A Transition Proposal for Lome Convention Trade Preferences: The Case of the EU Banana Regime

A Transition Proposal for Lom6 Convention Trade Preferences: The

Case of the EU Banana Regime David G. Raboy, Teri L. Simpson and Bing Xu

1 . INTRODUCTION

N 15 April 1994, representatives from the GATT Contracting Parties finally signed the Uruguay Round agreements, including provisions to

substantially liberalise trade in agriculture. There was, however, one skunk at the picnic which threatened to hold up the agreement. The Member States of the European Union (EU) were split as to the proposed regime governing the importation of bananas into the EU that was to be included in the EU's schedule of agricultural concessions. An ambiguous legal outcome allowed dissenting Member States to sign the GATT accord, while ostensibly reserving their right to challenge the EU banana regime. Several court actions were brought before the European Court of Jutice, some of which have been resolved, and some of which are still pending at the time of writing.' Several Latin American countries have threatened to bring the dispute before the World Trade Organisation (WTO). In addition, the United States government has begun an investigation of the EU banana regime under Section 301 of the Trade Act of 1974. Regardless of the legal outcome in the European Commission, the EU Council, and the Court of Justice, the controversy surrounding the EU banana regime will continue for some time due to the countervailing interests of different groups of Member States, protected former colonies and overseas territories, and Latin American exporters.

At root the controversy is not limited to a mere dispute between preferred and non-preferred producers of a specific agricultural commodity. Rather a bulwark

DAVID G. RABOY, TERI L. SIMPSON and BING XU are from Patton Boggs, LLP, Washington DC. They would like to thank two anonymous referees for their helpful comments on an earlier draft of this paper. I On 5 October 1994, the Court of Justice dismissed a case by Germany against the EU banana regime.

0 Blackwell Publishers Ltd. 1995, 108 Cowley Road, Oxford OX4 IJF, UK and 238 Main Street, Cambridge, MA 02142, USA. 565

566 DAVID G. RABOY, T E N L. SIMPSON AND BING XU

of European foreign and economic policy regarding former colonies, the LomC Convention, is being called into question. This Convention, which has provided trade preferences to former colonies in Africa, the Caribbean, and Pacific regions (ACP countries), expires at the end of the decade, and ACP and European officials meeting in Swaziland in May 1994 to discuss LomC, agreed that the current format is unsustainable.*

Although LomC covers many products, the banana controversy is particularly compelling because one set of LDCs, from Latin America (so-called ‘dollar- zone’ producers), has challenged the right of the EU to bestow preferences on another set of LDCs, the ACPS.~ The debate is being closely watched by other LDCs competing with preferenced ACPs in various EU markets, and the outcome of the banana dispute may signal the future of the entire system of LomC preferences. Recently the EU/ACP Joint Assembly communicated with the Contracting Parties to the GATT requesting a derogation from the GATT rules for the LomC Convention. At this writing no decision has been rendered. Even if a GATT waiver is granted, however, the EU must still address the questions of the most efficient way to provide trade preferences.

In this journal, Read (1994) described many of the issues associated with the EU banana regime, including how the EU was tasked with attempting to combine twelve individual regimes for twelve Member States into one unified regime as part of the Single European Market (SEM). He also attempted to analyse whether the SEM banana regime was more protectionist than the twelve regimes it replaced, and whether the SEM regime was an efficient mechanism to address the conflicting policy goals of internal liberalisation, increased consumer welfare, maintenance of ACP preferences, and GATT compliance. He concluded that alternatives would be more efficient than the existing SEM banana regime while noting that a description of such a system was beyond the purview of his paper.

Both the twelve individual regimes and the SEM replacement contained a combination of tariffs and quantitative import restrictions. Without a quantification of the protection levels from these quantitative restrictions, which Read lacked, it is impossible to determine which regime was more protectionist. More fundamentally, such a quantification is a prerequisite to the construction of a more efficient and sustainable system of preferences and/or aid, which could be devised as a successor to the existing preferences under LomC or a transition from LomC.

* ‘Lorn6 under Review’, Financial Times (16 May 1994). In 1992, five Latin American countries asked for a GATT dispute-resolution panel to review the

then existing banana regimes. The regimes were found by the panel to be GATT inconsistent. When the existing regimes were replaced with a single regime in 1993, a second panel was requested. The replacement regime was also found to be inconsistent with the GATT because of the preferential tariff provisions contained in the single regime.

