News and Analysis • Volume 14 • Number 1 • February 2010

6. Agreement Takes Bananas out of Tropical Products Debate

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On 15 December, the European Union announced that agreement had at long last been reached with Latin American banana exporters on tariff cuts, thus signalling an end to the WTO’s most protracted dispute. A broader deal on the treatment of tropical products, however, remains controversial.

Since the early 1990s, a number of Latin American countries have successfully challenged different aspects of the EU’s banana import regime, including import quotas and licensing procedures, the level of the bloc’s ‘most-favoured-nation’ (MFN) tariff, and trade preferences granted by the EU to its former colonies in Africa, the Caribbean and the Pacific (ACP countries). While the latter have limitless duty-free access to the lucrative European market, Latin American bananas were subject to an MFN duty of €176 per tonne until the deal was struck in December 2009.

In response to adverse rulings, the EU had already tweaked the regime several times. Quotas were eliminated and import licensing procedures were reformed. That left the level of the import duty and related procedural issues. The latest verdict in 2008 found that the €176/t MFN tariff, set unilaterally by the EU, was still inconsistent with its WTO obligations.

Outline of the Agreement

The Geneva Agreement on Trade in Bananas (WT/L/784) settles a host of issues bitterly fought over for nearly two decades. First, it sets out a schedule for annual tariff reductions until the EU’s MFN duty stands at €114 per tonne (see table below). The initial cut, worth €28/t, went into effect on 15 December 2009.

If a ‘modalities’ agreement is reached in the Doha Round agriculture and industrial market access negotiations before end-2013, the final €114 tariff will apply as of 2017. If there is no agreement by that deadline, the duty will be frozen at its 2013 level (€132/t) for two years at most. Cuts will resume earlier if an overall modalities deal is struck in the Doha negotiations.

Second, the EU will bind the tariff cuts in its schedule of market access commitments. Although trading partners may contest the proposed changes until mid-March, the Latin American signatories of the agreement - Brazil, Colombia, Costa Rica, Ecuador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Peru and Venezuela - have agreed not to raise objections.

Third, upon certification of the EU’s modified schedule, Latin American complainants will formally terminate all pending disputes. However, since formal certification could take several months, all dispute settlement actions will be suspended in the meanwhile on condition that the EU sticks to its tariff reduction timeline.

Fourth, Latin American MFN banana suppliers accept the agreement as the EU’s final market access commitment for bananas in the Doha Round farm negotiations.

US, EU to Drop Dispute

The EU and the United States also initialled a separate agreement on 15 December, under which both committed to taking no further action on their pending dispute on the EU’s banana import regime. Immediately after all other parties to the dispute have submitted to the Dispute Settlement Body a notification that they have reached a mutually agreed solution, the EU and the US will do so as well. The EU also promised not to apply any measures that discriminate between suppliers of banana distribution services based on the ownership or control of the service supplier or the origin of the bananas distributed. Although the US does not export bananas to the EU, it had joined the dispute to defend the interests that its transnational marketing companies, such as Chiquita, hold in banana plantations in Latin America.

Preference Erosion and Tropical Products

The dispute was complicated by two intrinsically linked issues. The first was ACP exporters’ strong opposition to further liberalisation of the EU’s banana market, sparked by fears that without a significant preferential margin they would be unable to compete with the more efficient Latin American producers. The second complication arose from the Doha Round negotiating mandates, which provide for the ‘fullest liberalisation’ of trade in tropical products, but also recognise that action should be taken to guard against the erosion of long-standing preferences.

The problem is that many of the products that could be considered ‘tropical’ are among those for which ACP countries have preferential access to the EU. Tensions have run high in WTO negotiations on the products that will be classified as tropical (and therefore subject to deeper and faster tariff cuts), and those that will fall into the ‘preference erosion’ category (subject to standard tariff reductions over a longer implementation period).

If other WTO Members accept the proposed changes to the EU’s market access schedule, the stand-alone agreement effectively removes treatment for bananas - the most controversial issue - from the tropical products vs preference erosion debate.

New Tariff Compromise Proposed

As part of a broader package linked to the banana agreement, the EU, the ACP and Latin American countries have also agreed on tariff cuts on a number of other tropical/preference erosion products that will be undertaken after the conclusion of the Doha Round. The parties will ‘jointly promote’ this approach in the negotiations, but at least India and Pakistan have already expressed some reservations with regard to the proposed extent of tropical product tariff reductions and the length of the implementation period for cutting duties on sensitive products on the preference erosion list.

The tri-partite deal provides for ‘tropical treatment’ for 65 percent of developing countries’ bound agricultural tariff lines contained in the lists of tropical products in Annex G of the 6 December 2008 draft modalities for agriculture (TN/AG/W/4/Rev.4). Developed countries would reduce duties higher than 20 percent by 80 percent, and the tariff lines involved would be negotiated with the exporting developing country concerned. Duties lower than 20 percent would be eliminated.

