What is good for Chiquita is good for the U.S.

A DECADE old banana war between the U.S. and the EU is over and the arms have been laid to rest. Press releases issued on April 11 give details of the agreement reached.

It was conceded that the banana disputes of earlier years were disruptive for all parties involved - traders, Latin American, African and Caribbean producers, and consumers. It expressed the hope that the agreement would end past friction and provide a better basis for banana trade. The agreement, no doubt, ends the friction between the EU and the U.S.; but the larger question whether it provides a better basis for all in the banana trade is in doubt.

The banana war

The EU banana regime was indeed complex and messy. The whole idea was to provide preferential treatment to banana imports from traditional ACP (Africa, Caribbean and Pacific) sources covered by the Lome arrangement. There was also the need to protect them from low cost ``dollar bananas" from Latin American countries. Thus, an elaborate three-tier licensing system had been put in place.

Dollar companies that were hoping to enter the European market in a big way after the establishment of the World Trade Organisation in 1995 were halted in their tracks by the EU banana regime. This led to near bankruptcy of Chiquita, a major producer. (See ``The bananas that soured," The Hinduof February 1).

When Mr. Pascal Lamy visited the U.S. in March this year for exploratory talks with the new administration, he said, ``The two elephants of the world trade have objectively extremely similar interests." This statement was not borne out by the EU-U.S. posturing and jousting before WTO panels!

The U.S. had good reasons to be concerned about some of the verdicts handed out in 2000 by the WTO dispute panels. The U.S. Anti-dumping Act of 1916 came under attack. The EU and Japan filed cases alleging that the AD Act was inconsistent with the U.S. obligations under the WTO. India and Mexico supported the case. The final verdict given on September 26, 2000 was that the U.S. AD Act was inconsistent with the U.S. obligations under WTO and the U.S. is required to bring its law in conformity with the WTO discipline. This would virtually take the bottom out of the U.S. trade policies. Will the U.S. Congress agree to amend a law that has been in force for 85 years?

Treatment of FSCs

Yet another verdict, which should worry the U.S., is that concerning tax treatment of foreign sales corporations (FSCs). The EC's case was that FSCs enjoyed ``subsidy" that was not consistent with WTO obligations. India supported the EU along with a few other countries. The panel ruled that the FSC scheme was inconsistent with the WTO obligations and should be withdrawn with effect from October 1, 2000. The appellate body also confirmed this ruling in February 2000.

The FSC decision was a major setback to the U.S. particularly because its implementation is time bound. If the U.S. did not take action within the stipulated time, the EU and other members were entitled to retaliatory action in line with the U.S.' own response in the banana verdict. Withdrawal of tax exemption on exports would strike at the root of the U.S. export strategies. It may take years for the U.S. administration to modify the FSC system and it is doubtful whether U.S. business would agree to major modifications.

The EU's response to the FSC verdict has been conciliatory. In a press release of October 2, 2000, it announced that the EU and the U.S. have agreed on procedures for handling the FSC dispute. They also agreed that pending review of compatibility of a FSC replacement legislation by a WTO panel, ``the EU would not be obliged to go to sanctions before panel reports." It went on to say, the EU's approach ``differs sharply from the U.S. approach taken during the banana dispute in 1988-89."

When the Bush administration took over, the stage had been set. The groundwork was perhaps done when Mr. Lamy held discussions in March and he mentioned ``bananas, hormones and foreign sale corporations" in a press interview. The tariff wars against the banana regime have by now been held in check by the EU's power to retaliate, if the U.S. delayed action on the FSC verdict.

There could have also been the strategy that, without the EU and the U.S. cooperating between them, the next round of WTO slated for November 2001 could be in jeopardy. Should the U.S. continue to be a warrior for a rule-based system under the WTO or strive for negotiated packages with the EU? When rigid legality fails, pragmatism may succeed. Near term commercial interests of business groups friendly to the Republican Party should have nurtured this pragmatism. And Chiquita has been close to them and is losing $200 million a year in the banana war!

The agreement reached on April 11 is not new or innovative. The EU, on its own, had worked out by November 1999 a two-stage approach: a transitional regime with quotas and licensing in the first phase, to be followed by a definitive regime based on a tariff without quota and licensing. The transitional quota system was also to be managed on a ``first come first served" basis or with reference to past performance.

The quota scheme kept ready by the EU was accepted with minor modifications. The new system will come into force from July 1. There will be three quotas (A, B & C) and Quota C would be reserved exclusively for bananas of ACP origin. Allocation of licences will be on the basis of historic references and not on first come first served basis.

The U.S. will suspend the sanctions now imposed on a number of EU exports. The two parties will jointly seek waiver of WTO rules to allow reservation of quota for ACP countries.

This scheme will be replaced by a tariff-only system by January 1, 2006 and the EU will begin negotiations necessary under WTO rules to bring about the new system. The net result is that dollar bananas, Chiquita especially, will regain access to the European market lost under the banana regime. The company can be bailed out of bankruptcy. Its share quotation shot up by 50 per cent on the day the agreement was announced.

The agreement is not good for the ACP countries. Though they may have preferential access in the transitional phase, there is no way a tariff-only system can be devised to offset the cost differentials between ACP and dollar bananas. There is the added risk that, at the end of the first phase, EU priorities may change and ACP interests may not command the same priority as they did in the early years of EU.

K. Subramanian

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