0 Blackwell Publishers Ltd. 1995

THE LOME CONVENTION AND THE EU BANANA REGIME 567

The purpose of this paper is twofold. First, using a methodology to calculate the tariff-equivalent to quantitative restrictions on commodity trade when there are quality differences (Raboy and Simpson, 1992), we calculate the tariff- equivalent to the quantitative restrictions associated with six of the twelve individual pre-SEM banana regimes. Combining this tariff-equivalent with pre- SEM tariffs, it is possible to assign an aggregate level of protection and to determine whether the pre- or post-SEM regime was the more protectionist. The determination of the aggregate level of pre-SEM protection among groups of Member States then provides the basis for a construction of a proposed transition regime including a more efficient preference system for ACP trade, and an aid system to improve the ability of ACP banana producers to compete under free- trade, or to allow a transition to other endeavours. The proposed system can serve as a transition model for other areas of ACP preference under LomC where quantitative restrictions or other non-tariff barriers are employed .4 Section 2 describes the LomC Convention and the various iterations of the EU banana regime. Section 3 calculates the tariff-equivalent to the pre-SEM regimes and addresses the question of protection levels pre- and post-SEM. Section 4 outlines a ‘trade and aid’ approach to replace the existing banana regime with a specific programme of a single tariff and producer aid.

2. LOME AND THE EU BANANA REGIME

Since its earliest days, the Member States of the former European Community (EC) have for foreign policy reasons sought means to assist the development of their recent former colonies. To this end, the EC established a series of agreements for privileged market access for the products of those countries, including the four LomC Conventions. The LomC Convention currently in force, LomC IV, was signed in 1989 by the twelve EC Member States and by 69 ACP nations, and is set to expire in 1999. LomC IV is a complex blend of various arrangements including price stabilisation, direct development assistance, and non-reciprocal tariff concessions, and like its predecessors, includes a Protocol on bananas .5

Until July of 1993, each individual EC Member State maintained its own banana trade regime. These varied from a perfectly open market in Germany to a

For instance, the EU Common Agricultural Policy (CAP) for rice contains a system of variable levies, deemed to be non-tariff barriers under the GATT Final Act. The rice CAP contains a system of preferences for ACP long-grain rice. Should vestiges of non-tariff barriers remain in the rice CAP, this procedure could appropriately apply.

The Protocol provides that ‘in respect of its banana exports to the Community markets, no ACP State shall be placed, as regards access to its traditional markets and its advantage in those markets, in a less favourable situation than in the past or at present.’



virtually closed one in France. All of the Member States except Germany applied a common external tariff of 20 per cent, which did not apply to imports from EC overseas territories and ACP countries, but did apply to dollar-zone imports from Latin America. Quantitative restrictions were also imposed on dollar-zone imports by the United Kingdom, Italy, France, Spain, Portugal, and Greece.

The UK imposed on Latin American bananas the 20 per cent EC tariff and licensed quotas. ACP bananas were exempt from the EC tariff and were not restricted by quota. In principle, ACP countries were treated equally under this regime. In practice, three former British colonies; the Windward Islands, Belize, and Jamaica; and one former Dutch Colony, Surinam; received preferential treatment (Fitzpatrick, 199 1). In Italy, under the previous regime, dollar-zone bananas were subject to the 20 per cent EC tariff and an annual import quota. Imports from EC and ACP producers were not restricted by quota and entered duty free, but they were subject to import permits. Parallel to the UK’s preferred treatment of its former colonies, Italy granted preference and unlimited access to Somalian bananas. Imports from third countries, mainly dollar-zone countries, were subject to an annual quota. France imposed the 20 per cent EC tariff on imports of Latin American bananas and required that they be licensed. Although no formal quota existed, France informally reserved two-thirds of its banana market for imports from its French Overseas Departments (Martinique and Guadeloupe) and one-third for imports from African franc-zone countries (Cameroon, Cote d’Ivoire and Madagascar). These bananas entered France duty free. When import prices exceeded a threshold level, licences were granted for the import of dollar zone bananas. Spain, Portugal, and Greece were supplied primarily by domestic production and from their overseas territories - Spain from the Canary Islands, Portugal from Madeira, and Greece from Crete. In general, ACP production was treated like protected domestic production against external competition from Latin America in the six countries that employed quantitative restrictions.

Throughout 1993, the EC took major new steps toward integration, symbolised by the change of its name to the European Union on 1 January 1994. Although the Community had already implemented a unified trade regime in most respects, its banana trade regimes were a glaring exception. On July 1 1993, the Community replaced individual trade regimes governing the import of bananas with a common policy embodied in Council of Ministers Regulation 404/93 (CR 4041 93). CR 404/93 imposes a fixed tariff-quota of 857,000 tonnes on bananas from ‘traditional’ ACP sources, to which duty-free treatment is extended. Over-quota (‘non-traditional’) ACP banana imports are subject to a specific tariff of ECU 750, which is about 150 per cent ad valorem. EU and overseas territories (DOM) producers have unlimited access to the EU market; however, aid to EU/DOM producers is limited to a quota of 854,000 tonnes. As for imports of bananas from third countries, including the producers in Latin America, CR 404/93 imposes



a two million tonne tariff-quota, a specific in-quota tariff of ECU 100 (approximately 20 per cent ad valorem), an over-quota tariff of ECU 850 (approximately 170 per cent ad vatorem), and an import licensing system.6

