The bananas that turned sour

CHIQUITA IS not the name of a dusky Cuban actress. It is a U.S. company that has played stellar roles in some Latin American countries. The 32-year-old Cincinnati based company was earlier known as the United Fruit Company. Its brand name - Chiquita - for bananas had a legendary reputation and nearly threatened to replace the popular name for the humble fruit. Even today, there are only two other majors - Dole Food of the U.S. and Del Monte Fresh Produce owned jointly by UAE and Mexico.

In the early 1950s United Fruit Company made history when in Guatemala it was threatened by the policy of its Prime Minister, Mr. Jacobo Arbenz, to redistribute land. The company was able to press the U.S. Government to come to its rescue. The charge, which was quite handy in the good old cold war days, was that the Government had ``turned communist.'' The CIA staged a coup, Mr. Arbenz was overthrown and the United Fruit Company lived happily ever after. Until the early 1990s and until the emergence of ``Fortress Europe'' and the new banana regime of the E.U.

Throughout the 1990s the company was known to have lobbied with the U.S. Government and mounted banana wars on the E.U. In recent weeks the company is in the news for a rather mundane reason - that it is on the verge of bankruptcy. The company has a public debt of $862 million. It has stopped repaying its debt as also interest of $12 million due on unsecured debt. Even earlier, the rating agencies began to treat its bonds as junk and they have downgraded the rating for debt further. Why have Chiquita's bananas turned sour?

It is a long and complex story that cuts across the whole gamut of the banana industry, corporate rivalries, GATT and WTO regimes, U.S.-EU frictions and the role of lobbies. It may also be a story of grass mis-judgement. Chiquita had apparently concentrated all its efforts on one major front, namely, EU's banana regime, and failed in that process to cover its other flanks.

Why and how did an ordinary fruit such as banana create waves across nations? It has very much to do with its production costs. The relative share of the commodity in the country's economy, both in its external trade and GDP, is important as the interests of corporates could conflict with those of local governments. Linked to an over-dependence of an economy on one commodity are factors such as the nature of ownership and control over such plantations. This ownership itself is the result of historical legacy dating back to the Nineteenth century.

Trading arrangements were established in the earlier decades with the metropolitan economies and these were related to the then existing trading (read, colonial) arrangements, blocs or links. Finally, the nature of regulation required to deal with a special commodity like banana is vital. It does not lend itself to a rigid application of the so-called ``rules-based-trading system'' under the WTO.

Expectations belied

The 1980s were the golden era for banana trade. Exports were around 7 million tonnes in 1980-85 and these grew further from 1988 based on expectation of substantial market expansion. East Asia was booming and Japan and China began to import bananas. There was the opening up of Eastern Europe after the Soviet collapse. A single market in Europe was on course and many other countries were also opening up under the GATT's auspices.

It was hoped that the traditional or pre-world war linkages would not hold and newer production and trading patterns would emerge. The three major companies and their affiliates that had concentrated in Latin American countries (Colombia, Costa Rica, Nicaragua, Venezuela and Guatemala), described as ``dollar'' companies, anticipated future increase in demand and began to increase investments in Central America and also invest in new areas such as Indonesia and the Philippines in Asia. The three major companies, already controlling 70 per cent of world trade in bananas, including half of the E.U., looked forward to grabbing the balance.

Later developments belied their expectations. Exports from 1995 to 1997 did not exceed 10-11 million tonnes. Eastern Europe did not blossom and continues to be in `transition'. East Asia was thrown off course by currency and economic crises after 1997 and is nowhere near reaching earlier rates of growth. But the heaviest blow came not from strangers, but from their own friends in E.U. who accounted for 35 per cent of world imports.

The blow from the E.U.

On July 1, 1993 the EU introduced a new banana regime favouring bananas from domestic producers and from former European colonies in Africa, the Caribbean and the Pacific (ACP) known as the ``404/93 regime'' with two main objectives. First, to create an integrated market and harmonise different trade agreements. The other, to safeguard the interests of the traditional ACP and European suppliers against import of cheap bananas from dollar companies.

The E.U. had to formalise its commitments to ACP banana producing countries under successive Lome Conventions so that no ACP State would lose its advantages in its traditional markets. The U.K. had also similar commitments to lift bananas from Winward Islands, Jamaica, Belize and Surinam. Prior to 1992, the U.K. market was primarily supplied from these countries. The EU had also to take into account the fact that for reasons of climate, terrain and labour costs, ACP and EU fruit would not be competitive with dollar bananas.

