The beef over bananas Mar 4th 1999 From The Economist print edition
The trade war between America and Europe over bananas,
and a looming clash over hormone-treated beef, expose big
weaknesses in world trade rules
AMERICA’S patience with the European Union at last snapped on
March 3rd. The casus belli: the EU’s failure to amend to America’s
satisfaction its banana-import rules. These favour fruit from excolonies in the Caribbean distributed by European firms over Latin
American bananas distributed by American ones. America’s
response: a knockout blow to imports of 14 European products.
But the move does more than threaten to cut off America’s
supplies of Parma ham and Belgian waffles. It also signals a crisis
of confidence in the World Trade Organisation (WTO), the
supposed arbiter of world trade disputes.
The immediate worry is that hostilities will break out on other
fronts too. America is fuming about the EU’s ban on hormonetreated beef. It is unhappy with Europe’s reluctance to embrace
genetically modified food. It is angry over European subsidies for
Airbus, Boeing’s rival in aerospace. It is concerned that an EU
directive on data-privacy and proposed rules on aircraft noise
discriminate against American firms. It is peeved that the EU has
asked the WTO to rule against its sanction-imposing “Section
301” legislation. In the background, there is huge resentment
that the EU is doing so little to stimulate demand, leaving America
as the sole locomotive of the world economy and chief bearer of
the “burden” of imports from struggling emerging countries. A
worse fear is that the WTO seems incapable of enforcing its rules.
After all, the WTO has twice told the EU that its banana regime is
illegal. But it has not been able to bring the EU into line because
its rules on compliance are so unclear. America is stretching WTO
rules too. It has imposed immediate sanctions that are equivalent
to 100% duties on a range of European products. It will, however,
refrain from actually collecting these until the WTO produces its
delayed assessment of the damage done to America by the EU’s
banana regime.
Legal shenanigans aside, this underlying flaw in the WTO could yet
prove fatal. If countries feel that the WTO does not work, they will be
tempted to bypass or ignore it. Big powers such as America and the
EU may prefer to act unilaterally. Smaller ones might gang up, or
curry favour with bigger powers to pursue their claims. The
predictability and fairness of a rules-based system could be lost. In its
place would be an arbitrary one based on power. Almost inevitably,
there would be more protection and more trade wars. The WTO’s
dispute-settlement mechanism is meant to have teeth. Its key
strength is that countries cannot veto WTO rulings against them. They
have the right to appeal once; if they lose again, they have 15 months
in which to fall into line with world trade law. If they do not comply,
the plaintiff can demand compensation or impose retaliatory
sanctions.
It was going so well
Until recently, the system had been surprisingly effective. It has dealt
with 163 disputes since the WTO was set up in 1995. America has
brought the most cases, 53 in all, closely followed by the EU, with 43.
America and the EU are also the most common defendants, the United
States in 29 cases, the EU in 26. Developing countries have used the
system too, both against each other and against rich countries. Most
cases have been settled without the need for arbitration. And when
the WTO has been called on to adjudicate, no government has yet
defied any of its rulings.
Thus America amended petrol standards when the WTO judged that
they discriminated against Venezuelan products. It obeyed the WTO
by lifting restrictions on Costa Rican underwear. And Japan is
reforming its discriminatory alcohol taxes after losing a case brought
by America, the EU and Canada. Indeed, the big worry was that the
system was too strong, not too weak. That was encouraging countries
to use the WTO’s enforcement powers to pursue objectives that may
have stretched beyond its remit. America tried to use the WTO to
compel Japan to enforce its antitrust rules. The EU complained to the
WTO about America’s Helms-Burton act, which penalises companies
The beef over bananas Mar 4th 1999 From The Economist print edition
investing in Cuba, but later reached a bilateral settlement. And,
urged on by trade unions and green groups, America wants the
WTO to impose tough and enforceable labour and environmental
standards on developing countries. Such fears now look
premature. In the banana case, America first complained to the
WTO about the EU’s regime in September 1995. Two years later,
the WTO ruled for the second time that the regime was illegal.
The EU was given 15 months to comply. On January 1st it
enacted some minor changes to its rules. Neither America and its
Latin American co-plaintiffs nor most independent observers think
that the EU’s new regime is legal. But the EU says they cannot be
sure until the WTO has ruled again, which it will do by April 12th.
Even that may not be the end of it. If the WTO finds against the
EU for an unprecedented third time, the EU could tinker with the
rules yet again and ask the WTO to repeat the process. The EU
might never have to comply in full.
taken with a pinch of salt. The EU is not obliged to exploit the loophole
in the rules. Indeed, the ambiguity in the rules about compliance may
be deliberate. America and the EU may want to hold other countries to
account without binding their own hands too tightly. If so, tightening
the rules would merely ensure that they are flouted more regularly.
