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Back to Subjects - Economics

The USEU Trade War

The USEU Trade War Chiquita Brands International Inc. is best known as the world’s number one distributor of banana’s, which account for more than half of its sales. For the past decade, Chiquita’s sales have dropped dramatically and the company is now on the verge of bankruptcy. Currently, Chiquita is trying to avoid filing for a Chapter 11 by attempting a major financial restructuring of their debt. There are many factors that have contributed to the company’s downward spiral, although all of these factors are linked to the trade barriers imposed by the European Union on banana imports. The European Union enacted import restrictions on banana’s in 1993, and just recently, is attempting to revise the old regime in order to comply with the World Trade Organization. The EU is preparing to introduce a new import system dubbed “first-come first-served” which they believe will be a WTO compatible system. Chiquita filed a lawsuit in January, 2001 against the European Union seeking reparations in the amount of $525 million for their losses that resulted from the old biased import system (Palmer). Chiquita is just one of many companies that were affected by this biased import regime, but some other companies still managed to work around the import restrictions. Chiquita’s rivals, Dole Food and Fresh Del Monte, although bruised as well by the European restrictions and falling banana profits, are in much better shape. Both have managed to increase their market share in Europe, largely at Chiquita’s expense (Alden). Chiquita, however, sought out and fought a political battle against the European Union with the United States government backing them. The old EU import regime was not only an issue for the companies involved, but for the United States as a whole, since it affected banana’s and other agricultural products sold in the US. The regime initially was enacted in 1993, and was later ruled in 1997 to not be in compliance with the World Trade Organization (PR Newswire). The regime was designed in part to protect less efficient banana growers in former European colonies. Chiquita’s management has complained for years that the policies of the EU have cost the company millions by favoring banana’s from Caribbean producers in former European colonies. The EU’s rules were judged to discriminate in favor of growers in EU territories and the Caribbean at the expense of Latin American producers and U.S. marketing firms (Croft). Britain and some other member nations of the EU still want continued protection for banana imports from African, Caribbean, and Pacific states, many of which are former colonies. Chiquita was the hardest hit from this import regime. They dropped from a forty percent market share to less than a twenty percent market share. Normally, this would not have totally destroyed a company, but in the case of Chiquita, it nearly did. Chiquita, more than any of its rivals, invested heavily in the 1980’s to exploit the European market, where a long established system of trade protection allowed bananas to be sold at more than twice the price than in the U.S. More than half of the company’s revenues came from European sales. Just before the imposition of the trade barrier in 1993, Chiquita over-expanded and incurred too much debt as it bought more Central American plantations and built a refrigerated shipping fleet. Other companies were able to easily recover and adapt to the trade barrier. Both Dole and Del Monte recognized quickly that the restrictions would curb sales of Latin American bananas in Europe. They chose to diversify, expand into new markets and buy into African and Caribbean operations that gave them preferential access to the European market. Dole, specifically, took interests in Jamaica, Cameroon, and the Ivory Coast, while at the same time buying up European importers that held the licenses to import under the EU regime. These companies success in Europe depended on their corporate adaptability. Chiquita put themselves at risk by investing so heavily into the foreign market, that they could not easily restructure and adapt to change. Dole and Del Monte realized that they are in business, not in politics, and thus made a sound business decision to adapt to the new policy. Chiquita, on the other hand, pursued a legal and political course. In January of 2001, Chiquita filed a lawsuit claiming damages from the European Commission for not carrying out the EU’s commitment to reform its banana import regime to comply with the 1997 WTO rulings. The Commission’s actions also breach fundamental rights and general principles of EU law, such as non-discrimination and the freedom to pursue a trade or business. The U.S. government also has tried to help Chiquita by asking the European Union to end the barriers against imports of Latin American bananas. The Clinton Administration stepped up the pressure on the EU by imposing retaliatory sanctions on imports from Europe. The EU simply responded to this with threats to strike back with record sanctions on U.S. products. The Clinton administration backed off and did not proceed with the implementation of the newly enacted “carousel” law that would have sanctioned European imports to the U.S. It was not until 1999 that the EU even attempted to mend the problem. In January, in response to