EU banana policy reform and developing countries case study

Bananas are crucial to the livelihoods of millions of people and a major source of export revenue for many developing countries. The major exporters to the European Union (EU) are a number of Latin American economies (principally Ecuador, Colombia, Costa Rica, Panama and Hondurus) as well as specific African and Caribbean countries. For some of these states, banana production for export to the EU is an important economic activity.

The EU's banana regime has been at the centre of international controversy for two decades and it has been one of the longest-running disputes under the GATT and, subsequently, the WTO. The bananas case study illustrates the inefficiency of trade preferences as aid, the way in which reform of EU agricultural policies creates both winners and losers among developing countries, and the important role which policies of development assistance can play in helping adversely affected countries to adjust to new trade and support arrangements.

The EU banana regime for domestic producers

A small amount of bananas are produced in the EU (around 10% of domestic consumption). Production takes place in a number of 'outermost regions' (the Canary Islands, the French overseas departments of Guadeloupe and Martinique, the Azores and Madeira) situated in tropical or sub-tropical areas, as well as very small quantities produced in Cyprus, Greece and continental Portugal. Prior to 2007, banana production was supported through a compensatory aid scheme under which producers enjoyed a guaranteed price up to a specified ceiling of banana production.

Under the reform of the EU’s banana regime in 2006, this compensatory aid scheme was abolished. In the outermost regions, the money was transferred to the POSEI scheme for the establishment of support for banana production under that framework. For producers in mainland Europe, the aid was transferred into the EU’s Single Payment Scheme. The only market support to EU producers now comes in the form of tariff protection against Latin American suppliers.

The EU banana trade regime

African, Caribbean and Pacific (ACP) banana-exporting countries traditionally have enjoyed preferential access to the EU market. Following several WTO disputes and subsequent reforms of its banana trade regime, the EC introduced a tariff-only regime on 1 January 2006 with an applied duty of €176 per tonne which Latin American exporters have to pay, combined with a duty-free tariff quota of 775,000 tonnes for ACP-origin bananas. However, this situation was not deemed satisfactory by the Latin American exporters, and the WTO's Appellate Body ruled against the EU's banana trade regime, most recently in December 2008. It decided that the EU was obliged to rebind and lower its banana tariff rate.

Reform of the EU banana trade regime

In December 2009, the EU initialled an agreement on bananas with Latin American banana exporters, laying down a schedule for the reduction of the EU's tariff on bananas. This agreement settles all pending disputes at the WTO and establishes that the tariff will fall from the current €176 per tonne to €114 over a period of seven to nine years.

ACP banana-exporting countries will continue to enjoy duty-free, quota-free access to the EU market under either the Everything But Arms arrangement or the Economic Partnership Agreements between ACP regions and the EU in force since January 2008. However, the changing tariff arrangements mean that the reduction of the preferential margin for ACP banana-exporting countries will be faster than initially anticipated.

ACP banana exporters have criticised the EU for agreeing to a reduction in the tariff imposed on imports of Latin American bananas. However, academic research has argued that the gains to ACP exporters come at a high cost both to Latin American exporters and to EU consumers who ultimately must pay a higher price. One study suggested that the EU banana regime cost EU consumers $2 billion annually to deliver a net gain of $150 million to ACP exporters (Borrell, 1999).

Preference erosion and the role of adjustment assistance

The EU accepts it has a responsibility to help ACP countries adapt to the effects of changes in the EU's import regime. In the past, the EU extended support to ACP banana sectors by funding the Special System of Assistance (SSA) from 1994 to 1999, and the Special Framework of Assistance (SFA) from 1999 to 2008 under which around €450 million was made available to assist in adaptation and diversification.

To assist ACP countries cope with the next round of the erosion of their preferences, the EU has introduced Banana Accompanying Measures (BAM) to support adjustment to the new banana tariffs in the ten ACP countries that have supplied more than 10,000 tonnes of bananas to the EU on average over the last ten years: Belize, Cameroon, Côte d'Ivoire, Dominica, Dominican Republic, Ghana, Jamaica, Saint Lucia, Saint Vincent and the Grenadines, and Suriname. The measures will last for a proposed maximum of four years (2010- 2013) and have a budget of €190 million, with a possibility of topping up this amount by a further €10 million.

Links:

History of the banana dispute at the WTO
This site recounts the successive challenges to the EU banana regime by Latin American exporters and the EU's responses

Resources:

Anania, G. 2009. How would a WTO Agreement on Bananas Affect Importing and Exporting Countries, Issue Paper No. 21, Geneva, International Centre for Trade and Sustainable Development.
Examines how a reduction in the EU banana tariff will affect exports from the ACP and Latin American exporters

CTA, 2010. Bananas: Trade issues for the ACP
Summarises the outcome and consequences of the 2009 Geneva Agreement on Trade in Bananas for ACP countries