The precedent is dangerous. The EU has already hinted that it will
not lift its ban on hormone-treated beef from America, as the
WTO requires, by May 13th. Canada is refusing to rescind
restrictions on foreign (mostly American) magazines. If it cannot
win justice from the EU and Canada, America is unlikely to
respect a WTO ruling against its ban on shrimp from countries
that use nets which trap turtles.
Discussion.
One solution would be for the WTO to stipulate what countries
must do in order to comply with its rulings. But America and the
EU are against the WTO’s taking on such a prescriptive role. John
Jackson, an expert on WTO law at Georgetown University in
Washington, DC, suggests instead that an independent arbitrator
could rule quickly on whether a country has complied.
That could be a winner. Both America and the EU, a bit more
circumspectly, claim that they want the rules on compliance to be
clarified. America says it is keen on change as soon as possible,
perhaps once the WTO’s review of its dispute-settlement
procedures concludes in July. But such protestations should be
The real problem is that America and the EU are not always willing to
accept that the writ of the WTO can trump domestic political
considerations. Sometimes, as in the banana case, this is because oldfashioned lobbies are too strong. In other cases, such as the rows
over hormones in beef or genetically modified foods, there is genuine
popular disquiet at the intrusion of the WTO into sensitive matters
that were once exclusively domestic. Trade rules need to be strong
enough to deter protectionism. But they also need to be flexible
enough to cope with the most difficult cases without testing the
system to destruction.
Critically evaluate the situation outlined here and comment on
the implications of these issues for International Business and
the Global economy.
The beef over bananas Mar 4th 1999 From The Economist print edition
Discussion:
trade should encourage the Caribbean to improve the efficiency of their
production function.
Evaluation of the situation (First element of the question):
1.0 Bananas:
On the surface it would appear that this is a classic example of how
Adam Smith’s (1776) absolute advantage theory at work, where the
banana producing nations clearly have natural advantage in the
production of bananas. According to this theory the banana producing
nations should export bananas, where they have absolute advantage and
import products from the US and Europe where these countries have
absolute advantage e.g. in capital or technology intensive goods.
However nothing is simple the bananas have provoked a battle between
two world economic superpowers, which both have other interests. In
the first paragraph of the case the EU; “…favour fruit from excolonies in the Caribbean distributed by European firms over Latin
American bananas distributed by American ones..”
In the case of the US they are seeking to protect US multinational firms
who are they could argue using the natural advantage of the Latin
American countries combined with the more efficient production
brought about the US firms’ technological and management
effectiveness. The US could argue that in this case the EU is going
against the theory of absolute advantage (Ibid) by in effect subsidising,
with its “…banana-import rules” favouring “fruit from ex colonies in
the Caribbean..”, (Case Study) imports of bananas from former
colonies. The clear difference between the two positions with regard to
bananas lies in the comparative production costs (Ricardo, D. 1817),
with bananas being produced by small scale farmers in the Caribbean
and by large efficient multinational (US) firms in Latin America. The
Hechscher-Ohlin Theorem (1933) would suggest that both sources of
bananas are seeking to export using their most their relatively abundant
factors and that therefore free trade should equalise factor prices
between these two sources. In other words it could be argues that free
Of course there are other issues at work here in particular issues raised by the
Human skills and technology based views, which challenge the assumption of
equivalence in technology and human skills (Keesing, D.B., 1965), so there is
in fact a technology gap between the highly efficient US Multinational firms
operating in Latin America and the small holdings producing g banana’s in
the Caribbean.
2.0 Other Issues:
The waters are further muddies by the linkage that is being created between
the issue of trade in bananas with the problem that the US has with the EU’s
attitude to then import of beef: “America is fuming about the EU’s an on
hormone treated beef.” (Case study paragraph 2). This certainly highlights
the increasing complexity of international trade. It might be argued that many
modern nations are in fact continuing to demonstrate many of the
characteristics of the pre classical theory of Mercantilism not necessarily in
its crudest form but certainly power and influence continues to play a big part
in World trade.
3.0 General Comments:
The case highlights a wide range of issues that might be picked up and
examined in more detail depending on the perspective, or position taken by
the person carrying out the analysis. The important thing to remember from
the perspective of this seminar is that you should remain clearly focussed o
the question and that you should seek to support your analysis and arguments
with well referenced sources of data. Sound robust arguments will also seek
to demonstrate that they have examined the issues raised by their analysis
from more than one perspective. The above analysis has not fully answered
the question you will need to use similar approaches to comment on the
implications of these issues for International Business and the Global
economy. Finally do not forget to include a reference section at the end of
any report. (See student handbook for a guide.)