CHAPTER 3

BANANA IMPORTING COUNTRIES AND TRADE POLICIES

3.1 Introduction

The period 1985-2002 witnessed many developments in trade policy that affected the world banana economy. Perhaps the most important were the launching of the Uruguay Round of trade negotiations to liberalize international trade in 1986, the opening up to world trade of the socialist economies in the early 1990s and the creation of the Single European Market in 1992. The bulk of this chapter deals with policy changes in the EC because these have had major impacts on world banana trade. Moreover, many changes in EC trade policies were brought about by WTO rules and regulations, which occurred at the time when socialist economies were opening up to world trade. Brief references are also made in this chapter to import policies in ex-socialist republics and other major importing countries, including the US and Japan.

3.2 The European Union

Banana imports are concentrated in two main markets: the United States (a free market) and the European Union. In the period 1985-2000 the US and EC each captured an average of 32 percent of all world banana imports, while the remaining one third of world trade was captured by Japan (9 percent), eastern Europe (6 percent), South America and Canada (8 percent), the Near East (5 percent) and other Asian countries and Oceania (5 percent). This section explores the changes in the EC banana import policies in the period 1985-2002.

1985 - 1992

Before the birth of the Single European Market, banana import policies in the European Community varied broadly between the different countries. Imports were duty free in Germany, where prices were lower and per capita consumption higher than any other country in the Community. Belgium, Denmark, Ireland, Luxembourg and the Netherlands applied a 20 percent tariff on third country imports (mainly dollar bananas). France, Spain, Greece and Portugal produced bananas domestically, but they also imported from ACP countries and dollar suppliers under license and subject to a 20 percent duty. Finally, Italy and the UK were ACP^[21] supplied, and dollar bananas were restricted by quota subject to a 20 percent common external tariff.

Before 1992 prices in freer markets were lower than in highly protected ones, and this was the intended outcome of policies aimed at raising producer prices of preferred suppliers. However, these were costly both for EC consumers and for non-preferred producers. Borrell and Yang estimated for year 1992 the economic cost of this regime as follows: EC consumers in protected domestic markets faced prices twice those of open markets; EC consumers of restricted markets paid more on marketing margins than those in (for example) Germany; and EC tariffs and lower world prices resulted on additional costs to Latin American exporters. They concluded that the system was inefficient because of an estimated US$ 1.6 thousand million paid in excess by consumers, only 300 million went to preferred suppliers (Borrell and Yang 1990). This analysis was questioned by some ACP country delegates during the Intergovernmental Group on Bananas meeting in Honduras in November 1992 because it failed to take into account the practical realities of the banana market (imperfect price transmission and the dynamic nature of banana trade, in addition to understating the benefits to ACP countries). However, the general conclusions vis-à-vis consumer and producer welfare were similar to those presented by FAO and other analysts (FAO 1992).

1993-1996

With the birth of the Single European Market (SEM) in 1993, and under Council Regulation (EEC) Nr. 404/93 of 13 February 1993, the EC put in place the Common Market Organization for Bananas (COMB - EC Banana Regime concerning the importation, sale and distribution of bananas). COMB honoured the Lomé Convention of 1975 by extending to all member states those protectionist policies that existed before the SEM was created, which included preferential access to 48 of its ex-colonies (Borrell 1999). In brief, the policy consisted of allowing EC domestic suppliers to export duty free bananas to all EC member states (and granting them also with deficiency payments); defined quotas for the duty free access of bananas from ACP countries; imposed a system of import licenses for specific volumes of dollar bananas; and limited the imports of additional dollar bananas through excessively high tariffs. In addition, COMB also provided quality and marketing standards.

The regime established a tariff-rate banana quota import system as follows:

• A quota of 857 700 tonnes for the duty free access of traditional ACP bananas (from Ivory Coast, Cameroon, Somalia, Cape Verde, St Lucia, Jamaica, Belize, St Vincent and the Grenadines, Dominica, Suriname and Grenada). The quota was allocated to each country on a historical basis.

