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You are here: Home > Current Topics > Mind your Business > 19 January 2004 |
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Oligopolies, Fair Trade, Bananas and Protectionism: The banana was subject to a bitter disagreement between the US and Europe throughout the 1990's and culminated in an agreement between the two in 2001. In this agreement, the EU is to amend its tariff system on the fruit over the following five years; carrying out this change and meeting the demands of all the stakeholders involved has not been easy and may well lead to further problems in the coming years as the new tariff system takes full effect.  Workers in a banana packing shed. Photo courtesy of Banana Link, Credit - Nick Shaw What was the argument about?In the UK alone we eat in excess of 140 million bananas a week - that's around 7 billion a year. World wide, the trade in bananas exceeds 2.5 billion tonnes each year. The popularity of the fruit throughout the world is enhanced by the fact that it is easy to eat, high in energy, fibre and vitamins, contains potassium which can contribute towards a lowering of blood pressure, is low in fat and cholesterol and releases important chemicals in the brain - neurotransmitters - serotonin and dopamine that contribute towards our moods, emotions, and control mechanisms. 
Bananas are produced in countries with a predominantly tropical climate - primarily in Central America, Africa and the Caribbean. Here is where the main problem lies. In 1993 the EU sought to protect banana producers from its former colonies - mostly in Africa and the Caribbean - by imposing tariffs and quotas on bananas from other growers - the so called 'dollar bananas'. This upset the US who argued that free trade was being restricted - especially affecting producers in countries with which it had ties. (Chiquita for example, donated half a million dollars to the Democratic Party!) The US imposed retaliatory tariffs on a range of European goods before the World Trade Organisation brokered the deal between the two in April 2001. Banana worker in Dominica. Photo courtesy of Banana Link, Credit - Philip Wolmuth In the deal, the EU agreed to remove the restrictions and set up a single tariff for all bananas. The process would occur in stages, with the final tariff being in place by 2008. The problem now facing the EU is that a reduction of the tariff, favoured by the 'dollar banana' states, would represent real problems for the producers in the Caribbean and parts of Africa. The tariff is currently at €75 per tonne (£52), ($1.60 or 88p per box) and some producers estimate that the new tariff could be anything between this level and €300. Anything at the higher end would cause massive job losses in countries such as Costa Rica in Central America. At the same time, the popularity of the banana in countries like the UK can be partly put down to the relatively low price. Low prices however tend to mean that someone somewhere is getting squeezed and the suspicion is that the burden is falling on the primary producers. It is estimated that the farmer might get around 10% of the price of a banana with workers getting anything from 9% in the case of Fairtrade bananas to as little as 1.5% on traditional farms. In comparison the trading company - the likes of Del Monte, Chiquita, Dole and Fyffe's could be getting up to a third of the price whilst retailers take around 40%. In the case of Fairtrade bananas, the cut for the retailer could be as low as 15%. The decision by the EU is therefore being watched carefully by the world's banana producers and distributors with a keen eye; the EU seems to be on a hiding to nothing with the tariff it sets - likely to please nobody and anger everyone for different reasons. |
The issues surrounding the banana industry are very complex. They not only involve economic issues but are also linked with political ones - many of which go back in history. The problem centres on the relationship between the growers, the main distributors. The industry can be described as an oligopoly dominated by five main growers. The two biggest are Chiquita and Dole who together account for around half the total market. Del Monte, Noboa - an Ecuadorian based group, and Fyffes take the remainder of the market. Each company is involved in the whole supply chain of bananas and there is evidence of vertical integration having taken place throughout the development of these companies. Because of their size, they benefit from significant economies of scale and whilst they are in a position to be able to benefit from these, the 'victims' are those that have to submit to their power, They are in a position of being a 'monopsony' - the only or dominant buyer in an industry. Some would suggest that as a result they have been in a position to exploit growers who themselves have very little market power. Whilst pressure may exist on growers to lower costs, supermarkets around the world seem to be making large profits on bananas - there may be an ethical issue suggesting they are making profits on the back of exploited and oppressed growers. Other ethical considerations include the amount of chemicals used to produce bananas and the way in which workers handling those chemicals are exposed to health and safety risks.
Other issues surround the imposition of tariffs and quotas worldwide. The European Union and the USA account for around two thirds of all imported bananas world wide. Europe's colonial history means that there are close historical ties with former colonies in African, Caribbean and Pacific countries, some of whom are major banana producers - so called ACP bananas. On the other hand, bananas produced in Central and South America by countries such as Costa Rica, Ecuador, Venezuela, Honduras and Panama are termed 'dollar bananas'. There are two main reasons for this; one is that these countries are heavily influenced by the US dollar and secondly, banana producers in these countries have close links to US based companies like Chiquita and Del Monte.
Fairtrade banana production in Dominica. Photo courtesy of Banana Link, Credit - Philip Wolmuth
Attempts to encourage trade with ACP countries have centred on a number of agreements starting with the Lomé Agreement in 1975. The basic situation with regard to the EU and its tariff system is as follows:
The major problem is that costs of production in ACP countries are quite different to those in 'dollar banana' countries. The terrain and facilities may mean that costs of production are twice as high as in some of the larger 'plantation' based countries of Central and South America. In addition, transport and distribution costs tend to be much higher. Costs of dollar bananas can be as much as a third lower than the European producers. Given these cost differences the opportunities for ACP countries to compete is rendered more difficult. The tariff and quota structure was supposed to help 'even out the playing field' for ACP countries. In reality, it angered the 'dollar banana' producers and led to a bitter trade war between the US and Europe. At the heart of this dispute is the theory of competitive advantage, which states that countries should specialise in producing goods in which they have a lower opportunity cost and engage in trade. In so doing, everyone will be better off. However, the acts of market failure also tell us that when price signals do not work effectively, there will be inefficiencies in the market and firms acquiring market power will be able to exploit the market. As has already been mentioned, the banana producers are so large they are able to exert, what may be considered, undue pressure on those who have very little market power - the growers - in order to maintain some form of competitive advantage.
The World Trade Organisation (WTO) set up in 1995, investigated the EU system following complaints by 'dollar banana' countries. There followed a six-year debate on the issue with claim, counter claim and extensive investigation by the WTO. The modifications to the protection system by the EU are likely to have winners and losers and the issue of exactly what the new tariff will be is likely to be crucial to determining who will be the winners and who will end up as losers. There are certainly a number of countries that rely on banana exports that are anxiously awaiting the news.
Read the information above and look at the presentation by Bob Kistinger of Chiquita (4.2MB) (http://www.chiquita.com/bottomline/confcall/TurnaroundandTransformation-121603.ppt). Evaluate the likely success of Chiquita's strategy in terms of their European business.
In three groups, spend some time researching further into the following three aspects of the banana industry:
Produce a presentation to contribute to a debate on the future of the banana industry. Each group will be expected to consider the history of the banana industry, the impact of the changes in the tariff and quota positions by the EU and the concerns over the ethical and environmental issues surrounding the production of bananas. Your presentation should make use of appropriate economic and business theory throughout using appropriate diagrams to reinforce your position. The presentation by each group will be followed by a debate in which the positions will be taken into account. This will produce an action plan for the future of the industry that goes some way to satisfying the needs and aspirations of all in the debate.
Worker in a banana field. Photo courtesy of Banana Link
