Bananas, Economic Partnership Agreements, and the WTO

22 October 2009

The conclusion of the Doha Round or an agreement to end the banana dispute at the WTO would significantly reduce the preferential margins that African, Caribbean and Pacific banana exporters enjoy under their Economic Partnership Agreements with the European Union.
 
On 1 January 2008, the EU implemented the Economic Partnership Agreements (EPAs) it had negotiated with many African, Caribbean and Pacific (ACP) countries. All agricultural exports from ACP countries that had successfully concluded the negotiations – most on an interim basis – are now allowed duty- and quota-free access to the EU. Bananas, along with sugar and rice, are widely recognised as the three agricultural commodities that would bring the greatest export benefits to ACP countries under the EPAs (for sugar and rice, however, the agreements call for a progressive removal of EU market protection by 2010).
 
In July 2008, eleven Latin American countries, the US and the EU appeared to have reached a provisional agreement to bring to an end the long-standing banana dispute at the WTO. However, the failure of the Geneva mini-ministerial to conclude a Doha Round ‘modalities’ deal left the issue unresolved. Since then, the EU and banana producers that export under the EU’s 176 euros per tonne most-favoured-nation (MFN) tariff have continued to negotiate in order to try to find a solution to the dispute.
 
Market access simulations
 
Recent research commissioned by ICTSD assessed the expected benefits for ACP banana exporters from the elimination, as a result of the EPAs, of the EU preferential import quota for ACP banana exports in place until the end of 2007. The study also examined how these benefits would be affected due to the erosion of preferential margins deriving from the conclusion of current WTO negotiations.
 
Six different policy scenarios were modelled. All simulations were generated with respect to 2016 and include the implementation of the EPAs. Differences in the scenarios relate to assumptions made with regard to the conclusion of multilateral and ‘bilateral’ (EU, on one hand, and MFN banana exporters and the US, on the other) WTO negotiations and the consequent reductions in banana tariffs.
 
Minor Effects on EU, but Major on ACP and MFN Exporters
 
Due to its current domestic policies, banana production within the EU is largely independent of changes in trade policies. However, producers’ incomes will be affected by policy changes through the effect they could have on domestic prices.
 
The Economic Partnership Agreements are likely to have only a minor impact on the internal EU market, but a very significant one on ACP and MFN exports of bananas to the EU. As a result of the EPAs, ACP exports in 2016 are forecast to increase by 84 percent (from 970,000 tonnes to 1,800,000 tonnes) at the expense of MFN exports, which are expected to drop by 5 percent overall, but see a 24-percent decline in the EU. The EU’s MFN tariff would have to be reduced to 60 euros/tonne, everything else held constant, to leave MFN exports unchanged compared to level they would be likely to reach if the EPAs were not implemented.
 
Effects of the EU import regime for bananas extend to other markets as well. The more open to MFN imports the EU market becomes, the higher the price of bananas in other importing countries would climb, and thus the lower their imports. However, when import tariffs in importing countries other than the EU are reduced or set at zero as a result of the conclusion of the Doha Round and the implementation of its provisions on tropical products, then, everything else held constant, US imports are expected to decrease rather than increase. This is because the tariff the US imposes on its banana imports is much lower than those of other major importers. For the US, the ‘trade diversion’ effect of tariff reductions in countries other than the EU prevails over ‘trade creation’. MFN exports to the US (the second largest banana importer) decrease, while those directed to other net-importers, which currently impose larger tariffs, expand significantly.
 
If the July 2008 tentative agreement between the EU, MFN countries and the US were to be implemented, it would affect both the EU’s imports of bananas and its domestic price. ACP banana exports would remain well above pre-EPA levels, while MFN exports (although they would increase by almost 400,000 tonnes) would remain below pre-EPA levels.
 
If the Doha Round is concluded and includes the tentative July 2008  agreement on bananas, it would not affect the EU market much with respect to the scenario in which only this agreement is implemented. Both MFN and ACP exporters would benefit from the liberalisation of banana trade in countries other than the EU.
 
MFN vs ACP interests
 
For MFN exporters the issue is trade liberalisation: the more liberalised banana trade becomes, the higher will be export prices, exports and export revenue. The conclusion of the Doha Round is more beneficial to them than the July 2008 agreement with the EU, as long as the multilateral agreement includes the provisional July 2008 deal, or the provisions for tropical products are those on which consensus seems to have emerged in July 2008 in Geneva. 
 
The most favourable scenario for ACP countries would be to retain quota- and duty-free access to the EU market without the conclusion of the Doha Round or the implementation of the tentative July 2008 agreement. Should the latter alternative occur, it would imply the erosion of one-third of the benefits resulting from the preferences granted by the EU within the EPA context. If the EU MFN tariff were to be reduced, it would be better for ACP countries if it takes place within the Doha Round framework since that would bring an increase in market access in non-EU countries and a partial diversion of MFN exports towards such markets, increasing ACP competitiveness in the EU market, as well as the EU import price.
 
MFN and ACP banana exporters thus share at least one common interest: if a WTO agreement is to be reached, this should be the conclusion of the Doha Round rather than a deal between MFN countries and the EU alone, along the lines of the tentative July 2008 accord.
 
The modelling exercise suggests that by 2016 least-developed countries (LDCs) will not be able to compete with MFN and ACP countries in the EU banana market. Moreover, this would be the case regardless of the trade policy regimes in place, i.e. even without the implementation of the EPAs. Nevertheless, the conclusion of the EPAs implies an erosion of the preferences granted to LDCs under the EU’s Everything but Arms initiative. With regard to the possible outcomes of the Doha Round negotiations, the more open the EU becomes to MFN banana exports, the harder it will be for LDCs to compete in this profitable market.
 
Finally, while the results presented appear robust enough to withstand changes in a number of the assumptions made in the modelling exercise, they are relatively sensitive to the hypotheses regarding expected changes in yields. Because ACP exporters are, generally speaking, less efficient in producing and marketing bananas than their MFN rivals, this finding suggests that aid targeted at improving efficiency in banana production in ACP and LDC countries may be as beneficial as granting them preferential market access, and that the negative effects of preference erosion can be offset by providing financial and in-kind resources needed to improve the logistic infrastructure and technical efficiency of their banana industry. This result is consistent with ACP countries’ request for additional technical and financial aid from the EU aimed at improving the market competitiveness of their bananas as a condition for their acceptance of the tentative July 2008 agreement.
 
Giovanni Anania is Professor at the Department of Economics and Statistics, University of Calabria, Italy. The author based this article on his research paper entitled ‘How Would a WTO Agreement on Bananas Affect Exporting and Importing Countries?’ available at
https://www.ictsd.org/themes/agriculture/how-would-a-wto-agreement-on-bananas-affect-exporting-and-importing-countries.

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