• A tariff quota rate of Ecu 100 per tonne to 2 million tonnes of bananas originating from non traditional ACP and third country bananas. It was increased in 1994 to 2.1 million tonnes and to 2.2 million tonnes in 1995. This quota was subject to a system of import licenses that divided the operators into three categories^[22]:

  - Category A: The 66.5 percent of the quota was reserved to established operators for third country (dollar) and non-traditional ACP bananas. These licenses were transferable (tradable) among operators.
  - Category B: The 30 percent of the quota was reserved to established operators that marketed EC and ACP bananas (European companies). These licenses were transferable (tradable).

  - Category C: The 3.5 percent of the quota was reserved to new EC operators who started to import bananas from sources other than EC and/or traditional ACP bananas^[23] from 1992. These licenses were not tradable.

Out of quota imports from third countries were subject to a tariff of Ecu 850 per tonne, and from non-traditional ACP banana exporting countries and EC producer territories of Ecu 750. In addition, and in order to prevent any loss of income by EC banana producers, compensation payments for a maximum of 854 000 tonnes domestically produced were granted in case prices fell bellow the production costs. Specific quotas were assigned to individual EC regions, and almost 50 percent went to the Canary Islands.

EC internal trade barriers were eliminated to allow the free circulation of bananas and, as a result of the redistribution of supply, retail prices in different countries converged: they increased by 8 percent in Germany and decreased by 11 percent in France and by 6 percent in the UK. The implementation of the COMB had also an immediate impact on world banana trade. It coincided with a year in which world exports expanded by 2.3 percent, while imports to the EC fell from 3.4 in 1992 to 3.3 million tonnes in 1993. The banana surplus of 1993 affected prices worldwide; in the United States retail prices fell by 7 percent. In Europe, bananas that could not enter the EC were diverted to Eastern Europe and the Former Soviet Union, which were in the process of opening their economies. Imports to these markets more than doubled in the first few years following the implementation of COMB (Paggi et al 1998), with supplies shifting from transshipment through Western Europe to direct shipment to Russian ports (FAO 1994).

Some analysts have concluded that the COMB was not effective in sustaining high domestic prices of preferential EC suppliers, it depressed world prices and reduced banana foreign exchange revenues in developing countries (Borrell 1999). The CMOB was disputed very heavily from the very beginning. A GATT panel concluded in January 1994 that it was in breach of the Most-Favoured-Nation (MFN) clause in Article I of the GATT, which can be interpreted to mean that contracting parties such as the EC cannot discriminate between the GATT contracting parties, in particular between ACP and dollar banana exporting countries (Pelzman 1999). Despite this ruling, four of the five Latin American countries that had initiated the panel preferred to reach an agreement with the EC. This agreement is known as the Framework Agreement on Bananas (FAB). It is laid down in Council Regulation (EEC) 3290/94 of 22 December 1994. The four Latin American countries (Colombia, Costa Rica, Nicaragua and Venezuela) agreed not to pursue the adoption of the aforementioned GATT panel report, nor to bring any further complaints during the lifetime of the regime, in return for certain modifications to the regulation. The FAB expanded the MFN tariff quota level and decreased the within-quota tariff rate to 75 commercial ECU per tonne. Part of the tariff quota (49.3 percent) was divided up into country-specific quota shares allocated to the four Latin American countries: Costa Rica receiving 23.4 percent, Colombia 21 percent, Nicaragua 3 percent and Venezuela 2 percent. Furthermore, these four countries were allowed to issue export certificates for up to 70 percent of their specific quota with the clear objective to alter the distribution of the MFN tariff quota rent in their favour. The remaining 51.6 percent of the tariff quota was reserved for the Dominican Republic (55 000 tonnes), Belize (15 000 tonnes), Côte d’Ivoire (7 500 tonnes), Cameroon (7 500) tonnes and other countries (5 000 tonnes). Two immediate consequences of the FAB were the reduction of the “advantages” and of the EC market shares of traditional ACP countries (FAO 2001c).