In its country schedule of Uruguay Round agriculture concessions, the EU included CR 404/93 with three important modifications. First, the quota for third country bananas was increased to 2.2 million tonnes. Second, 54 per cent of this quota was allocated to four Latin American countries via country-specific quotas, leaving a ‘global’ quota of 46 per cent for the remaining third-country exporters. Third, not only would the EU GATT offer provide for import licences to be distributed in accordance with CR 404/93, but it also would allow Latin American producing countries to require export licences for 70 per cent of their country quotas.’ In effect, the licences would not be required for importers of traditional ACP bananas now importing from Latin America, but would be required for traditional importers of Latin American bananas. The contemporaneous EU justification for this licence requirement dichotomy was to limit the putative market power of US multinationals. It is unclear, however, how restrictive trade regimes are preferable to market discipline in preventing concentrations.8

The import licences are to be distributed as follows: 66.5 per cent to operators who have marketed third country and/or non-traditional ACP bananas in the past (‘Category A’), 30 per cent to those who have marketed EC and/or traditional ACP bananas (‘Category B’), and 3.5 per cent to new operators marketing non-EC or non-traditional ACP bananas after 1 January 1992 (‘Category C’). ’ This corresponds to the volumes available to Category A and Category C operators defined in CR 404/93. It means that European companies like Fyffes and Geest, which have traditionally exported from ACP countries and not from Latin America, and which therefore are in Category B, would be permitted to export from Latin America without licences. Other companies, virtually all North and South American, would be restricted from exporting bananas without having obtained such export licences.

Whereas the market shares of US-owned companies appeared high in the restricted pre-SEM regimes, the contrast to the free-trade regime in North America is striking. Latin American-owned multinational companies have been highly successful in achieving substantial market penetration in the North American free-trade environment. In 1981, Latin-owned banana companies supplied only 12 per cent of the North American market. By 1993, vertically integrated, Latin-owned multinational companies accounted for 47 per cent of the North American market.

Of this 47 per cent market share, 18 per cent was attributed to Del Monte, since 1991 owned by Mexican nationals. The other 29 per cent accrues to Colombian and Ecuadorian multinational companies such as Turbana, Noboa, and Banacol. These companies own substantial production assets, are fully integrated through all levels of the production/transportion/distribution chain, and were developed entirely with private Latin American capital.

In the case of bananas, market power would require high concentration levels in the US ownership of Latin American banana plantations producing for export. Whereas this may have existed in an earlier period, 80 per cent of the banana export plantation area in production in 1992 in Latin American was owned by independent producers and Latin American-owned multinationals.

In Colombia, 40 per cent of the production area was owned by Latin-owned multinationals and 48 per cent was owned by independents - the remaining 12 per cent was divided by the US companies. In Costa Rica, 27 per cent of producing facilities were owned by Latin-owned multinationals and 41 per cent were owned independently. In Nicaragua, US multinationals had no presence in 1992, and in Venezuela, where US company investment is not apparent, Latin-owned


570 DAVID G. RABOY, TERI L. SIMPSON AND BING XU

3. THE AGGREGATE LEVEL OF PROTECTION IN THE PRE-SEM BANANA REGIMES

As discussed in Read (1994), there were three qualitatively different groups of

Group 1: Germany with no tariff and no quantitative restrictions; Group 2: Belgium, Luxembourg, Denmark, Netherlands, and Ireland which

imposed the Community-wide 20 per cent tariff; and Group 3: Italy, UK, France, Spain, Portugal, and Greece which imposed

quantitative restrictions as well as the 20 per cent tariff.

The first step in determining the aggregate level of protection under the pre- SEM regimes is to calculate the tariff equivalent to the quantitative restrictions in the six relevant countries. This is done using a methodology suggested in Raboy and Simpson (1992), which is consistent with the ‘price-gap’ methodology incorporated in the GATT Final Act (1993). The Final Act defines the tariff equivalent to a non-tariff barrier to be the difference between representative internal and external market prices, after these prices have been adjusted for distorting factors such as quality differences.

The Final Act tariffication methodology was developed to reflect conditions under which non-tariff barriers could be reduced in single countries, rather than across several countries. The pre-SEM banana regimes were unique for several reasons. First, although there were common aspects of eleven of the twelve pre- July regimes (such as the 20 per cent tariff), there were also qualitative differences. Different countries employed different licensing arrangements. More fundamentally, only six of the countries imposed quantitative import restrictions, and the nature of the restrictions differed from country to country. The Final Act provisions relating to tariff-equivalents apply to only six of the twelve regimes. A basic decision must be made as to how to apply tariffication to an amalgamation of twelve individual regimes so as to produce one tariff-equivalent .

A further complication is the notion that, although some of protected banana production is sourced from territory that is formally a part of the EU, much of it is not. Concepts such as ‘internal price’ must be adjusted to include protected imports from ACP countries.

banana regimes prior to the SEM:

multinationals from Colombia have been highly successful in establishing joint ventures. US companies own minor shares, or no share, of the banana export production facilities in these four countries.

