences whereby all importers required a licence to trade. These were issued free of charge by the Commission but tied to the specific quota quantities. The idea was to create an incentive for companies to import (higher cost) ACP fruit. Because of quota limitations a profitable trade in licences developed as operators sought access to the higher priced EU market. The tariff quota was further divided so that 66.5% of the licences were allocated to traditional suppliers of dollar bananas and 30% to those trading ACP or EU bananas. 3.5% was allocated to newcomers. This attempt to reconcile divergent interests resulted in a regime which did safeguard EU production and guarantee ACP access, however it also created a system in which European consumers were paying high prices for their bananas and by so doing, access to the European market became extremely lucrative. However some interests were not satisfied with the BR and sought to challenge it. At the same time the EU also introduced a Special System of Assistance (SSA) for ACP banana exporting countries to compensate for losses experienced as a result of changes to the BR. This provided ACP banana exporting countries with additional funding (ECU95m) to help them improve the quality, marketing and competitiveness of their bananas. The funding was insufficient to cover the costs of adjustment or the fall in banana prices in the UK, the ACP states main market, between 19923.

3. Challenges to the Banana Regime

1. Within the EU the German government and Benelux importers challenged the regime a number of times (largely unsuccessfully) in the European court. The defeat of Germany at this point is significant because it demonstrates the strength of producer interests (lobbied by Britain and France) over the largest single consumer of bananas in the EU. In 1993 Latin American banana exporters (Costa Rica, Columbia, Guatemala, Nicaragua and Venezuela) challenged the national regimes of the Community in the GATT. The GATT found

2.

P. Clegg, 2002 'From Insiders to Outsiders: Caribbean banana interests in the new international trading framework' in S. Dearden (ed) The European Union and the Commonwealth Caribbean, Ashgate, Aldershot.

that the ACP preferences violated Article I (most favoured nation) and requested that the EU equalise tariff rates for all banana exporting GATT members (GATT panel report DS32/R) 3. In February 1994 a second challenge to the Banana Regime found that the regime violated MFN and that the distribution of licences was unfair (GATT panel report DS38/R).

Although the last two challenges were successful, the GATT rulings could not be adopted because the EU and ACP blocked their adoption. This approach to the adoption of rulings was fundamentally changed with the creation of the WTO whereby blocking requires a highly improbable consensus. Nevertheless in 1994, in an attempt to appease the complainants, the EU concluded a Framework Agreement (box 2) with Colombia, Costa Rica, Nicaragua and Venezuela. The Framework Agreement was rejected by Box 2: The Framework Agreement other Latin American suppliers, including Guatemala (one of the GATT complainants) Increased the tariff quota for dollar along with Ecuador, Mexico, Honduras and the bananas was increased from 2m Dominican Republic. It was also opposed by tonnes to 2.2m tonnes (2.553 from two large US TNCs, Dole and Chiquita who 1.1.1995) persuaded the US government to take action Reduced the duty on this from ECU against it. Thus an attempt was made by the US 100 to ECU 75. in collaboration with Chiquita bananas under Allocated specific shares (up to 49.4%) Article 301 of the Omnibus Trade Act to find of the dollar quota to these countries the EU BR guilty of unfair trading practices. Gave these states the authority to This was terminated in September 1995 when issue export certificates which enable the US registered a complaint with the WTO them to determine which suppliers along with Honduras, Guatemala, Mexico and could take advantage of the EU's later (February 1996) Ecuador. The import licences. complainants argued that EU measures were In return these states agreed not to inconsistent with a number of articles of the challenge the BR until 2003. GATT, the Agreement on Agriculture (AoA), the General Agreement on Trade in Services (GATS), the TRIMs agreement and the Agreement on Import Licensing Procedures (AILP). During this period the US was unrelenting in its opposition to aspects of the BR. In January 1996 the US had managed to convince Costa Rica and Colombia to challenge the Framework Agreement, of which they were major beneficiaries, by threatening them with trade sanctions. The WTO issued its reports in May 1997, which upheld the complaints finding fundamental elements of the BR to be inconsistent with WTO obligations (see box 3). Importantly the WTO did not find against ACP preferences per se, but did rule against aspects of the operation of the licensing system, in particular the reservation of 30% of licences for operators of ACP/EU bananas, as well as the different treatment of bananas from the Framework Agreement countries and other Latin American producers. Box 3: The 1997 WTO Report 1997 WTO finds BR inconsistent with obligations under GATT: ~ Article I: most favoured nation treatment (general MFN) ~ Article III: national treatment ~ Article X: obligation to publish laws, regulations ~ Article XIII: non-discrimination in the administration of quantitative restrictions It found the licensing arrangements to be in breach of Articles II and XVII of the GATS The Panel also found the Regime to breach licensing articles of the Agreement on Import Licensing Procedures (AILP): ~ Article 1(1) that licensing agreements should prevent trade distortions ~ Article 1(3) The neutral, fair and equitable application of import licensing procedures. The EU appealed against the rulings. In particular it challenged the ability of the US, a non-banana producing country, to challenge its BR. The EU also argued that the WTO should consider the aims and effects of its licensing arrangements. The appeal was largely unsuccessful and the EU was obliged

to accept the rulings and consequently to revise the BR by January 1, 1999 to make it compatible with WTO requirements.

