ASIL Insights

Agriculture has traditionally been a primary source of economic tension between the United States and the European Union. The dispute over the EU's banana regime has been among the most contentious in recent years. It is also among the more legally and politically complex. 

The dispute involves the EU's regulatory regime for imported bananas, enacted in 1993.(1) Prior to 1992 each of the 12 EU member states had its own banana import regime. Germany operated on a free market system and had no import restrictions. The other 11 members imposed a 20% tariff, and 6 members (France, Italy, Portugal, Spain, Greece, and the UK) also applied quotas on bananas produced in Central and South America. These latter restrictions were designed to protect the EU market for bananas produced in former EU territories and in the ACP countries (developing countries in Africa, the Caribbean and the Pacific) that entered duty free under the Lomé Convention.(2) As part of its 1992 integration program the EU established, effective July 1, 1993, an EU-wide banana trade regime.(3)

Under this complex system banana imports were subject to one of two two-tier tariff rate quota systems based on their country of origin. ACP bananas received duty-free entry up to a ceiling of 857,7000 metric tons, allocated to each of the banana-producing countries on the basis of their historic exports to the EU. ACP imports in excess of this amount paid 750 ECUs per metric ton. Non-ACP bananas were subject to a duty of ECU 100 per metric ton on imports up to 2 million metric tons, and ECU 850 on imports above that amount. Thirty-three and a half percent of the 2 million tons of non-ACP bananas subject to the lower duty of ECU 100 was reserved for European marketing firms, most of which historically had marketed only ACP bananas.

Although the US immediately protested the new banana regime, the first legal challenge was brought not by the US, but by five Latin-American banana-producing countries (Colombia, Costa Rica, Guatemala, Nicaragua, and Venezuela). They initiated GATT dispute settlement proceedings in June 1993. The GATT panel ruled in January 1994 that the EU regime was GATT-illegal. However, as was common under the GATT system that allowed parties to a dispute to block rulings against them, the panel report was not adopted. Rather, the EU negotiated a so-called "Framework Agreement" with all of the complaints except Guatemala that increased and guaranteed the value of their export quotas, in return for their agreement to withdraw the GATT complaint and refrain from further GATT challenges until December 31, 2002. This agreement raised the non-ACP quota to 2.1 million tons in 1994 and to 2.2 million tons in 1995; lowered the in-quota tariff on Latin American bananas by 25% to ECU 75 per metric ton; and allocated specific export quotas to each of the 4 Latin American signatories.

The combined adverse economic impact of the banana regime and the Framework Agreement on US producers with operations in Latin America led them to take action. In September 1994 Chiquita Brands International and the Hawaii Banana Industry Association filed a petition under section 302(a) of the 1974 Trade Act challenging both the EU regime and the Framework Agreement on the grounds that they were discriminatory and reduced US companies' share of the EU market by more than 50%.

The petition was the first section 301 petition filed under the Clinton Administration and as such was regarded as a test of the new Administration's commitment to use US trade laws aggressively to protect US interests. Noting this, fifty members of the House, including members of the leadership, wrote to the US Trade Representative (USTR) urging acceptance of the petition. 

Common Cause released a study at the time identifying the chairman and CEO of Chiquita International Brands, Inc., and affiliated companies and executives as among the largest contributors to the Democratic and Republican parties in the 1993-94 election cycle. This revelation raised questions as to the true motives of the Administration in pursuing Chiquita's case, particularly in light of the fact, much noted by critics, that the Chiquita facilities allegedly injured by the EU banana policy are located outside the US and have a largely non-US workforce. 

Despite the mounting criticism, on October 7, 1994, the USTR initiated an investigation under Section 302 of the Trade Act against the EU.(4) On January 9, 1995, the USTR issued a preliminary determination that the EU banana regime did adversely affect US economic interests with an impact of several hundreds of millions of dollars. Both the EU and Caribbean producers immediately criticized the USTR decision. The regime was defended by the EU as a valuable foreign aid policy tool, and by the Caribbean nations as the mainstay to their economies, the elimination of which would lead to political and economic instability. 