Latin American-owned multinationals have also emulated the product differentiation strategies of US companies. They diversify their sourcing across several countries, have developed sophisticated quality control and transportation systems, and have established competitive marketing organisations capable of selling quality produce at premium prices to the most demanding customers.



These complications imply that the concept of the tariff-equivalent to the pre- SEM regimes will be substantially less precise than in other agricultural situations involving only one country. Such problems, however, are sufficiently surmountable to produce an acceptable result. The key step is to logically define ‘domestic’ production to be all protected banana imports. A second necessary assumption, that which produces the greatest loss of precision, is to amalgamate all of the markets in which there were quantitative restrictions, even though the nature of the quantitative restrictions might differ.

One tariff equivalent for all of the pre-SEM banana regimes was calculated for the period 1990 through 1992. Monthly data was available over this period (Eurostat) which allowed for proper modelling of the quality-related price premia necessary to adjust prices. First, an unadjusted tariff equivalent was calculated. This was then adjusted by a quality coefficient.

As previously noted, the non-tariff barriers that are the focus of the tariffication exercise existed in six EU countries. Protected production included domestic EC banana production, production in DOM countries, and ACP production. Accordingly, the logical choice for a representative ‘internal’ price for tariffication purposes is a trade-weighted average of the prices of all protected production over the period 1990 through 1992 that was shipped to all six EC countries.

If ACP and EU/DOM bananas are considered protected ‘domestic’ production, then dollar-zone bananas are ‘external’ production. The external price for tariffication purposes must be the best representation of the price that would exist under free trade. The logical choice here is the trade weighted average c.i.f. price of dollar zone bananas imported into Germany. The weights in this calculation are the relative quantities of banana imports sourced from the various Latin American countries.

It is widely accepted that Latin American bananas are currently of a higher quality than those sourced from EU/DOM and ACP areas. Of concern is whether a price-gap calculation measures only the effects of the non-tariff barrier, or is distorted by price differences that would occur under free trade. A methodology exists to adjust tariff equivalents for systematic quality differences among otherwise competing goods. The adjustment methodology includes: (1) the development of a testable hypothesis to explain quality-related price differences under free trade; (2) identification of a comparable market to test its hypothesis; (3) the use of econometric methods to calculate systematic price premia; and (4) adjustment of the tariff equivalent by the estimated quality coefficient (Raboy and Simpson, 1992).

There are any number of factors that affect the quality of banana~ .~ There is also a good candidate for a market where the quality hypothesis can be tested. In

The origins of quality differences are evident in the evolution of dollar zone banana exports to



Italy, in the pre-SEM period, ACP and dollar zone bananas were sold side-by- side in significant quantities. This was not the case in other EU countries or there are problems with data . that would complicate premia calculations. lo The distribution networks in Italy were such that even with the 20 per cent community-wide tariff applied to dollar-zone bananas, the market was free to set the relative prices of ACP and dollar-zone bananas at the wholesale level. Accordingly, a comparison of the point-of-first-inland-sale prices would reveal any quality-related price differences. Figure 1 compares the weighted-average tariff-inclusive prices of Latin American bananas and ACP bananas over the period 1990- 1992 and illustrates the price premium accruing to dollar-zone bananas.

An hedonic pricing model was used to test for statistically significant, consistent, quality-related price differences between tariff-inclusive dollar zone and ACP-source bananas in Italy. The data (Eurostat) included monthly prices by source for dollar zone and ACP bananas. There are 334 data points in the data set. The equation that was estimated was:

I - 1 I - 1

In Pip = c + ,E Q ~ D ~ ~ , ~ ~ ~ ~ ~ ~ + c fljD(i,year + trend + E 1 = I j = 1

where

North America. Similar influences affect the EU market. In the North American trade three important characteristics have been identified that relate to quality or quality assurance, and that vary from company to company. These are physical quality characteristics; including especially freedom from bruises, and ripening predictability; delivery reliability; and company-provided marketing and technical support. Bananas are shipped green under controlled temperature conditions that postpone and regulate the ripening process. Ripening predictability is affected by the method of transportation over the trans-ocean voyage. There are many other quality control aspects of the banana growing process that may vary from country to country. These include the choice if banana variety, natural growing conditions, insecticide and disease-control technologies, and other factors. l o For instance, in the UK, dollar zone and ACP bananas were also sold side-by-side in proportions the reverse of Italy. Through 1988, however, there were only three authorised importers for afl bananas. More recently, a relatively small dollar-zone quota has been granted to independent ripeners, but this amount is less than half of dollar-zone imports. Accordingly, the overwhelming majority of dollar-zone and ACP imports are dominated by three companies. The result is that the quality premium does not show up in the c.i.f. price, but is apparent in wholesale prices, the premium being captured by the importer. For instance, in 1989, the average c.i.f. price in the UK for ACP bananas was Ecu 707 while the tariff-inclusive average c.i.f. price for dollar-zone bananas was a lower Ecu 598. But at wholesale, the dollar-zone price was over Ecu 1 ,OOO while the ACP price was Ecu 944 (GIEB, 1990).