4. The Revised Banana Regime (1637/98 & 2362/98)

1. 2. 3. Maintains the duty free ACP quota of 857,700 tonnes, but gets rid of country quotas within this. Maintains the 2.2m tonne tariff quota for dollar and non-traditional ACP imports at the tariff rate of ECU 75 per tonne. Makes permanent an increase of 353,000 tonnes additional to the tariff quota to reflect increased membership of the EU. Within this quota dollar bananas would pay duty of ECU 300 per tonne and ACP bananas ECU 100 per tonne. For imports above this revised tariff quota of approximately 2.5 m. tonnes the duty would be ECU 765 for dollar bananas and ECU 665 for ACP bananas. The existing system of licences which had reserved 30% for importers of ACP and EU bananas is replaced by distinctions between traditional and non-traditional suppliers. Traditional suppliers would receive 92% of the licences and non-traditional 8%.

4. 5.

The US and Ecuador remained unsatisfied by these changes. Ecuador launched a new complaint in the WTO and the US, still lobbied by Chiquita, threatened to impose duties on EU exports. The EU in turn sought to stave off the duties by requesting arbitration by the WTO. The WTO ruled that the revised regime still breached Articles II and XIII because ACP imports were treated in a more favourable manner than dollar imports. Furthermore the ACP quota was ruled to be too high because it was based on an unrepresentative period. The criteria established for newcomers was also seen to discriminate against Latin American suppliers (Article XVII). Thus in April 1999 the DSB found against the EU and allowed the US, to impose duties on EU exports (although to a much lesser amount than the US had threatened). In May 2000 it also permitted the imposition of duties by Ecuador. 2 The Commissions Proposal (COM (1999) 582 final) In November 1999 after much consultation with the complainants, and other governments concerned, and with banana operators, the Commission proposed a two stage scheme in which tariff quotas would remain in force until 2006 when a tariff only regime would be adopted. In the period up to 2006 the Commission proposed to maintain the existing A and B quotas of 2.2m tonnes plus 353,000 with dollar bananas paying a duty of ECU 75 per tonne and ACP bananas entering duty free. The ACP quota of 857,700 tonnes would now be open to all suppliers, duty free for the ACP while non-ACP suppliers would pay ECU 275 per tonne. The question of licences remained and two options were presented. 1. 2. a system based on historical allocation of the market the introduction of the First Come First Served (FCFS) principle

If neither of these were possible the Commission proposed to move immediately to a tariff only system. The Council requested the Commission to look into the feasibility of the FCFS system. The Commission (Fischler and Lamy) initially favoured the FCFS principle as a means of making the system immediately compatible with WTO requirements. The FCFS was felt to be both transparent and flexible. In addition it removed the need to distinguish between traditional and non-traditional suppliers on which negotiations were at an impasse.

Ecuador has never imposed these because to have to pay higher prices for EU imports of mainly basic foods would be politically unpopular.

The ACP viewed the potential loss of their quota to a tariff only regime as unacceptable. The FCFS system was viewed as being essentially a ship race to Europe which disadvantaged small and independent importers.3 The ACP argued that banana production remained important for the social, economic and political fabric of the Windwards, and that while some improvements could be made in increasing yields per acre by changing land use patterns and technical practices, they would still be unable to compete on the basis of cost leadership. They argued that small holder banana production cannot easily compete with large scale plantation production characteristic of Latin America. 4 They managed to convey their concerns to the European Parliament which called for the retaining of quotas with a tariff preference for the ACP for a ten year period, rejecting the proposal for a tariff only regime outright. However traditional support from French and Spanish producers was not forthcoming thereby dividing the historical mutual interest between ACP and EU suppliers. Clear opposition also emerged in August 2000 from nine Latin American producers who rejected the FCFS in favour of a tariff quota scheme as proposed by a group of Caribbean exporters.5 Ecuador and the Dole banana company were the exceptions, favouring the FCFS principle. In October the General Affairs Council ratified the new proposals including the FCFS principle despite this opposition believing it would provide a final end to the dispute with the US. In this instant it becomes clear that the US sanctions were costing the EU dearly and that ACP interests are less politically significant. The new US government was initially sympathetic to the FCFS principle but became increasingly hostile to it not least because Chiquita bananas were claiming to have suffered huge losses due to the operation of the BR. In March 2001 the US threatened to impose further sanctions against EU exports. The EU in turn threatened retaliation. Nevertheless the Commission and the Council were increasingly exasperated by the ongoing dispute and European companies were claiming to have suffered significant damages due to it. Furthermore some WTO members had indicated their intention to block the EU's request for a waiver for the new Cotonou Agreement in the WTO in the absence of agreement on a new BR. The dispute looked set to escalate until on 11 April 2001 the EU finally came to an agreement with Ecuador and the US paving the way for a new banana regime with both a tariff and a quota component.