It would appear from the text that developed countries could include products already bound at zero within the 65 percent of Annex G tariff lines to which they would apply ‘tropical treatment’.

The proposed ‘preference erosion modality’ contains two lists of preference erosion products - a long one (62 items) for the EU and a shorter one (18 items) for the US. These countries would make standard formula tariff cuts on the listed products over eight to ten years, but no reductions would occur in the first two years. Importantly for ACP exporters, sugar, rum, cut flowers, ground-nut oil, tobacco and orange juice figure on both the EU and the US lists of preference erosion products.

More controversially, the modality also proposes an exception for those preference erosion products that either of the preference-giving countries has designated as ‘sensitive’. If the imports of such products are higher than 10 percent of domestic consumption in 2003-2005, the preference-giving country would have seven years to phase in new quotas and to reduce out-of-quota tariffs. The December 2008 modalities draft had set a five-year implementation period for sensitive product tariff reductions.

The tariff package was presented to the General Council on 17 December in a letter addressed to WTO Director-General Pascal Lamy and the chair of the agriculture negotiations, New Zealand’s Ambassador David Walker. Although the United States did not sign the letter, it has not raised any objections so far. Negotiations will continue at the WTO.

Aid for ACPs

The EU committed to providing ACP banana exporters financial assistance worth s200 million over the next three years to help them adjust to the new tariff. The so-called ‘banana accompanying measures’ (BAM) will be additional to regular development aid, and will be “country-specific, build on past support and help tackle the deal’s broader consequences.”

Market Implications

In 2008, the 27-member European Union imported bananas worth €2.9 billion (US$4.2 billion), more than half of the world total. Latin American MFN exporters supplied 72.5 percent of the 5.4 million tonnes of the fruit bought by European consumers, while 17 percent came from ACP countries. The rest were grown in EU territories.

Ecuador, Colombia, Costa Rica and Panama are the largest Latin American suppliers, leaving just over 3.5 percent of the EU’s total MFN imports to be shared between other Latin and Asian exporters. The big four are likely to reap the most benefits under the deal.

Cameroon, Côte d’Ivoire, the Dominican Republic and Belize dominate within the ACP group, and their banana industries are likely to survive, although they are expected to lose market share to MFN suppliers. Many Caribbean countries are preparing to see their banana exports dwindle or cease altogether.

Amidst Rejoicing, ‘Historic Accord’ Bitter Pill for ACP Countries

Latin American MFN exporters expressed satisfaction that a deal had finally been reached. César Montaño of the Ecuadorian mission called it “an historic accord because it puts an end to a misunderstanding among developing countries.” Panama’s Commerce and Industry Minister Roberto Henriquez said his country was feeling “very optimistic regarding the end of these difficult negotiations, where we can say with pride that the Panamanian negotiation team has played a fundamental role.”

Costa Rica’s Ambassador Ronald Saborío Soto noted that the agreement represented “a good equilibrium for the Latin American countries, who will enter into the European market more easily, and because it allows the ACP countries to continue exporting their products.” He also stressed that the deal was a success for “an important number of developing countries that want to have market access as a result of this round. This shows they can obtain the results they seek.”

European Commission president Jose Manuel Barroso professed to be “delighted that we have finally found a way to solve the bananas dispute with a compromise that works for all sides. This is an important boost for the multilateral (trading) system.” The sentiment was echoed by WTO Director-General Pascal Lamy, who applauded the ‘good will and a spirit of compromise’ shown by the protagonists, adding that he hoped “the same pragmatism, creativity and diplomacy will help move forward the Doha Round negotiations.”

ACP countries have been less enthusiastic. Reflecting wide-spread feeling across the bloc, and the Caribbean in particular, a disillusioned editorialist wrote in the Jamaica Observer on 30 December that the real beneficiaries of the deal were “the multinational corporations which dominate the world market. The small farmers of the Caribbean will be worse off and the workers in Latin and Central America will certainly be no better off. The affluent consumers in Europe will get cheaper bananas. No wonder there are so many who question the fairness of the rules of the WTO and there is so much angst about the implications of globalisation for small developing countries.”

At the WTO’s year-end General Council meeting, Côte d’Ivoire cautioned that the package - including bananas, tropical products and preference erosion - was ‘indivisible’, and that unbalancing any of the three pillars must entail a reopening of all parts of the global solution. He also said that further development of African countries’ banana sectors was compromised, and that they would have great difficulty in avoiding decline.

The General Council ‘took note’ of the banana agreement, but did not formally adopt it.