Unable to reach a negotiated settlement with the EU, the USTR in September 1995 altered its strategy. It terminated the Section 301 case against the EU, and, joined by Guatemala, Honduras, and Mexico, initiated a dispute settlement proceeding in the WTO. Ecuador joined the case in February 1996.

The petitioners alleged that the EU regime violated the GATT 1994 Articles I, II, II, X, XI, and XIII as well as the Agreement on Import Licensing Procedures, the Agreement on Agriculture, the General Agreement on Trade in Services (GATS), and the Agreement on Trade-Related Investment Measures. Consultations were held, but because the EU member states refused to grant the EU Commission a mandate to negotiate substantive changes in the regime, no resolution was reached. Consequently, on April 24, 1996, the US, Ecuador, Guatemala, Honduras and Mexico jointly requested that a WTO dispute-settlement panel be convened. It was established on May 8, 1996. The EU case as presented to the panel relied heavily on its assertion that the banana regime was a legitimate part of the Lomé Convention for which the EU had a WTO waiver. The US side's response was that the banana regime was not covered by the Lomé Convention.

The WTO panel report, issued on May 22, 1997, found that the EU banana import regime was discriminatory and as such was inconsistent with the GATT 1994, the WTO agreement on Import Licensing and the GATS. One month later the EU notified its intention to appeal certain issues of law in the panel report. The Appellate Body not only upheld the panel findings, but found additional violations of GATT.(5) Specifically, it reversed the panel's finding that the Lomé waiver covered discriminatory quotas and found that certain aspects of the EU licensing regime violated GATT Article X (publication and administration of trade regulations) as well as the WTO agreement on Import Licensing Procedures. The Appellate Body report and the panel report as modified by the Appellate Body were adopted on September 25, 1997. The WTO granted the EU 15 months, until January 1, 1999, to comply.

In mid January 1998 the European Commission announced a modified banana regime that it claimed was WTO-compatible. The main elements of the new regime were: 1. Maintenance of the current Latin American banana tariff-rate quota (2.2 million metric tons at duty of ECU75/ton; above quota duty at 765/ton); 2. Establishment of a new, autonomous Latin American tariff-rate quota of 353,000 tons at duty rate of ECU 75/ton to account for EU enlargement (Austria, Finland, Sweden joined the EU in 1995); 3. Allocation of a percentage of the tariff rate quota to exporting countries with a "substantial interest' in the market for bananas. 4. Maintenance of a maximum quantity allowance of 857,700 metric tons at a zero duty for traditional ACP imports; 4. Elimination of the previous licensing system, replacing it with a system distributing licenses to actual importers on the basis of the volume of imports handled during the 1994-96 period.(6)

The US objected that the new system continued to use two separate criteria to allocate shares of its banana market to Latin American and ACP nations and as such violated the WTO. The US argued that in order to be WTO-compatible the EU must adopt a single tariff-rate quota covering all suppliers and must base the allocation of shares of the quota among supplying countries on the same set of criteria.(7)

Despite US objections the EC Agriculture Council approved the new regime and the new system was adopted in October 1998.(8)

In an effort to resolve the disagreement over the WTO-consistency of the modified banana regime, the US and Ecuador repeatedly sought to reconvene the original WTO dispute-settlement panel that had ruled against the EU in 1994. The EU refused and instead requested in mid -December the establishment of a new panel under Article 21.5 of the Dispute Settlement Understanding (DSU) to determine the WTO-consistency of its new regime. 

Unable to secure a decision by the original panel on the new regime, the US announced in November 1998 a preliminary list of EU products that would face prohibitive tariff duties of 100 % ad valorem if the EU failed to implement a WTO-consistent banana regime by January 1, 1999. A final list was published in December.(9)

In mid January, the EU having failed to implement what the US regarded as a WTO-consistent banana regime, the US requested authorization to impose retaliation in the amount of $520 million -- the estimated annual economic loss of US exports and profits for US suppliers as a result of the EU failure to comply with the panel rulings. The US cited Article 22.2 of the WTO's Dispute Settlement Understanding that allows a complainant to request authorization to retaliate 20 days after the deadline for implementation imposed by the panel - in this case January 1, 1999.

