EC Bananarama 1992 : the sequel - the EC Commission proposal

Some European Community (EC) countries give preferred market access and high prices to bananas from selected developing countries or EC regional suppliers. This preferential status is regarded as a form of aid to these countries, most of which are developing small island economies. EC marketers of bananas from these preferred suppliers also benefit because of the high retail prices. Nonpreferred suppliers - mainly developing countries of Latin America - are hurt by the policies because access is denied or restricted and the lower demand depresses the world price for bananas. The Community's commitment to establish a single unified EC banana market on December 31, 1992 provides a timely opportunity to reform existing distortionary trade policies. The recently announced proposal of the Commission of ECs to regulate banana trade within a unified market relies on quotas to control imports. The proposal is extremely complicated. It is designed to severely restrict competition and to maintain the advantages of selected groups. The authors update their earlier analysis of world banana trade to reflect the market in 1993. They evaluate the implications of the Commission's proposal alongside existing and alternative policies. They find that current policies cost EC consumers about $1.6 billion annually to transfer a net benefit of $0.3 billion a year to preferred suppliers. So, it costs EC consumers about $5.30 to transfer $1.00 of aid toselect developing countries or regions. Additionally, every dollar of aid reaching preferred suppliers costs other developing country suppliers $0.32. EC marketers are the main beneficiaries. Of the $5.30 cost to EC consumers, over $3.00 is collected as excessive marketing margins by protected importers and wholesalers. About $1.00 is lost in outright waste. Several plausible versions of the Commission's proposal are modelled. At best they are found to be slightly less costly than existing policies and at worst, considerably more costly. A 3.5 percent reduction in the quota allocation is estimated to lead to a 30 percent increase in the cost of the proposal. The authors conclude that the Commission's proposal for a unified EC banana policy appears to be little more than a way of replacing existing distortionary national policies with an almost equally distortionary single policy and market. The only difference: the costs would be borne by consumers in all EC countries rather than consumers in only some countries. Worse still, costs could increase. Markets that now gain the benefits of mostly open and competitive marketing such as Germany would face closed and uncompetitive conditions. For developing countries exporting bananas, the proposal offers little. At best conditions may be no worse than they are now. At worst the policy could hurt Latin American suppliers even more than current policies and introduce considerable confusion about the level of support to preferred suppliers. Under the proposed quota system aid will not be well targeted. A more efficient way of achieving the EC's aid commitment is through a small tariff of about 17 percent, used to fund a system of well-targeted deficiency payments or direct aid. The only reason for choosing the Commission's proposal over simpler, tariff-based options seems to be to maintain the vested interests of protected EC markteters. But this is contrary to the objectives of unification, which are to seek gains from increased competition and trade.