01/27/1999
The Wall Street Journal Europe

By Greg Rushford

The arguments in the impending trade war between the United States and the European Union over bananas has so far centered on who's right and who's wrong. Perhaps people should be looking at who the major losers are. European consumers and American companies are getting hammered, as usual, but they're not the only victims. The Caribbean and African economies some European governments purport to defend would also benefit were the EU to drop its banana protectionism.

If Europe dismantled its complex web of quotas, licenses, and tariffs that comprise its protectionist banana regime it would give these Third World countries the true economic incentives they need to diversify their economies. It would also be doing the right thing by European consumers, who presently pay twice as much for their bananas as Americans do.

Right now, this trade row is at a standstill. Despite European charges that the U.S. is acting like a unilateral bully, U.S. Trade Representative Charlene Barshefsky has taken the matter to the World Trade Organization to ensure fair treatment for American companies. She has moreover threatened to slap prohibitive 100% tariffs on $520 million worth of European products ranging from cashmere to pork by Feb. 1, an act that would punish American consumers who are as innocent in this dispute as European consumers. The only way to avoid the sanctions, Ms. Barshefsky insists, is for the Europeans to stop discriminating against American banana multinationals -- chiefly Chiquita Brands International -- thus complying with a 1997 ruling by a dispute-resolution panel of the WTO. The last blow in the war came this week, when two supporters of the EU position, the tiny Caribbean countries of Dominica and St. Lucia, contrived to keep the WTO from deciding on the legality of the sanctions, something the WTO was expected to approve.

Sir Leon Brittan, the European Commission's vice president in Brussels, has vehemently protested that the EU has now complied with the WTO directive. Sir Leon charges that Washington's threatened trade sanctions are unilateral and flat-out "illegal."

Let's peel away the confusing rhetoric. The economics is easy. The EU's banana regime slices up Europe's banana markets by granting preferential trade concessions to former colonies and present overseas regions. France protects bananas from Cameroon, the U.K. protects bananas from Grenada, Spain protects the Canary Islands, and so on. These economies are too small to be efficient banana producers in global markets. Big European banana distributors like Fyffes, Geest Bananas, and Jamaica Producers have to pay twice the price for bananas that the large American firms like Chiquita pay for their "dollar bananas" in large Latin American countries like Ecuador.

Nobody disputes that the scheme results in sharply higher prices for European consumers, who are asked to bear the burden to help out their former colonial brethren. "Without this provision, the Caribbean industries would be destroyed," asserts Gordon Myers, the general secretary of the Caribbean Banana Exporters Association, the trade lobby backed by Fyffes, Geest, Jamaica Producers and Caribbean banana interests.

Mr. Myers has a point, but don't try peddling any quota scheme as foreign aid in respectable economics circles. The real beneficiaries of the banana regime are the European banana companies, plus assorted middlemen, shippers, and people who ripen bananas in Europe. This is a small circle compared to those who suffer by paying higher prices. Ms. Barshefsky additionally says that poor farmers in the Caribbean get perhaps seven cents on the dollar, the middlemen taking the rest.Whether her assertion is exaggerated or not, essentially all quota schemes work -- including U.S. quotas on textiles, apparel, sugar and lumber. But the question is, for whom? Consumers always pay dearly, while the middlemen make out like bandits. It is "simply crazy" to pretend that foreign aid in the form of quotas will ever provide real incentives for Caribbean economic growth, states Columbia University economics professor Jagdish Bhagwati.

Mr. Bhagwati sensibly advocates a mini-Marshall Plan for the Caribbean, which would promote true economic growth and would be far less expensive than the banana regime. The immediate fight at the WTO is on narrower, less-idealistic grounds. In September 1997, the WTO determined that the EU was carving up its banana markets like they were, say, a banana pie, making sure that the domestic champions got the best slices.

While the actual division of European markets is not a matter of public record, credible industry observers believe that the three largest world players are Fyffes, Chiquita and America's Dole Food Corp., each of which holds about 18% to 20% of Europe's banana market. While Chiquita's piece of the banana pie may be somewhat larger than that, Ms. Barshefsky charges that the American multinationals have lost more than 50% of their share of European markets since the current banana regime was adopted in 1993.

Sir Leon vehemently argues that Ms. Barshefsky is out of line. "We have given the United States every opportunity to get the banana dispute resolved rapidly in the proper place -- the World Trade Organization," he has stated. "They could at any time have requested a panel to determine the issue."

Nonsense. The United States -- joined by Ecuador, Guatemala, Honduras and Mexico -- did request a WTO panel to determine the issue. That panel, which was backed up by an appellate panel requested by the EU, agreed in September 1997 that the EU had been cheating the American companies.

Before the WTO was created in 1995, any member country to the WTO's predecessor, the General Agreement on Tariffs and Trade, had the right to block any dispute-resolution panel findings it did not want to obey. Unwilling to drop its protectionism, the EU blocked two GATT panel rulings on bananas in 1992 and 1993. Ms. Barshefsky's present legal authority for the $520 million in retaliatory sanctions, which is called the "suspension of tariff concessions" by lawyers, is based on the WTO's Article 22. This article details the rights of a winning party that has evidence that the losing party has not acted to implement the WTO's recommendations."

The step that has to be taken next is not merely to suspend tariff concessions unilaterally, but for the party to apply to the dispute settlement body of the WTO for permission to revoke concessions," explains Ronald Cass, who is dean of the Boston University School of Law. "Once we have done that and the DSB says `yes,' we get to hit them."

Rather than fight to hang on to the vestiges of its banana regime, Europe might reflect upon its own history. In 1902, England's colonial secretary, Joe Chamberlain -- a man who believed that tariffs were "the politics of the future" -- proposed a scheme called imperial preference. Like today's banana regime, imperial preference would have given preferential tariffs to colonial possessions.

The major difference between imperial preference and modern banana protectionism is that the former was admittedly a way to protect manufacturers and agriculture in the mother country, while the latter is disguised as foreign aid.After a huge political row stirred up by a young MP named Winston Churchill, imperial preference was defeated in 1903. Joe Chamberlain was destroyed, suffering a paralytic stroke from which he never recovered, recounts author William Manchester in "The Last Lion."

Chamberlain's son Neville carried on the family tradition, until Churchill finally prevailed over him too.In today's Europe, it seems that the ideas of the Chamberlains and not the Churchills have prevailed.

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