5. The New Banana Regime 216/2001 & 896/2001

1. Abolishes the country quotas for Latin American (dollar) bananas within the 2.553m tonne A and B quota. Within this quota the tariff for dollar bananas was ECU 75 per tonne and for ACP bananas it was duty free. Removes 100,000 tonnes from the ACP quota - and adds this quantity to the dollar quota - leaving the ACP with a duty free quota of 750,000 tonnes with effect from 1.1.2002. Drops the FCFS principle in favour of the historical trading patterns for the distribution of licences. (83% of the A and B quota to historical shippers of Latin American bananas, mainly benefiting Chiquita because of the new reference period chosen, 1994-6, and 17% to newcomers) Commits the EU to move to a tariff only regime from 1.1.2006 at the latest without quotas or licences.

2. 3.

4.

The US in turn agreed to support the EU request for a WTO waiver for the BR from the Article XIII.1 requirement that like products from all third parties be treated equally and Article XIII.2, that the

3 4

WINFA Press Release, 6 October 2000. The comparative costs of production are Dominica can produce bananas at US$515 per tonne while Ecuadors cost of production is US$162 per tonne. 5 S. Dearden 2002, The EU Banana Protocol, in S. Dearden ibid.

distribution of trade which results should resemble the distribution of trade in the absence of restrictions. The US also agreed to lift existing trade sanctions.

Thus from 2006 the regime is due to be replaced with a tariff only scheme the details of which are still to be finalised. The objectives of the new regime include the maintenance of appropriate protection for ACP and EU suppliers, to avoid change in the present level of imports, and to minimise the effects of the regime on prices and costs. Importantly the new regime was not, and still is not, the only possible solution. It was the only solution at the time for which majority support, including the US, could be gained.6 The European Court of Auditors has recommended that the Commission take this opportunity to carry out a fundamental review of the CMO for bananas and in particular the consequences of the planned move to a tariff only regime in 2006 and on the future of banana production in the EU. 7 In particular the Court of Auditors found that the restriction of supply via the quota had resulted in prices being maintained at a higher level in the EU than on the world market. This review therefore constitutes an ideal time to lobby the Commission for desired changes. 2004 will also see the expansion of the EU membership. Importantly in November 2001 the WTO meeting in Doha approved the ACP waiver for obligations under Article I and Article XIII allowing the maintenance of a tariff preference for ACP bananas until 2008. The WTO waiver was granted in recognition of the need to protect ACP banana supplying countries during a transitional period. The waiver is subject to the conditon that should access for dollar bananas be adversely affected discussions would commence immediately with a view to rectifying the matter. 8

Stevens, C. (2002) 'Banana Skins and Turf Wars', in Wallace, W. and Wallace, H. (eds) Policy Making in the European Community. Oxford: OUP. 7 Information note of the European Court of Auditors concerning Special Report No 7/2002 on the sound financial management of the Common Market Organisation for bananas. EN 08.10.2002. 8 WTO 2001 European Communities- Transitional Regime for the EU Autonomous Tariff Rate Quotas on imports of bananas. WT/MIN(01)/16 14 November.

Chronology of Events 19932002 1993 New Banana Regime (BR). Establishment of the CMO for bananas Special System of Assistance to ACP banana producers GATT ruling against the regime but not adopted due to opposition from EU and ACP Framework Agreement raises quota to 2.2m tonnes and lowers duty to ECU 75 per tonne. US, Mexico, Ecuador bring matter to DSB of WTO WTO finds against BR system of licences, and Framework Agreement, but not against ACP preferences per se. EU revises BR: changes system of licences, replaces with distinction between traditional suppliers and new entrants. US still opposes and threatens trade sanctions. Ecuador opposes. Second WTO ruling on EU Banana Regime US imposes sanctions on EU EU proposes two stage scheme with tariff only regime from 2006. Also proposes the FCFS principle allocating the quotas. US opposes FCFS principle in favour of historical distribution. Threatens trade sanctions EU and US and EU and Ecuador reach agreement on new BR. ACP lose 100,000 tonnes of C quota when it takes effect. WTO Doha approves waiver for EU preferential tariff for ACP under Banana Protocol to 2008 New BR takes effect; 100,000 tonnes of ACP quota transferred to dollar quota New members join EU; tariff quota to be increased accordingly Proposed date for review of COM in Bananas EU Banana Regime to become tariff only Expiry of WTO Cotonou waiver

1994 1994

1994/5

1995 1997

1998

1999 (April) 1999 (April) 1999 (November)

2001

2001 (April)

2001 (November)

2002 (January)

2004 2004 2006 (1 January) 2008