In Italy, sufficient competition among importers occurs so that price premia show up in c.i.f. prices. Thus, there is a good data set (Eurostat monthly observations) to use in an hedonic model. Sufficient data on wholesale prices in the UK does not exist to use in our hedonic model. Anecdotal evidence, however, from GIEB (1990) and 1993 Eurostat indicates that the UK dollar-zone quality premium is of a similar magnitude to that in Italy.



FIGURE 1 Dollar Zone Versus ACP Banana Prices for Italy

Ecu/kg

0.80 1 0.70

0.60

0.50

0.40

0.30 - 0.20 ‘ - ‘ . l . ’ . l . l ’ l . l . l . l . l . “ l . l . l . l ” . l ~

J M M J S N J M M J S N J M M J S N 1990 1991 1992 I I Latin qmerican I

Source: Eurostat 1990-92

TABLE 1 Calculation of Quality Price Coefficient for Latin Bananas Relative to ACP

Variable Coeflcient Standard Error T-Statistic

Constant - 0.7378 0.0209 -35.35 Latin 0.1971 0.0168 11.73 Trend -0.004 O.oO08 -4.98

R2 = 0.5154 DW = 2.05 F = 87.49

pijt

c = a constant, D(i,source = a dummy variable denoting source, D,,, = a dummy variable denoting year, and Trend = a monthly trend variable.

Regressions were run for source countries individually and for two sources only: ‘Latin’ and ‘ACP’. By omitting one source dummy the coefficient on the remaining source dummies provide the quality premia, relative to the omitted source. The results of the ‘two-source’ equation are reported in Table 1. Latin bananas sell at a highly statistically significant 20 per cent premium over ACP bananas in Italy.

= the price of a metric ton of bananas from source i, in yearj, in month t ,



The 20 per cent quality premium evident in Italy is assumed to pertain to all EU Member States. The preliminary data from the post-SEM regime indicates that this assumption is not out of line.'' The external price for tariffication purposes, therefore, must be lowered by 20 per cent to remove the distortion caused by quality adjustments. Table 2 provides the calculation of the quality adjusted tariff-equivalent to the quantitative restrictions that existed in the six relevant countries, using the price-gap method.

The aggregate protection levels in the three groups of countries, pre-SEM, can now be determined. Group 1, of course, has a zero protection level; Group 2 has a 20 per cent tariff, and Group 3 has an 83 per cent tariff (20 per cent simple tariff plus 63 per cent tariff-equivalent). Based on total banana trade in the EC over the period 1990- 92, the trade-weighted average level of protection under the pre- SEM regimes was 47 per cent.

In order to assess whether the pre- or post-SEM regimes were more protectionist, ideally a tariff-equivalent to post-SEM quantitative restrictions would be calculated and added to the new community-wide ECU 100 tariff. At this writing, however, sufficient data does not exist for that exercise.13 It is

TABLE 2 Quality Adjusted Tariff-Equivalent to pre-SEM Quantitative Import Restrictions (in EcuImetric

tonne)

1990 1991 I992 Average

ACPIEUIDOM Price 680 710 660 683 Latin American c.i.f. Price 486 5 10 440 477 Quality Adjusted Latin Price 384 408 352 381 Quality Adjusted Price Gap 296 302 308 302 (Specific Tariff) Ad Valorem Tariff 62 % 59 % 70 % 63 %

I' Monthly Eurostat data exists for the first six months of the post-SEM regime. This data is not sufficient for a proper hedonic model, and transition problems will certainly distort the data. Nonetheless, anecdotal evidence exists to compare the landed costs of ACP and dollar zone bananas. In the UK, the premium was of the order of 10 per cent. In Germany, it was 16 per cent. In France, the premium was higher than 20 per cent. These estimates are based on thin trading volumes in some cases and should not be taken literally. The 20 per cent assumed quality premium accruing to dollar zone bananas appears, however, to be reasonable for tariffication purposes. '* The problems associated with aggregating markets for tariffication purposes have already been discussed. An empirical complication of such an exercise stems from the implicit assumption that income and demand elasticities are the same in the six countries with pre-SEM quantitative restrictions and Germany. This necessary simplifying assumption may affect the tariffication robustness. l 3 CR 404193 was implemented in July of 1993. Thus at the time of writing there is six months' data available, but the current data reflects much uncertainty and relevant adjustments have not occurred. The GATT agreement contains substantial modifications to CR 404/93 which when implemented will cause further adjustments.



possible, however, to make some observations about the pre- and post-SEM regimes. First, importation of dollar-zone bananas into Germany, Netherlands, Belgium, Luxembourg, Denmark, and Ireland were unlimited in the pre-SEM era, subject only to the 20 per cent tariff in the latter five countries. This is in direct contrast to the EU-wide quota in the post-SEM regime. To compare the two regimes, however, one could assume for the sake of argument that the actuul import levels in the countries without quantitative restrictions, pre-SEM, represented binding quotas. This counterfactual could then be compared to the post-SEM regime.

