Yes, we have no bananas ...

By Matthew T McGrath -- Logistics Management, 3/1/1999

... or gourmet biscuits, designer handbags, couture cashmere sweaters, high-end coffee makers, or pecorino cheese. These are just a few of the items that could be more difficult to come by if the so-called "Banana War" between the United States and the European Union (EU) continues.

In the September issue of Logistics, I discussed the new dispute-resolution procedures of the World Trade Organization (WTO). This month, we'll see how well the new system stands up to the intractable sovereign will of the two chief adversaries, which are committed to the correctness of their positions and, at least publicly, to the credibility of the multilateral dispute-resolution process. We'll also consider how such a high-level policy spat may affect the logistics professional's day-to-day concerns.

The basis for the banana dispute seems rather obscure to the casual observer and hardly worth starting a trade war over. The European Union since 1993 has maintained an import-quota system that favors former British and French colonies in Africa and the Caribbean, to the detriment of fruit exports from U.S.-owned plantations in Central and South America. The WTO's predecessor, the General Agreement on Tariffs and Trade, issued two panel rulings in favor of the United States, but the EU blocked implementation.

Since the establishment of the WTO, however, a losing party no longer can indefinitely block implementation of a decision with which it disagrees. Under the new rules, after a specified period, the winning party is authorized to take retaliatory measures. In this case, the United States proposes slapping 100-percent tariffs on a list of European imports that represent $520 million in trade--equivalent to the trade volume deemed to have been impeded by the EU's banana regime. The EU, meanwhile, contends that the modified system it adopted after the WTO's adverse ruling satisfies the WTO's legal requirements. It further insists that retaliation cannot be imposed until mandatory arbitration to test whether its new system satisfies WTO's rules has been carried out. The United States, therefore, has delayed implementation of its retaliatory measures from Feb. 2 to March 3.

How is a product chosen for retaliation? The U.S. Trade Representative selects products whose export values total two to three times the estimated adverse impact of the offending foreign action on U.S. trade. That list is published for comment from potentially affected importers and exporters; it then is pared down to those products that are expected to have the greatest impact without causing too much harm domestically. (Thus the emphasis on consumer goods, rather than raw materials.) It also tries to avoid products that are unavailable from any other foreign source. With respect to the EU, the United States tries to select products that are exported disproportionately from the member countries considered to be the strongest advocates of the offending action. Finally, the list is published with HTSUS numbers and an effective date, to be applied for all such articles entered or withdrawn from a warehouse for consumption on or after that date.

Retaliatory trade measures can have a substantial impact on your business. Importers, freight forwarders, and other stakeholders that do not follow the retaliation process closely may find that a shipment contracted for months earlier has been subjected to huge penalty duties with virtually no notice. The official reasoning is that, since there was some advance public notice, no matter how late, importers should have prepared accordingly (never mind that they had no earthly reason to pay close attention to a dispute over bananas!). Usually, the federal government does not make allowances for goods in transit, goods shipped before the effective date, or goods purchased under long-term contracts.

What steps can you take to protect yourself from the effects of retaliatory measures? First, examine the U.S. Trade Representative's list to determine whether you will be affected, then make sure shipping arrangements will permit you to submit a consumption entry or warehouse withdrawal before midnight on the measure's effective date.

Try to get your product removed from the list, but prepare as if it won't be. Try to amend any long-term contracts by adding a contingency clause for retaliatory tariffs and take similar steps with letters of credit and other financing arrangements. Seek alternative supply sources in case the worst comes to pass. And be aware that, once a product has been selected as a potential target under one dispute, it also may be used in future retaliations against the same country, even if it was dropped from the final list in the original dispute. The European products targeted in the banana dispute, for example, could well be included in the hit list now being compiled for a dispute over meat hormones. There is no statutory time limit on how long a retaliatory action can remain in effect, moreover, so it is difficult to plan for the removal of retaliatory duties.

Claude Pepper, the octogenarian former chairman of the House Rules Committee, was once told by an administration staff member that the results of a particular trade negotiation might take five years to come to fruition. That was too much for Pepper, who preferred the here-and-now to speculation about an uncertain future. "Five years?" the chairman harrumphed. "Young man, I don't even buy green bananas!"

The late chairman's sentiments have both metaphorical and literal significance in the current dispute, as patience is running short and the stakes seem to be getting higher. Those of us in the trenches should be forewarned and take appropriate countermeasures, lest we end up becoming the punch line in yet another bad banana-peel joke.

Matthew T. McGrath is a partner in the law firm of Barnes, Richardson & Colburn in Washington, D.C., specializing in customs and international trade law practice. Mr. McGrath is a member of the ICC's Committee on Customs and Trade Regulations, which participates in deliberations of the World Customs Organization, and also is Washington Counsel to the American Association of Exporters and Importers. He may be reached at (202) 457-0300.