The new regime, therefore, provided for a tariff preference for ACP fruit with no tariff for EU fruit. Individual export quotas were provided for traditional ACP suppliers based on best performance (supplies) prior to the regime. There was a tariff quota for other bananas. It was topped by a prohibitive tariff for imports above the quota. The system also provided for incentives to traders handling ACP and E.U. fruit. For instance, the EU producers in Canary Islands, Martinique and Guadeloupe were assured of income support when prices fell below cost of production.

Dollar allocation, in turn, was not to be grabbed entirely by dollar companies and 30 per cent of dollar allocation (B licence) was reserved for established operators of EU and ACP bananas with a view to cross-subsidising the expensive ACP fruit with profits from import of dollar bananas. It was a complex system and sought to take care of the interests of all the participants and could have ensured stability and growth. Dollar companies were not happy over these, particularly Chiquita.

Colombia, Costa Rica, Nicaragua, Venezuela and Guatemala challenged the new regime in the GATT. The GATT panel ruled that the Category B licences (30 per cent of dollar imports) providing for cross subsidisation and ACP preferences were in conflict with GATT rules. The GATT Council could not, however, adopt the Panel report as the ACP countries, with EU support, opposed it.

All the same, the EU was keen to settle the matter with the aggrieved countries and offered a Banana Framework Agreement (BFA) in return for their agreeing not to challenge the EU regime in GATT/WTO. It was also a part of the Uruguay Round final settlement. Quotas were to be allocated to the countries and they were to distribute licences to their companies. Colombia, Costa Rica, Nicaragua and Venezuela signed the BFA. Guatemala refused and reserved the right to challenge the regime. (Chiquita's role in this country is well known.). Meanwhile, in December 1994, the EU received a GATT waiver for the preferential treatment given to ACP imports, including bananas under the Fourth Lome Convention. The waiver was to last up to to the end of February 2000 and regularised the preferential treatment with no obligation to extend them to other GATT parties. Dollar companies could not wait that long.

In 1994 Chiquita Brands International took up the matter with the U.S. Trade Representative (USTR) seeking assistance to remedy the disadvantages the company faced under the E.U. regime and the BFA in the distribution of dollar bananas. It is also known that Dole and Del Monte, the two other large U.S. banana companies, did not file requests with the USTR. Dole is said to have proposed a compromise in 1995 to avert WTO action and it was turned down. (Reference: Banana Action Net.csr 25).

Tariff wars

The WTO came into existence on January 1, 1995 and the situation had changed materially. Unlike GATT, the WTO had dispute settlement mechanisms and DSB's rulings are binding on member countries.

The USTR took up the company's cause with the newly created body. It was the first ever case to be taken by the U.S. and it is significant that it dealt with the problems of one company. One U.S.-owned corporation producing bananas in other countries sought access to EU markets in an unfettered manner. And these bananas do not even pass through U.S. ports!

Why the U.S. authorities took up the issue at all may be a puzzle to trade theorists. But others conversant with the ways of lobbies in the U.S. and the uses of campaign finance would not be surprised. Many details of campaign donations by Chiquita have been given under the website of the Campaign for Labour Rights in a section titled ``Chiquita Campaign.'' Factual material was collected under recourse to Freedom of Information Act.

In April 1996 the U.S. along with Ecuador, Guatemala, Honduras and Mexico challenged the EU regime under the dispute settlement mechanism. In May 1997 a WTO panel ruled that the EU banana regime was violative of WTO obligations. The EU took the dispute to the WTO Appellate Body that largely upheld the findings of the panel and gave its ruling on 25 September 1997. EU was given time until January 1, 1999 to implement the revised arrangements. This was not to be the end of the dispute. The EU designed a new scheme that tried to remove the elements faulted by the WTO and brought it into force on January 1, 1999. Under the revised regime, individual allocations were replaced by larger traditional ACP quantities to be imported tariff free. Import licensing system which had been attacked was also replaced.

These revisions also were not acceptable to the complainants and they wished to take the matter again with the WTO panel. The U.S. was apprehensive of further delays flowing from WTO procedures and the dilatory tactics EU might adopt and decided to resort to Section 301. On December 21, 1998, U.S. published a list of products on which 10 per cent tariff would be imposed. There were reports of the U.K. trying to manipulate the list with the USTR to safeguard employment in the U.K. in sectors like Scottish cashmere.