the EU’s mandate of WTO compliance, the European Commission amended the banana regime. However, a WTO panel ruled in April of 1999 that these amendments actually perpetuated the WTO incompatibility of the original banana import regime (PR Newswire). With the start of the new U.S. administration, the EU has a real opportunity to improve trans-Atlantic trade relations by ending its protectionist policies and abiding by international trade laws. Every nation has domestic political interests to consider in international trade matters. The world’s trade rules were designed to promote the important global interest of fair trade. The EU is severely harming the cause of free and fair trade. The EU did start to head in the right direction, however, after the Bush Administration threatened to implement the “carousel” law. The “carousel” law was designed under the Clinton Administration, but never put into effect. The law requires the administration to revise the list of EU goods hit with 100 percent duties every six months until disputes over bananas are resolved. They responded by attempting to restructure their import restrictions so as to comply with the WTO. They just recently designed a new import system called “first-come first-served”. Under this system, a banana exporter applies for entry into the European Union market only when its bananas are loaded on a ship, fully documented, and already on the water committed to the European Union. The discrimination of the current illegal system is eliminated because all applicants will be treated equally and each applicant gains market access in the same proportion as every other applicant based on the applicant’s actual commitment of bananas to the European Union (Murdock). They also have promised that this is just their first move toward an open and competitive banana market. They passed a law committing to open its banana market no later than January of 2006. The U.S. government as well as Chiquita is opposed to this new system. Chiquita wants managed trade, a closed market with a guaranteed market share. Under this proposal, licenses would be awarded only to certain importers based on their historical market shares of five to ten years ago. This proposal is flawed, though since there is no fair or legal basis to achieve it. It also sets a bad precedent for other trade negotiations because it continues a managed market instead of an open, competitive system. Chairman of Dole Foods, David Murdock charged that “the continued effort by the US Trade Representative to force a different solution is just a naked political effort to achieve a one-company solution for Chiquita. Chiquita’s ultimate aim is to gain a guaranteed market share that is disproportionately greater than every other participant.” (Alden). This accusation is not entirely fair to the U.S. government. The government may be pursuing the same goals as Chiquita, but they are not doing it only for Chiquita’s benefit. Their trade negotiations will affect every banana producer and even banana consumers at home and abroad. However, Murdock’s claim against Chiquita is well founded. It seems as though Chiquita is trying to unfairly regain its old market share. The companies goal should be movement toward fair trade, but they oppose such propositions. They propose a closed system based on market shares from five to ten years ago, a time when their market share was the greatest. Chiquita does have a valid claim in their lawsuit against the European Commission. The Commission did ignore the WTO and some of the bylaws of the EU, which resulted in further losses by Chiquita. The European Union did recognize their fault in the past decade, and they are attempting to reform toward fair trade. The EU should pay the reparations that Chiquita is seeking, and pursue further trade negotiations with the US with a goal toward a fair, WTO compliant system. Chiquita should focus their attention on their lawsuit and on restructuring their debt. They already have incurred their losses, and they cannot make up for them. The only thing Chiquita can do from here is to move forward with hope of fair trade so that they can once again, gain a significant share in European markets. Currently, the EU and the US avoided a damaging trade fight after the EU agreed to delay implementation of new rules to allocate banana import licenses. The EU did say that unless some other agreement is made, the new “first-come first serve” system will come into force by July first (Palmer). Bibliography: Alden, Edward. Bowe, Christopher. Banana producers fight curbs. Reuters company news. February 15, 2001. Croft, Adrian. Update 1 – EU, Washington in new clash over bananas. Reuters company news. March 8, 2001. Johnson, Tom. Corrected – Update 1 – Large Chiquita shareholder exploring buyout. Reuters company news. February 20, 2001. Murdock, David H. Europe’s step toward free trade. Westlake Village, CA. March 9, 2001. Nolan, John. Banana Company struggling as debts mount. The Associated Press and Local Wire. December 4, 2000, BC cycle. Palmer, Doug. Update 2-US says could target new EU goods in banana dispute. Reuters company news. March 7, 2001. PR Newswire. Chiquita files suit against the European Commission. Cincinatti. January 25, 2001. PR Newswire. U.S. Agriculture Coalition Presses EU to End Protectionist Policies on Beef and Bananas. Washington. March 6, 2001.

Word Count: 1606