Using 1992 trade levels, the counterfactual could be described as follow^:'^ 1.37 tonnes entered duty free, 0.43 million entered at a 20 per cent tariff, and above 1.8 million tonnes, all imports entered the EU at an 83 per cent tariff level. This can be contrasted to CR 404193. Under this regime, two million tonnes can enter at approximately a 20 per cent tariff, and anything above this quota is subject to approximately a 170 per cent tariff.I5

Other than the region between 1.8 and 2 million tonnes, tariffs are always the same or higher under the post-SEM regime. At the margin, however, bananas faced an 83 per cent tariff under the pre-SEM regime, while.the marginal tariff is 170 per cent under the post-SEM regime. Trade occurred at the pre-SEM marginal tariff level, it has not under the post-SEM marginal tariff level.

Even under the counterfactual where trade levels associated with pre-SEM regimes are considered as quotas, the logical conclusion is that the post-SEM regime is a more protectionist regime. Of course, this conclusion is strengthened in light of the reality that dollar zone bananas faced no quantitative restrictions in six of the twelve pre-SEM regimes, accounting for about 75 per cent of pre-SEM dollar zone imports.

4. A PROPOSED TRANSITION REGIME

Read (1994) argues that the quota system embodied in CR 404/93 is inefficient and innately inferior to a system based on tariffs and/or production subsidies. This section uses the tariffcation analysis in Section 3 to construct a proposed transition system, based on a single tariff and producer subsidies to replace CR 404/93. The system is illustrated with reference to a 1990-92 base period. Following a description of the quantitative aspects of the proposed system, the political viability of such a system will be discussed in the context of the current political environment.

As derived in Section 3, the average level of protection in the EC pre-SEM was equivalent to a 47 per cent tariff. Therefore, the first element of a proposed

l 4 In 1992, total dollar-zone banana imports were 2.41 million tonnes (Eurostat). Is Under the GATT proposal, the quota would be 2.2 million tonnes.



transition regime is a 47 per cent tariff on all dollar-zone bananas imported into the EU. All quantitative restrictions would be repealed. The 47 per cent tariff enhances ACPfDOM competitiveness in Germany, Luxembourg, Belgium, Netherlands, Denmark and Ireland; relative to the pre-SEM regime; but renders protected bananas less competitive in the six countries with pre-SEM quantitative restrictions.

A system of producer subsidies is therefore designed to initially make ACP/ DOM producers financially whole. The first step is to derive the price at which ACP/DOM producers would be forced to compete with dollar-zone bananas. This is done with reference to the 1990-92 base period. During this period, the average c.i.f. price of unrestricted dollar-zone imports was Ecu 476. If a 47 per cent tariff were levied, the tariff inclusive price of dollar-zone bananas would be Ecu 700. But it is assumed that dollar-zone bananas enjoy a 20 per cent quality- related price premium over ACP/DOM bananas. On a quality-equivalent basis, therefore, ACP/DOM bananas would be effectively competing against a landed price of Ecu 560 for dollar-zone bananas.

Given the average c.i.f. prices of ACP/DOM bananas over the base period, the level of subsidy that would allow ACP/DOM producers to compete with dollar- zone bananas and remain whole financially can be calculated. The required compensation level is simply the gap between the ACP/DOM c.i.f. price and the competitive dollar-zone price of Ecu 560 (the competitive margin), multiplied by ACP/DOM average volumes in the base period. Table 3 shows this calculation for various ACP/DOM countries.

This calculation in no way relates to the level of aid that might be necessary to make ACP banana industries viable. It merely reflects the level of compensation necessary to maintain the status quo. In the illustration, dollar-zone bananas are landed at a tariff-inclusive, quality-adjusted, effective price of Ecu 560. Thus, the market would be indifferent between paying the actual landed cost of dollar-zone bananas, or purchasing ACP/DOM bananas for Ecu 560. The required compensation is the extra amount necessary to remunerate ACP/DOM producers at the 1990- 92 c.i.f. price levels given that they are constrained to sell bananas at no more than Ecu 560/tonne.

Table 3 also shows that the proposed aid package would cost about Ecu 160 million per year, based on 1990-92 prices and volumes. On a static revenue basis, the 47 per cent tariff would raise close to Ecu 300 million annually, net of the proceeds associated with the Ecu 100 in-quota tariff of CR 404/93. Thus the proposal would be a net revenue raiser to the EU.