1999-2002

With the birth of the WTO in 1995 and the creation of new dispute settlement procedures, the Framework Agreement was challenged once again, this time by Guatemala, Honduras, Mexico and the US. Ecuador joined the claimants in 1996. The WTO panel ruled that the EC did not comply with its international obligations, and that it would need to bring its banana regime in line by January 1999. More precisely, the modified regime did not comply with WTO rules in three aspects. First, the preferential import rights for bananas from the ACP countries continued to constitute discrimination against other WTO members and were larger than the EC was allowed to grant to the ACP countries under the exemptions permitted by the WTO. Second, the distribution of the tariff quota among supplier countries in LA was based on out-of-date and non-representative reference quantities. Third, the distribution of import licenses was still based on the old, discriminatory system. The most significant changes to the Framework Agreement applied by the EC in 1999 included abandoning of the system of license allocations by type of operators (licenses A/B/C), reviewing the country allocation of TRQs according to their performance in the period 1994-96, and the lifting of quota allocations to traditional ACP exporters (plus allowing for licenses to be tradable among operators). As a result of this agreement, Ecuador, Colombia, Costa Rica and Panama could now capture a 90 percent share of dollar banana imports to the EC. Moreover, due to the enlargement these countries could export larger volumes than in previous years^[24]. In the ACP countries, the agreement resulted in a fall of banana imports from the Caribbean but in a moderate increase from Africa. This could be due to the strong cross-country competition that resulted from lifting individual country quota allocations and from trading licenses among operators. In this new competing trading environment, African countries benefited over those in the Caribbean because of their lower production costs.

In April 11, 2001, and after eight years of disputes that cost the EC millions of dollars of retaliatory duties from the USA, the EC and USA reached an agreement in their longstanding banana regime dispute. It follows some of the proposals presented in November 1999 and October 2000, including the two-step approach to liberalizing the EC banana market whereby the current tariff-quota system would be followed, no later than 1 January 2006, by a tariff-only system (a tariff preference would continue to be granted to ACP countries until 2008). The change to a tariff-only system in 2006 is expected to have major consequences in the trade flows of the world banana economy and in the export revenues of low income countries such as Ecuador. Other important changes introduced included:

• Abolition of the country sub-quotas within tariff-quota A/B;

• Allocation of 83 percent of quota A/B to ‘traditional operators’ based on their imports in the 1994-96 reference period (‘historical licensing’);

• Change in the definition of ‘traditional operators’ in favour of ‘primary importers’ (corresponding to category A of Regulation EEC 404/093, i.e. companies that are directly involved in the production or shipment of bananas in the supplying countries);

• Creation of a quota C of 850,000 tonnes available to all countries and with an applied within quota tariff of €300 per tonne. Within this quota ACP bananas enjoy a tariff preference of €300 per tonne;

• Allocation of 89 percent of quota C to ‘traditional operators’ and 11 percent to ‘non-traditional operators’;

• Transfer of 100 000 tonnes from the ACP quota (C) to quota B from January 2002. From this date, quota C has become reserved for ACP countries.

Ten “Accession countries” (8 Central and Eastern European countries^[25], Malta and Cyprus) will join the EC in May 2004. According to Eurostat, their total imports reached a peak of 703 000 tonnes in 1999 but have decreased since then. Poland accounts for almost half of these imports, followed at a distance by the Czech Republic, Hungary and Slovakia. The other Accession countries each import less than 30 000 tonnes annually.

Table 21 Net banana imports into Accession countries 1996-2002

Source: Eurostat 2003

The European Commission has indicated two basic principles of the enlargement as regards the CMOB (DG AGRI 2003a). Firstly, the enlargement should ensure sufficient supply of bananas to EC consumers, in conformity with WTO rules. Secondly, the “acquis communautaire” should be implemented, meaning that the banana imports of the new Member States should be governed by the CMOB (DG AGRI 2003b). However, this view is not shared by all Accession countries. Some of them have expressed reservations about the CMOB on two accounts: its conformity with the rules of the WTO and the high cost of the management of a system of import licenses. Moreover, some governments worry that a system of tariff-quota will increase the retail price of bananas, thereby reducing consumption due to the lower purchasing power of their citizens relative to those in the EC. They have therefore indicated their preference for joining the EC banana market from 2006, when a tariff-only system is in place.

