US and EU trade relations slip over banana dispute

For all but the handful of officials involved, it defies belief that a dispute over the marketing of bananas has brought the US and the European Union to the brink of a trade war.

Not only is there something irresistibly comical about the fruit itself; but both sides' arcane procedural manoeuvring in the World Trade Organisation has made it hard to understand just what the battle is all about.

The explanation is that much more is at stake than bananas, the terms on which the EU imports them - or the economic costs if the US goes ahead with controversial plans next Monday to impose sanctions on $520 million (€449 million ) of European exports, ranging from candelabra to cashmere sweaters.

Improbable as it may seem, the dispute has become a crucial test of the basic rules of international trade, and of continued US support for them. Its reverberations are placing huge strains on the four-year-old WTO and exacerbating frictions between the US and other important trade partners, notably Japan.

Equally important, failure to resolve the conflict could put at risk the broader relationship between the US and the EU, the world's biggest trading powers, and impair their ability to work together to prevent global economic recovery being undermined by an outbreak of protectionism.

Like most contentious trade issues, the bananas conflict has its origins in domestic, as much as international, politics. In this case, the efforts of Bill Clinton, the US president, to survive impeachment, electoral calculations and the power of its lobby system have all played a role in strengthening US determination to force the issue to a showdown.

Washington has been trying to overturn the EU's banana import regime ever since it was set up in 1993. Although the US exports no bananas, it claims the regime, which favours fruit from former British and French colonies in Africa, the Caribbean and the Pacific, discriminates against US distributors of cheaper Latin American fruit, such as Chiquita Brands (based in Cincinnati, Ohio).

The US twice won judgments against the regime in the old world trade tribunal, the General Agreement on Tariffs and Trade (GATT), but the EU was able to ignore them. Then, in late 1997, a WTO disputes panel also found against the arrangement. In the WTO, unlike the GATT, enforcement of such judgments cannot legally be blocked.

But although the EU has since modified the banana regime, the US says the new one is no better than the old. After months of unsuccessful efforts to persuade Brussels to negotiate further changes, Washington's patience snapped in October. It warned that unless the EU complied with the WTO ruling by the start of this year, the US would retaliate with sanctions no later than March 3rd.

Two factors prompted the ultimatum, delivered by Mr Erskine Bowles, then Mr Clinton's chief of staff. One was the imminence of the mid-term Congressional elections. The other was vigorous lobbying by Carl Lindner, head of Chiquita, whose lavish political contributions have earned high-level political influence in Washington.

Some observers expected Mr Bowles's ultimatum to be shelved after the elections. Instead, Washington has continued to turn up the heat on Brussels. The reason appears to be that the bananas conflict has become enmeshed with the politics of impeachment. This appears to be the clearest example so far of the international cost of the president's distracting trial.

There are signs that Mr Clinton's preoccupation with his defence, and his need to win friends in Congress, has left the field open for hardliners to push the dispute with Brussels to the brink. Their aggressive stance is said to have dismayed moderates in Mr Clinton's administration, who have been striving, with some success, to improve economic co-operation with the EU.

In any event, the bananas case has now become a highly visible litmus test of US attitudes to trade policy. Even liberal, internationally minded Congress members say that unless the US prevails, already shaky popular and political support for the WTO will crumble further. They argue that it is essential to show voters that the EU and others are being held to their WTO obligations.

Furthermore, the dispute looks like just a warm-up for a battle this spring over the EU's ban on hormone-treated beef, against which the WTO has also ruled. Senior US officials say their tough line on bananas is intended to show that, however hard Brussels may find it to comply with the hormones judgment, they will tolerate no delay.

This month, another element entered the picture. This was Mr Clinton's call, in his State of the Union address, for WTO ministers to launch a comprehensive trade liberalisation round when they meet in the US at the end of this year.

But US participation in a new trade round will require Congress to give the president's "fast track" authority to negotiate trade agreements. That looks a daunting task, after Mr Clinton's failure to secure fast track 16 months ago. At the least, he will be under heavy pressure from Capitol Hill to stand up robustly for US interests in trade disputes.

But US firmness faces stubborn resistance in the EU. The European Commission is reluctant to consider further changes to it, not least because that would involve reopening a difficult internal debate. The banana regime was agreed only after lengthy arguments and in the face of strong criticism from Germany and several others.

In addition, France and some EU governments oppose on principle what they consider US bullying. "Any solution to this dispute will be difficult, because hard-liners are dug in on both sides of the Atlantic," says one European official.

But even some observers who doubt whether the EU has complied with the WTO bananas decision - and criticise it for footdragging - fault Washington's tactics. Although the US insists it is entitled to impose sanctions, critics blame it for rushing to retaliate before the WTO has pronounced on the EU's revised import regime. By doing so, they say, Washington is acting as judge and jury.

The legal rights and wrongs are unclear, because the bananas case has exposed serious ambiguities and inconsistencies in the WTO's rules for enforcing compliance with its disputes rulings. Politically, however, the case has stirred up strong feelings in a number of governments about alleged US trade unilateralism.

One is Japan, long a target of aggressive US trade onslaughts, most recently over steel. Last week Japan sided with the EU by leading 10 WTO members in a challenge to Washington's sanctions plans. Canada, although it did not support the Japanese move, is also unhappy about US threats to retaliate in a bananas-style dispute about its restrictive magazine laws, before Washington has obtained a definitive WTO ruling in its favour.

The conflict took a surprise new turn late on Monday, when Caribbean banana-producing nations thwarted a US request for WTO approval of its planned sanctions by blocking the agenda of the meeting that was due to consider it.

So far, these tensions have not spilled over into the rest of the WTO's work. But there is a danger that, if the bananas dispute dragged on much longer, they could lead to deeper divisions, which would polarise opinion among its 133 members and handicap their preparations for a new trade round.

Worse still, failure to resolve the issue could undermine the WTO's dispute settlement procedures, the bedrock of its authority to enforce global trade rules. That in turn could lead countries to revert to brute force to settle trade feuds, rather than submit to the impartial rule of law.

Any of these outcomes would be especially unsettling at a time when the global economy is struggling to regain stability, after the financial turmoil in Asia, Russia and Brazil. The consequence would be to make it harder to restrain protectionist pressures in the west, in the face of rising competition from exports cheapened by deep currency devaluations.

It has not come to that, yet. Brinkmanship, histrionics and bluster aimed at impressing domestic audiences are important ingredients of all big trade conflicts. Optimists point out that, despite such warlike noises, the world trade system has been remarkably successful in overcoming previous crises. Furthermore, solutions often emerge only when the clock is ticking.

Nonetheless, the protagonists in this dispute seem to be entrenched in exceptionally rigid positions, from which it will be difficult to retreat. Furthermore, Mr Clinton, who probably alone has the personal authority to call a truce, is distracted by other matters, which seriously constrain his room for diplomatic and political manoeuvre.

In the end, the best hope must be that the US and EU will conclude that they have too much invested in the multilateral trade system to risk destroying it over bananas, and will use their apparently infinite procedural wiles to agree on some face-saving compromise.

But even if they can succeed in shifting bananas to the back burner, many of the underlying political pressures which gave rise to this dispute are likely to remain. However it ends, the US, the EU and their WTO partners face some testing times ahead.