The implications for bananas of the recent trade agreements between the EU and Andean and Central American countries : by Giovanni Anania

21 September 2010

In the October 2009 issue of TNI, Giovanni Anania explored the implications of a potential agreement to end the banana dispute at the WTO on the preferential margins that African, Caribbean and Pacific (ACP) countries enjoy under their Economic Partnership Agreements with the European Union (EU). Two months later, the EU concluded with Latin American countries and the US the Geneva Agreements on Trade in Bananas, while adopting a €190 millions package aimed at supporting ACP producers. Earlier this year, as the EU concluded agreements with eight banana-exporting countries in Central and South America, it became clear that preferences enjoyed so far by ACP countries will be eroded further. This month, therefore, TNI once again gives the expert the floor.

Earlier this year, the EU concluded trade negotiations with Colombia and Peru and, later, with six Central American countries (Costa Rica, El Salvador, Honduras, Guatemala, Nicaragua and Panama). Within the resulting agreements - which still await ratification from legislatures on both sides of the Atlantic - the provisions on bananas are critical from the perspective of the American countries. EU concessions on bananas are the same for all eight countries: the EU has agreed to progressively reduce its import tariff on bananas originating in these countries to 75 €/t by 1 January 2020.

In the absence of any agreement, the import tariff to be applied to their exports in 2020 would have been 114 €/t, whereas now the preferential margin will increase progressively from 3 €/t in 2010 to 39 €/t from 2020 on (table 1). However, between the entry into force of the agreement and 2020 a "safeguard" clause will prevent larger than anticipated increases in EU banana imports. If imports from a specific country in a given calendar year exceed that country-specific "trigger import volume" (TIV) for that year, then the EU may suspend for up to three months or until the end of the calendar year (whichever comes first) the preferential import regime and revert to the pre-agreement tariff (the so-called Most Favoured Nation, or MFN, tariff).

While the TIVs are obviously linked to each country's recent exports to the EU, their actual values suggest that the same rule has not been equally applied to all countries. For instance, relative to its recent export volumes, the TIVs for Colombia are much less generous than those for the other major exporters, while Peru enjoys a relatively liberal export allowance to the EU.

The 39 €/t preferential margin eventually granted by the agreements will significantly improve the competitiveness of the eight Andean and Central American countries on the EU market vis a vis other exporters. From 2020 onwards, the benefits for those countries already exporting bananas to the EU will be conspicuous, as both their exports and the price they are paid for their bananas will increase. This should be the case for countries such as Colombia, Costa Rica and Peru.

Countries that currently do not export bananas to the EU, or that are only marginal exporters, will benefit from the agreements only if the increase in their competitiveness on this market, as a result of the preferential margin granted, is sufficient to overcome the negative factors that currently make their exports unprofitable.

The assessment of the effects of the agreements in the short run (between 2010 and 2020) is more complicated, because of the safeguard provision. In principle, however, four cases are possible. Only one scenario would on the short term not generate benefits for the Andean and Central American countries for sure; moreover, it seems unlikely to materialise for the majority of the countries concerned (see box 1).

The effects of the agreements will be felt beyond the boundaries of the signatory countries. Other MFN exporters to the EU, as well as ACP and LDC countries, are all expected to see their relative competitiveness on this market fall with respect to the signatories; ceteris paribus, they will export less to the EU and receive a lower price for their exports. In markets different from the EU, imports will decline and prices increase, as a result of the trade diversion of some of the exports of the Andean and Central American countries; other countries are expected to expand their exports to these markets, but this will only partially compensate for the decline of their exports to the EU.

Since the beginning of this decade, banana exports by ACP countries, as a whole, to the EU have been growing significantly; moreover, recent developments show that they have been able to take advantage, probably more than many had anticipated, of the quota- and duty-free access to the EU market thanks to the implementation of the Economic Partnership Agreements.

The extent to which the recent trade agreements signed by the EU and the Andean and Central American countries will have a negative impact on ACP exports will depend on these countries' capacity to continue to improve the market competitiveness of their bananas, in terms of product qualities and efficient logistical infrastructures. In this respect, making an effective use of the financial resources made available by the EU in the framework of the December 2009 WTO deal will probably prove to be a crucial factor.

Box 1: Possible effects of the agreements on Andean and Central American countries between 2010 and 2020

Four cases could be distinguished:

1.     In the absence of any agreement exports to the EU subject to the MFN tariff would be equal to, or larger than, the TIV. In this case exports and equilibrium prices would remain unchanged under the agreements, the only effect being an income transfer from the EU budget to (most likely) banana traders, in the form of  "rents" deriving from the lower tariff applied on the country's exports up to the TIV.  Colombia appears as a possible "case 1" candidate. In fact, based on recent trends, Colombia's expected banana exports to the EU appear very close to the TIVs it will face; in addition, its overall exports have been increasing and under the new import regime it will become profitable to divert some of its exports from other destinations to the EU market. The reduction in EU tariff revenue which will become "rents", likely to be transferred to banana traders, will equal 4 million euro in 2010, but will reach 76 million euro in 2019.

2.     In the absence of any agreement exports to the EU subject to the MFN tariff would be above 0 and below the TIV. In this case the agreements will lead to an increase in the country's production, exports and price received, while the opposite will occur for the EU domestic price and for the import price paid for bananas originating in ACP countries as well as in countries whose exports remain subject to the MFN tariff. In this case, too, depending on the equilibrium reached, part of the reduction in EU tariff revenue may well become "rents" to be accrued (again, most likely) by banana traders. Peru, Costa Rica and Panama seem likely to fall under this case. Costa Rica and Peru, on different scales, show upward trends both for their exports to the EU market and overall, but expected exports to the EU under the current import regime remain below the TIVs. Panama, on the contrary, shows a negative trend for its banana exports, both to the EU and overall; all things being equal, the agreement with the EU should help contain this trend.

3.     In the absence of any agreement no exports to the EU would occur at the MFN tariff, but they become profitable under the preferential tariff. Because of their current ability to export bananas, though not to the EU, Guatemala, Honduras and Nicaragua seem to fall under this scenario.

4.     In the absence of any agreement no exports to the EU would occur at the MFN tariff, and the preferential margin granted by the agreements is not sufficient to make them profitable. El Salvador could possibly be falling under this category (or, alternatively, under scenario 3).

The agreements will generate benefits for the Andean and Central American countries in the first three cases (assuming, somehow optimistically, that in case 1 "rents", no matter who will capture them, will induce indirect benefits in the exporting country), but production and trade will increase only in cases 2 and 3.

Giovanni Anania is with the Department of Economics and Statistics, University of Calabria, Italy; ganania@unical.it). The analysis in this note is based on research financially supported by the "New Issues in Agricultural, Food and Bio-energy Trade (AGFOODTRADE)" research project funded by the European Commission, and by the "European Union policies, economic and trade integration processes and WTO negotiations" research project funded by the Italian Ministry of Education, University and Research. The views expressed in this note are the sole responsibility of the author and do not necessarily reflect those of the European Commission.

A longer version of this article is available at https://www.ictsd.org/themes/agriculture/the-implications-for-bananas-of-the-recent-trade-agreements-between-the-eu-and

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