Banana spat threatens a trade war

Protectionism is taking hold in Washington, says Hilary Clarke

THE SEEMINGLY absurd trade spat between the US and the European Union that erupted last week over the EU's banana regime could be masking more than just a problem with a yellow fruit. As the global economic downturn gathers force, the mood of trade politics in America is turning ominous.

Washington and Europe have been fighting for years over the EU banana regime which guarantees access to EU markets for bananas from EU member states' former colonies, mainly in the Caribbean, at the expense of cheaper, bigger Central American ones. Last year the World Trade Organisation supported an American complaint that the regime discriminated against US banana distributors such as Chiquita. The EU recently agreed a proposal to amend the regime to comply with the WTO ruling, but the US argues that the new regime does not fulfil the obligations put on the EU.

The EU, for its part, with Britain one of the stongest supporters of Caribbean producers, said if the US didn't like it then it could make another complaint to the WTO. But that would take about two and a half years to complete.

The US lost its temper and last week it threatened to double tariffs on selected European imports - ranging from party tricks to tweed jackets - worth a total of pounds 900m to pounds 100m of British exports to the US, unless the EU amends the regime again before it comes into force on 1 January.

Now, according to Brussels sources, the EU will take WTO action against the US sanctions unless President Clinton replies to a letter from EU Commission President Jaques Santer by 25 November when the WTO disputes panel meets.

The US seems to be taking things a bit far, especially given that it doesn't even produce bananas and Hurricane Mitch has practically wiped out all banana production in Central America anyway. But Chiquita is one of the most active and effective corporate lobbyists in Washington. In the 1950s United Fruit, as Chiquita used to be called, helped orchestrate and pay for US intervention in Central America to ensure a friendly business environment. Now the company donates heavily to both the Republicans and the Democrats, with its chairman Carl Lindner notorious in Washington circles for his tight connections with politicians. For Europe, last week's trade war threat by the US is even more alarming given the Democrats' good performance in the congressional elections earlier this month.

But the row over the EU banana regime isn't the only target of US trade hawks' wrath. There have been other signs of growing protectionist pressures in Washington, amid concern about a sharp rise in the US trade deficit. Congress also toyed with the idea of erecting punitive barriers against Japan, Russia and Brazil's steel exports, and there is still a threat of action over the EU's ban on US hormone-grown beef.

On Friday US trade repre-sentative Charlene Barshefsky and Japan's trade minister, Kaoru Yosano, met to prepare for next week's trade summit of 21 Asian and Pacific nations. The meeting led to "an exceptionally blunt set of exchanges" because of Japan's apparent failure to pledge tariff cuts on a number of fish and wood products, said Ms Barshefsky.

The banana issue, however, remains the most pressing in terms of world trade peace and it is causing concern at the WTO. "Either the Americans don't have any faith in the WTO or they think they can get away with a heavier hit against Europe," said a WTO source.

The argument that the vagueness of the original WTO dispute panel decision, which while condemning the banana regime didn't specify how the EU should amend it, is the reason for the current muddle holds some water. The best outcome to the banana wars is that the WTO disputes procedure will emerge strengthened. If unilateral sanctions are imposed by the Americans, however, the authority of the WTO will be seriously undermined. "It's really rather sad that when the EU and the US should be working together to deal with the effects of the Asian financial crisis, we are engaged in this dispute," said the WTO source.

A trade war would be bad news at the best of times. With the current fragility of the world economic system, it would be a disaster.