Gone Bananas.....by John Stepek

After 16 bitter years, the banana wars between Europe and America are ending. But what on earth were they and why does it matter?

The banana wars could be about to end. "Thank the Lord," I hear you say. Get the bunting out for the street parties! This dreadful war is finally at an end!

Well, maybe not. In fact, you're probably thinking: "Banana wars? What?"

But you'd be amazed at the trouble the humble banana has caused in its time. On this occasion, we're talking about a trade spat that goes back to 1993.

That makes it the world's longest-running trade dispute. The roots and causes of the banana wars go far deeper than this, but people have written whole books on this topic, so I'll not get into that right now (check out a site such as Bananalink).

Banana wars redux
Here's what the current dispute comes down to. The European Union gives favourable terms to banana growers in its former colonies in Africa, the Caribbean and Pacific region (ACP).

Basically, it charges import tariffs (taxes) on bananas imported from everywhere else, to protect prices for the ACP region. The idea was to help Europe's ex-colonies using favourable trade terms so they wouldn't need direct overseas aid.

The US complained to the World Trade Organisation (WTO). The US doesn't export bananas to Europe, but Latin America does and the banana crop there is controlled by US multinationals. The US reckoned this subsidy was unfair on the Latin American producers, and the WTO - which polices world trade - agreed. It told the EU to stop it in 1997.

Tit for tat tactics
The EU changed its rules. The US didn't think it had gone far enough. The WTO has been forced to rule against the EU on this topic six times since the dispute kicked off.

Now it looks as if - although it's not certain - the EU and Latin America have come to an agreement. Tariffs will be lowered over the course of seven years, to the point where Europe's former colonies are no longer given favourable terms.

Cheap bananas for all
So there'll be more competition in the banana market and consumers will end up getting cheaper bananas - good news, right?

In theory, yes. Anyone who reads my columns even occasionally will know that I believe in capitalism, free markets and all the rest.

That's not because I'm a viciously competitive borderline psychopath who thinks the weak should be crushed under the jackboot of the strong, which is the vague impression that I think some people get of capitalism.

It's because I think it's the best way we know to help everyone in the world improve their standard of living. It's like democracy - it's got plenty of faults, but it's better than all the other systems we've tried so far.

Why's free trade a good thing?
The basic idea behind free trade is this: you want to eat oranges and apples, I want to eat oranges and apples. We could each grow our own supply. But my garden is great for growing apples and rubbish for growing oranges. Yours is great for oranges, but a nightmare for apples.

So rather than me wasting valuable time and money struggling to grow oranges, I just devote my whole garden to apples. You do the same with oranges. Then we trade our surplus with each other.

That way we both benefit from a higher standard of living: we've saved ourselves time and energy by focusing on what we're good at and we still have all the apples and oranges we need. Broaden the theory out to countries, and that's pretty much the idea behind free trade.

And it does work. It's one of the main reasons why China and emerging markets have managed to get a lot richer in recent years. It's not a panacea, and it does have losers - just ask your average blue-collar American worker - but as whole, the global standard of living improves.

So this "victory" in the banana wars is a good thing, right?
Well, not necessarily. For capitalism to work most effectively, the rules should apply to everyone. Unfortunately, they don't. Trade across the world is rife with protectionism and special interests and it's particularly bad in the agriculture sector.

I'm not saying this represents a failure of free trade or capitalism. You can free markets up bit by bit, increase the size of your trading blocs and gradually spread the benefits across larger areas. But this deal doesn't strike me as being the right place to start.

The EU imports about four million tonnes of bananas a year. Of that, 3.4 million already comes from Latin America. So the big companies already control a vast chunk of the banana trade. Meanwhile, a vast chunk of the Caribbean islands' economies relies on banana farming, for example.

Tough, you might think, that's competition for you. They should be growing something else. Well, that'd be fine, but it's not that simple.

Because although we might be looking at scrapping tariffs on bananas, the big protectionist measures still around - the European Common Agricultural Policy being a prime example, although US biofuel subsidies are another one - are still in place and heavily defended by their beneficiaries.

So whatever this is, it's not a level playing field.

Supporting the needy
Now to be fair, seven years is a fairly long time to get to adapt to these changes, and they've been on the cards for a long time. The ACP countries will also get about €190 million in aid to sweeten the deal.

However, the ACP countries may have another ace up their sleeve - Fairtrade, which sources many of its bananas from the Windward Islands in the Caribbean.

Now, I think that Fairtrade is a sticking plaster rather than a solution. Ultimately, it's just another subsidy, paid for by the consumer, and it's a bad idea for these countries' economies to be so reliant on one crop - particularly given that it is vulnerable to destruction by disease and weather. They should diversify in any way they can.

However, if you want to exercise your freedom of choice as a consumer to buy a banana which includes an element of charitable giving and, dare I say it, ethical shopping, then I'm certainly not going to discourage you from doing so.

And while European farmers are still being given huge subsidies under the Common Agricultural Policy, effectively robbing developing world farmers of their livelihoods, I can't really describe the end of the banana wars, with the potential impact on poor farmers in developing markets, as a real victory for free trade.

John Stepek is the editor of MoneyWeek