Finally, in February 2001 the EC launched the Everything-but-Arms initiative (EBA) which grants duty-free access to all goods produced and exported in the Least Developed Countries (LDCs) except weapons and munitions. A temporary exception was made for bananas, sugar and rice, for which the duty-free access is being phased in gradually. From 2006, bananas produced in LDCs will enjoy duty-free market access. However, this measure is unlikely to have a significant impact in the short term, as all LDCs producing bananas of export quality belong to the ACP group which already enjoys duty-free market access. High transport costs may discourage some of the more significant Asian LDC producers from supplying the EC (e.g. Bangladesh).

Figure 28 EC: share of domestic banana market by source, average 2000-2002

Source: European Commission 2003

Figure 29 EC: domestic production and imports by origin 1990-2002 (thousand tonnes)

Source: European Commission, 2003

3.3 The United States of America

The US is the largest importer of bananas in the world with an estimated 3.91 million tonnes in 2002. About 10 percent of these are re-exported to Canada, and the rest is consumed in the US. Bananas originate almost entirely from Latin American countries, with imports from other parts of the world considered negligible. Central America is the largest supplier with a market share of 60 percent, and is almost exclusively in the hands of TNCs.

Imports have grown steadily since the early 1960s (Figure 30), but are beginning to show signs of slowing down. From 1970 to 1984 they grew at 2.6 percent, and in the following 16 years (1985-2001) at the slightly lower rate of 2.45 percent. Consumption per capita in the last 16 years increased at 1.7 percent per annum due to, inter-alia, the steady annual growth of income per capita (2.1 percent) and the fall in retail banana prices in real terms (-1.3 percent per annum)^[26].

Figure 30 The United States: banana imports 1961-2001

Source: FAOSTAT

Figure 31 The United States: banana imports by origin, average 2000-2002

Source: U.S. Census Bureau, Foreign Trade Division

Retail prices in the US are lower than in the EC due to the lack of tariffs or quantitative import restrictions as well as lower transportation costs. During 1985-2001, retail prices in France were on average 75 percent (and those in Japan 88 percent) higher than those of the US. FAO has found that US import prices fluctuated considerably during the period 1970-2000 (FAO 2001b). No outliers or evidence of structural breaks were identified in the series while price volatility, measured by the variation of prices around its long run trend, was found to be on the increase. In projecting world banana trade to 2010, the FAO also found that both income and price elasticities of demand were lower than those of emerging markets, and anticipated that the future rate of growth of imports by the US will be lower than that of the 1990s. This projection is based partly by the lower demographic growth expected this decade and partly by the currently high level of per capita consumption, which is believed to be close to saturation levels (FAO 2003a).

3.4 Japan

Japan is the world’s third largest banana import market with an average of nearly one million tonnes in the period 2000-02. Because of its geographic location, the Japanese banana market has been dominated by the Philippines, although Ecuador has increasingly played a more important role throughout the 1990s. Ecuadorean exports to Japan increased from 75 000 tonnes in 1986 to 210 000 in 2000 when they reached a market share of 20 percent. In year 2000 the Philippines and Ecuador accounted for about 95 percent of all Japanese banana imports.

Figure 32 Japan: banana imports 1985 - 2001

Japan, like the United States, has no quantitative restrictions on banana imports but applies a general seasonal import tariff of 50 percent from October to March and 40 percent for the period from April to September. Under WTO, these are committed to be reduced to 40 and 25 percent respectively. However, virtually all banana imports into Japan come through a preferential tariff rate of 20 percent (October to March) and 10 percent (April to September). This tariff is granted to most developing countries, including most banana exporting countries of Latin America, Asia and the Caribbean. Imports from least developed countries are granted duty-free access but the volumes are insignificant.

3.5 Russia

A major change in world trade in the early 1990s was signalled by the opening up of trade in the ex-socialist republics in Europe. Although the population of the Russian Federation did not have a long-standing tradition of consuming bananas, they have nevertheless become one of the most popular fruits in recent years, accounting for about 1/3 of total fruit consumption (FAO 1999a). Banana imports in the Russian Federation grew from 13 000 tonnes in 1992 to 1 million tonnes in 1997. In Russia, 97 percent of total imports in 1997 came from three Latin American countries (Ecuador 61 percent, Colombia 23 percent, and Costa-Rica 10 percent), while the remaining 3 percent came from the Philippines. Supply shifted from transhipment through Western Europe during the 1980s to direct shipment to Russian ports in the early 1990s. Large companies capable of purchasing whole cargoes of bananas have increasingly dominated this trade, while banana imports from Europe have practically ceased.