What had begun as banana wars way back in 1994 had now been turned into tariff wars. In January 1999 Ecuador and EU requested the WTO panels to examine the compatibility of the revised regime under WTO and whether the level of U.S. retaliation was justified. Against the U.S. claim of $520 million, the panel and Arbitrator allowed $191.4 million and the U.S. list was revised to reflect the ruling. The WTO's Dispute Settlement Body formally adopted the Panel's and arbitrator's reports on April 19, 1999. As in the case of GATT, when the matter came up in 1994, it was not feasible to block its adoption. The award for Ecuador was given on January 17, 2001 for $450 million.

The WTO might have ordained. But the disputes will go on and there are no signs that it would be solved soon. The European Commission is said to be considering options for reforming the banana regime to make it compatible with WTO obligations while reconciling EU obligations to the ACP producers. It does not seem that the conflicting interests of ACP and dollar producers can be resolved unless there is an international trade regime for banana outside of the WTO.

The Caribbean bananas cost more and this cost difference is the result of historical and social factors. They are produced in many small and independent farms and the wages are high. Banana farms in Winward Islands are less than four acres. The Oxfam had brought out a document (A Future for Caribbean Bananas) in March 1998 supplying startling details. It carried the views of one of the farmers, who said, ``We are told that the world had changed, that because of the WTO there must be free market in bananas. But that should not be so free that it can destroy people's lives.'' On the issue whether it would destroy Caribbean peoples consider the following data given by Oxfam in the same report:

As against the Caribbean plantations, the Central American plantations are directly owned by or contracted to multinational corporations and range from 2500 to 12,000 acres. Chiquita employs about 38,000 workers in Central America. They are also vertically integrated. A study done by the FAO revealed that production costs in Ecuador, Costa Rica and Colombia ranged from $3 to 4 per box while the cost in other areas range from $8.5 to over $12.4.

Thus, there is no way the Caribbean costs could be brought down to the level of dollar bananas. The EU regime was compassionate since it tried to safeguard the interests of these high cost farmers.

The U.S. victory in the WTO was pyrrhic in many ways. The WTO was ushered in with much fanfare and arm-twisting of developing countries on the ideology that trade would be a better way of welfare than aid. But these banana wars clearly suggest that there is more to human welfare than trade. Not all trade need promote welfare and a lot depends on past history and institutional structures. U.S. efforts in defending the interests of U.S. banana producers as also in the other products like beef harmones has reduced the credibility of WTO.

No wonder the backlash in Seattle was so violent and those who demonstrated consisted of farmers and displaced tribals and Chiapas. During recent years the Drug Enforcement Agency of the U.S. has detected higher volumes of drug flowing from the Caribbean. It is spending several million dollars to curb the trade. It has been established in some studies that in the Caribbean Islands banana is the most suited crop since it can withstand periodical typhoons and other crops cannot survive under high wind velocity. If they cannot grow bananas the other option is to grow poppies. Perhaps some of the farmers have already started doing it.

The WTO victory does not bail out Chiquita either. The company had already turned red. The data on net income from 1991 to 1997 shows that the company was continuously incurring losses except in 1991 and 1995 and the losses in 1992 was of the order of $284 million. The European nightmare cost it heavily and the company assumed a high profile due to its political connections with the White House and U.S. parties.

The company did miscalculate. It had probably over-estimated U.S. power and underestimated the resistance from the EU and the countries in ACP dependent on banana trade. When its rivals like Dole were diversifying into other fruits and products, Chiquita was heavily dependent on banana production. It was too dependent on the EU market accounting for 85 per cent of its income in 1996. No wonder it had to wage a war against the EU regime. Moreover, it was producing high cost banana in relation to its rivals and was firm in its belief that its product had brand advantage. Brand advantage on items like fruits does not last long. It had also to face severe criticism from environmental groups over the practices adopted in its plantations in Central America. It did make efforts to get certification and to adopt better methods. But these had drained its resources. It was hoping that the EU market would fall in its lap. It took too long a time and came in trickles. And Chiquita's creditors could not wait any longer!

The moral of the story is that there is more to trade than the working of big corporations and welfare need not necessarily be promoted by trade engaged in by multinationals.

K. Subramanian

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