The request was on the Dispute Settlement Body (DSB)'s agenda for its meeting of January 28, 1999. St. Lucia and Dominica, claiming that the changes in the EU banana regime demanded by the US would destroy their economies, sought to block adoption of that DSB agenda. This was the first time a DSB agenda had been blocked in the WTO's four year history; it was feared it would establish a dangerous precedent if allowed to stand. At the urging of the WTO Secretariat the block was removed.

The EU contested the US interpretation of the WTO dispute settlement rules, arguing that its modified banana regime should be presumed WTO-consistent, and that only if a new Article 21 panel ruled against the new regime would the US be entitled to invoke Article 22 to seek authority to retaliate.

This so-called "sequencing question" was a novel issue for the WTO. Under the GATT, the WTO's predecessor organization, a formal grant of authority to retaliate was granted only once. An important feature of the new WTO dispute settlement procedures is Article 22.2, which accords winning parties the right to seek authority to retaliate if the losing party fails to implement the panel ruling within a specified time period. The rules fail, however, to address clearly the issue of how such "failure to implement" is to be determined. The question is whether a country's authorization to retaliate must await a formal Article 21.5 compliance panel finding that the targeted country had failed to comply with a prior panel ruling, or whether the Article 22 panel could in effect determine the compliance question when deciding on the retaliation authority request. 

Ultimately the impasse was broken by a proposal by WTO Director General Ruggiero that the arbitration process established under the WTO's Article 22 be used to determine the amount of appropriate retaliation.

The US agreed to refrain from collecting retaliatory duties pending a decision by the arbitrators. Pursuant to the arbitration procedures, the arbitrators were to determine by March 2, 1999, the extent of the economic harm caused to the US under the revised banana import regime. In contrast, the US request for authority to retaliate in the amount of $520 million was based on the impact of the initial banana regime. Claiming insufficient information had been received from the parties, the arbitrators announced they were unable to issue a determination within the allotted timeframe.

The very next day, the US announced that it would impose a contingent liability of 100% duties on imports valued at $520 million of selected products from the EU.(10) This action triggered a request by the EU for consultations under Article 4 of the DSU.

On April 9, 1999, the arbitrators' report was issued.(11) It effectively ruled that the US was not required to obtain a new Article 21 compliance panel decision prior to seeking retaliation authority. This ruling was confirmed by a dispute settlement panel in July 2000, which found that a compliance assessment can be made by a panel established under Article 22 to assess the level of retaliation.(12) The arbitrators further determined that the EU's revised banana regime was WTO-inconsistent and that the damage to the US was $191.4 million -- significantly less than the initial US calculation of $520 million. Consequently, both parties agreed to comply, the EU by amending, once again, its banana regime and the US by reducing its retaliation authority request to $191.4 million. The US request was granted on April 19, 1999, and duties were imposed retroactively to March 3, 1999.(13) 

In November 1999, the European Commission adopted a proposal to modify, once again, its banana regime so as to bring it into compliance with the WTO. The proposal called for a transitional tariff rate quota (TRQ) system which would be replaced, at the latest, by January 1, 2006, by a tariff-only regime. Under both tariff regimes ACP suppliers would be given a preference.(14) The EU justified this preference as part of the Lomé Convention for which the EU had obtained a WTO waiver.(15)

The US rejected this proposal as equally WTO-inconsistent as were the two former banana regimes. Frustrated by what it considered was the EU's failure to comply with the series of WTO rulings against its banana regime, the US, in early 2000, began to consider a novel and controversial approach to retaliation. Under the so-called "carousel approach" the US would periodically alter the products against which it imposed retaliatory duties. Rotation of the products on the retaliation list, it was argued, would increase the number of EU producers hit by the retaliation and thereby increase pressure on the EU to bring its system into compliance. Despite legislation mandating rotation of the products on the retaliation list, the Clinton Administration left office without instituting the carrousel approach, leaving the decision to the new Bush Administration.