In August 1998 a severe economic crisis hit the Russian Federation affecting all imports, including bananas, that fell from 1 million tonnes in 1997 to 580 000 in 1998 (Figure 33). The economic situation has since become somewhat stabilized, and banana imports have recovered moderately to an estimated 730 000 tonnes in 2002. The crisis has proved that the demand for bananas in the Russian Federation is price elastic. At the end of 1997 the price of one kilo of bananas constituted 41 percent of the price per kilo of beef; in July 1998 it had climbed to 46 percent and in November to 71 percent. Demand shrank 53 percent after prices in July-November 1998 doubled in rouble terms. The market is considered to offer good prospects over the longer term in line with the expected recovery of the economy.

Figure 33 The Russian Federation and China: banana imports 1992-2000

Source: FAOSTAT

3.6 China

China is one of the most important banana producing countries in the world. Its participation in the world banana trade was significant in the past, when as an exporter it shipped 400 000 tonnes in 1964. However, exports have since steadily decreased and at the end of the 1990s the country became a net importer.

Production expanded rapidly in a relatively short period of time. China’s banana production was stagnant in the period 1960-1984, but since 1985 it has grown at a rate of some 9 percent per annum. From 500 000 tonnes in 1994, banana production has grown in year 2002 to 5.6 million tonnes, and the expansion shows no signs of slowing down. Domestic consumption of bananas in the period 1985-2000 also grew markedly, at close to 10 percent per annum. Banana imports were marginal in the period 1985-1993, but in three years they increased from 93 000 tonnes in 1994 to over 500 000 tonnes in 1996, when they stagnated and even decreased in the last two years (estimated at 374 000 tonnes in 2002).

Considering the size of its population and the economic growth achieved in recent years, China has the potential to become in the long run a key player of the world banana economy. However, we are not able to predict if its role will be as an importer or as an exporter of bananas. Limitations on road and port infrastructure in the south, including cold storage and ripening facilities, constrain the expansion of imports. Moreover, improvements in the road system in the North have encouraged traders to buy from the growing domestic production rather than from abroad. The fall in imports of recent years is due, to a certain extent, to domestic demand being increasingly satisfied by the growing domestic production. If current trends prevail, China would become a net banana exporter by the end of the decade.

3.7 Other Importing Countries^[27]

Various import regimes are in place in the remaining importing countries, including one or the combination of the following: quotas, import tariffs, internal taxes and technical barriers. A notorious case of technical barriers is the application of phytosanitary restrictions by Australia to protect its home production from potential diseases carried by bananas from the Philippines.

Countries that only apply import duties on bananas include Norway, New Zealand, Bulgaria, Chile, China, Cyprus, Egypt, Hungary, Malta, Republic of Korea, the Russian Federation, Saudi Arabia and Switzerland. Norway and New Zealand, both countries with a high per capita levels of banana consumption, charge the same ad-valorem duties to bananas as competing fruits. Tariffs vary from as little as 5 percent ad valorem in the Russian Federation to a combined rate in Cyprus of 41.2 percent plus US$1 213 per tonne for imports from non-EC countries. Lower tariffs are applied by Peru (25 percent), Hungary (14-25 percent), Saudi Arabia (12 percent), Poland (0-20 percent, plus a value added tax), Chile (10 percent) and Bulgaria (7-10 percent). In the upper range are Egypt (60 percent), Republic of Korea (70 percent) and China (25-40 percent).

Some countries like Tunisia and Morocco apply not only high duties but also internal taxes and other import restrictions. Import licences are required in Tunisia, where the duties are 100 percent ad valorem. Morocco restricts banana imports but it periodically issues licenses when home production is insufficient to meet domestic demand.

Countries that impose no licenses but apply import duties and internal taxes include Algeria, Argentina, Japan, Poland and Uruguay. The import duties range from very low specific and ad valorem levels in Uruguay where imported fruits and vegetables are subject to a VAT of 23 percent, to duties of 45 percent in Algeria. Finally, imports into Libya are channelled through a single import organization which controls import volumes in line with demand.