It is beyond the scope of this paper to discuss the structure of a proper aid package or the proper distribution of the compensation. Certainly one would want to structure it in as non-distortionary a fashion as possible - inefficient producers should not be artificially encouraged to remain in business. Funds could be used for development purposes both in and out of the banana business,

@ Blackwell Publishers Ltd. 1995

c P

TABL

E 3

Cal

cula

tion

of R

equi

red

Ann

ual

Com

pens

atio

n Le

vels

for

AC

PlD

OM

Ban

ana

Prod

ucin

g C

ount

ries

(All

Pric

es in

Ecu

s pe

r To

nne,

V

olum

es in

Ton

nes)

Con

stru

cted

Ta

ri&

Incl

usiv

e $ Z

one

Wei

ghte

d A

vera

ge

$ Zo

ne C

ompe

titiv

e C

ompe

titiv

e A

CPI

DO

M A

vera

ge

Ann

ual R

equi

red

Com

pens

atio

n A

CPI

DO

M

c. i.$

pr

ice:

199

0-92

Pr

ice:

199

0-92

M

argi

n V

olum

e: 1

990-

92

Lpve

l (E

cus)

C

ount

ry

Can

ary

Isla

nds

840

560

280

346,

434

96,9

83,1

26

Ivor

y C

oast

65

0 56

0 90

11

9,32

0 10

,732

,465

C

amer

oon

630

560

70

101,

415

7,09

3,66

5

Cap

e V

erde

600

560

40

2,53

4 10

1,22

5

Som

alia

* 47

0 56

0 0

22,0

48

0 B

eliz

e 51

0 56

0 0

24,0

50

0 G

uade

loup

e 600

560

40

101,

731

4,06

3,83

9 D

omin

ica

640

560

80

54,3

55

4,34

5,51

4 M

artin

ique

62

0 56

0 60

20

0,43

9 12

,O 1

5,69

8 Ja

mai

ca

670

560

110

69,3

75

7,62

7,56

7 St

. Lu

cia

640

560

80

117,

820

9,41

9,34

4 St

. V

ince

nt

650

560

90

72,5

16

6,52

2,59

0 G

rena

da

640

560

70

7,46

3 59

6,64

4

Tota

l 1,

267,

966

159,

501,

676

Surin

am

500

560

0 28

,466

0

Not

e:

* Dur

ing

this

peri

od, c

ivil

war

in S

omal

ia d

ecim

ated

the

bana

na in

dust

ry. A

ccor

ding

ly, t

he n

umbe

rs fo

r So

mal

ia a

re n

ot r

epre

sent

ativ

e of

pote

ntia

l act

ual

pric

es o

r co

mpe

nsat

ion

leve

ls.

M

d


or for lump-sum income support^.'^ Both the tariff and aid package should be subject to a phase out. Initially, however, it is clear that a tariff of the proper magnitude, one which provides the average level of protection associated with the pre-SEM regimes, would also provide sufficient revenue for a viable aid package. A second line of inquiry concerns the political viability of a trade and aid proposal. The positions of the antagonists in this negotiation are very tightly held.

The primary parties with interests in the EU banana regime can be divided into five groups: (A) EU, ACP, and DOM producers; (B) EU importing companies; (C) Latin producers and Latin-owned exporting companies (including transnationals); (D) US transnational companies; and (E) EU countries (traders and consumers) who previously had no quantitative import restrictions on bananas. Typically, groups A and B are viewed as being allied in favour of CR 404/93 and groups C, D, and E are considered to be opposed, preferring free trade in bananas (Pedler, 1994). The core interests of these groups, however, are quite complicated. Group A primarily desires to have guaranteed trade at remunerative prices. Accordingly, binding quantitative restrictions are preferred to tariff-equivalents. Group B is probably the greatest beneficiary of CR 404193 in that the regulation creates quota rents which can be captured by EU importers through the licensing system. This group would clearly be made worse off under tariffication where quota rents were captured as tariff revenue, unless a significant portion of the revenue were somehow channeled to them. Group C has been split in two. In general, due to their comparative cost advantage, Latin producers would prefer a free trade situation. If quotas are to exist, however, then some Latin producers have decided that export licences will allow them to capture some quota rents. Finally, groups D and E clearly do better under free trade.

It is fair to say that groups A and B consider highly managed trade as their best case scenario and the other three groups similarly would view free trade as their first choice (Pedler, 1994). Obviously, these two positions cannot be reconciled. A compromise consensus depends on the satisfaction of the minimum elements that each group needs.

Group A will not be satisfied with a system that simply compensates them for the demise of their banana industries through an aid system. In some ACPs, there are no current viable substitutes for banana production, and the economies are heavily dependent on the banana industry. Such countries must maintain trade in bananas. If quotas cease to be defensible, then a high tariff that protects some level of trade would be an attractive fall-back position. It is unlikely that the

'' There are three areas cited as resulting in a lack of ACP/DOM competitiveness: labour compensation/productivity , transportation, and topography. Investment can certainly enhance ACP/DOM labour productivity, land yields, transportation systems and product quality. Topography, however, will remain a problem.



ACPS would embrace tariffication over quotas, but tariffication is certainly preferable to them than free trade.

Would groups C and D, representing the dollar-zone producing and exporting sector, accept a high tariff in trade for the removal of quotas? As Table 3 shows, even with a 47 per cent tariff, dollar-zone bananas would successfully compete against most ACP bananas. The dollar-zone producer/exporter sector believes that tariffication would provide an acceptable middle ground between an administered market and an open one.''