Most issues involved in the US-EU banana case remain to be addressed by the new Administration. The issues range from what constitutes a WTO-compatible banana regime, to the interpretation of the Dispute Settlement Understanding. The US has rejected as WTO-inconsistent a December 2000 EU proposal regarding the structure of its banana regime: tariff-rate quotas allocated on a first-come, first-serve system. The US further insists that any new banana regime must include licenses for 1.066 million tons of Latin American banana exports to the EU for Chiquita and Dole. And in mid January 2001 a WTO appellate body overturned the prior panel ruling that a compliance assessment could be made by a panel established under Article 22 to rule on retaliation. The appellate body found that that ruling had no legal effect because the panel had overstepped its own terms of reference. The effect of this decision is to leave the important question of sequencing unresolved. 

The latest development brings the case back to the European Court of Justice. Chiquita filed a suit in the European Court of First Instance on January 25, 2001, alleging that the EU banana import policies have inflicted $525 million in damages against its operations and violated a legal mandate from member state ministers to bring the regime into compliance with the WTO. 

CONCLUSION

In the end, the major impact of the dispute between the US and the EU over the latter's banana regime likely will be, not on that regime, but rather on the rules and laws for resolving international trade disputes.

The case has raised serious questions about the process by which the US decides which trade disputes to pursue in the WTO: specifically, whether the system provides too much discretion to the Administration and thereby favors the politically connected. The effectiveness of the current procedures for determining retaliation are also being questioned. Calls for more effective, that is, more onerous, measures such as the carrousel approach are countered by fears of mirror legislation in other countries. In the WTO, the unresolved question of sequencing is generally considered the most important systemic problem of the Dispute Settlement Understanding and one which must be addressed without delay. The Dispute Settlement Understanding is considered by many to be a cornerstone of the WTO. The enforceability of WTO obligations is what distinguishes it from many other international agreements and what makes it a magnet for new issues such as those relating to labor and the environment. Without its acclaimed "teeth" the framework of rules likely would fall into disuse. The effectiveness of those teeth depends heavily on the existence of procedures that ensure that policies found to be WTO-inconsistent are brought into compliance in a timely manner. Until the sequencing debate is resolved no such assurance can be given. 

Endnotes

1. Council Regulation (EEC) No.404/93
2. The Lomé Convention is a trade and aid pact between the EU and the ACP countries, one element of which is the provision of preferential treatment for certain imports to the EU from ACP countries.
3. Council Regulation No. 404/93 on the Common Organization of the Market in Bananas, Official Journal of the EC No.L47(Feb 25, 1993) pp.1-11
4. 59 FR 53495
5. WT/DS27/AB/R
6. The Year in Trade: Operation of The Trade Agreements Program (OTAP) 50^th report, 1998 p. 53.
7. US Dep't of State telegram "Bananas: Status and Summary" message reference No.105004, June 11, 1998.
8. EC Commission Regulation NO. 2362/98 of Oct. 28, 1998, Official Journal L Series 293, Oct. 31, 1998
9. The final list published on December 21, 1998 included pecorino cheese, sweet biscuits, bath preparations, candles, plastic plates and sheets, handbags, wallets, felt paper, folding cartons, greeting cards, lithographs, cashmere sweaters, bed linen, batteries, coffee and tea makers, and chandeliers.
10. USTR press release 99-17, March 3, 1999
11. WT/DS27/ARB
12. WT/DS165/R
13. 64 FR 12092, April 19, 1999
14. EU Commission, 2250^th Council meeting-Agriculture-Brussels, 20 March 2000
15. EU Commission, 2218^th Council meeting-Agriculture-Brussels, 15 Nov. 1999

About the Author
Eliza Patterson is a trade lawyer currently working for the Washington Office of the Port Authority of New York and New Jersey and can be reached at ERPatterson@msn.com. She graduated from Harvard Law School in 1975.