The United States government has also weighed-in on this issue, urging that the EU adopt a scheme involving a single tariff and an aid scheme." The US referred the EU to a proposal contained in a 1992 World Bank study (Borrell and Yang, 1992).

Tariffication and aid might be an acceptable compromise for ACP/DOM producers, Latin producers, US- and Latin-owned banana export companies, and European governments in countries without prior quantitative restrictions. There is no obvious benefit, however, to one important group that seems to have had the upper hand in the construction of CR 404/93 - EU importing companies. These companies mounted an effective lobbying campaign that ultimately led to the adoption of CR 404/93 (Pedler, 1994). This campaign included reversing a trend towards tariffication of the pre-SEM banana regimes in favour of a quota system in the early deliberations on a combined regime. In order for the importing companies to accept a trade and aid proposal, either tariff revenue through the aid package would have to be made available to EU importers of ACP/DOM fruit, as well as producers, or private commercial transactions (mergers and/or joint ventures) would be necessary to internalise the problem associated with loss of quota rents.

Replacement of the existing administered trade regime in bananas with a single tarifflaid system will be a difficult political undertaking. Nonetheless, a trade and aid package seems to satisfy more of the minimum requirements of the affected parties than other compromise possibilities, and certainly is a more efficient way to advance trade preferences.

5. CONCLUSION

Twelve individual banana regimes existed in the EC prior to the formation of the SEM. These were characterised by varying degrees of tariffs and quantitative

" One of the authors, David Raboy, has had discussions with officials of the governments of Costa Rica, Guatemala, Colombia and Honduras in capitals and/or these countries' missions to the EU in Brussels, and to the GATT in Geneva. The impression from these discussions is that a tariff level of the order of 47 per cent would be an acceptable price to pay to dismantle the quota system. Is Letter from US Trade Representative Mickey Kantor to Vice President Leon Brittan of the Commission of the European Community (5 April 1994).



restrictions. This article has calculated the aggregate protection level afforded by these regimes and concluded that the replacement post-SEM regime is more protectionist.

Having calculated the aggregate protection in the pre-SEM regimes, the paper then suggests a system employing a single tariff and producer aid as a more efficient way to provide preferences to ACP producers than the current banana regime. Such a single tariff, ‘trade and aid’ proposal may establish an appropriate model to replace other LomC convention trade preferences employing inefficient non-tariff barriers.

Note that such an approach is appropriate regardless of the outcome for Lome. A trade and aid proposal, by definition, involves preferential tariff treatment for one set of LDCs at the expense of another. It is beyond the scope of this paper to discuss whether as a policy matter, this type of preference is desirable. This paper is limited to the question of the most efficient way to advance preferences, once it is determined that one set of LDCs is to be favoured.

There are several examples of discrimination among LDCs in the current trade environment. One example is the United States’ Caribbean Basin Initiative (CBI) which discriminates in favour of Western Hemisphere LDCs. A GATT waiver was required for CBI.

Regardless of whether the EU desires to maintain the existing set of LomC preferences, or replace them with a trade and aid approach including tariff preferences, a GATT waiver will most likely be necessary. As previously mentioned, the EU has already requested a waiver for LomC. But some waivers are more easily achieved than others. In a communication from the US government to the EU, for instance, it was made clear that whereas the US opposed CR 404/93, ‘if the EU adopted a GATT consistent import system, GATT members would view sympathetically an EU request for a waiver for the zero tariff preference. ’I9

REFERENCES

Borrell, B. and M.-C. Yang (1992), EC Bananaram (World BanWWashington, DC). Fitzpatrick, J. (1991), Trade Policy and the EC Banana Market - An Economic Analysis (John

GATT Secretariat (1993), Final Act Embodying the Results of the Uruguay Round of Multilateral

Group D’Interet Economique Bananier (GIEB) (1990), The Banana Economy - The Twelve

Pedler, R.H. (1994), ‘The Fruit Companies and the Banana Trade Regime’ (BTR), in Lobbying the

Fitzpatrick and Associates/Dublin).

Tmde Negotiations (December).

Markets in the European Economic Community and their Suppliers, Paris (GIEBIParis).

European Union, R.H. Pedler (ed.), (Dartmouth Publishing Company/Hampshire) .

l9 Letter from US Trade Representative Mickey Kantor to Vice President Leon Brittan of the Commission of the European Community (5 April 1994).



Raboy, D.G. and T. Simpson (1992), ‘A Methodology for Tariffication of Commodity Trade in the Presence of Quality Differences - The Case of Peanuts’, 7he World Economy, 15, 271 - 281.

Read, R. (1994), ‘The EC Internal Banana Market: The Issues and the Dilemma’, 7he World Economy, 17, 219-235.


A Transition Proposal for Lome Convention Trade Preferences: The Case of the EU Banana Regime

Documents

Transcript of A Transition Proposal for Lome Convention Trade Preferences: The Case of the EU Banana Regime