The Tariff-equivalent I: Price-Gap Calculations

The EU chose to justify its proposed TO rate of 230€ by using the PG method which it applied to the EU-25 to account for the new members using an average over 2000-2. As discussed here, though straight-forward in principle, the application turned out to be complicated and controversial, leading to a wide range of estimates that I report in table 4. For the calculation of the IP, annex 5 of the WTO guidelines state that

[..] The internal price shall generally be a representative wholesale price ruling in the domestic market or an estimate of that price where adequate data is not available.”

Although bananas are by and large a relatively undifferentiated commodity, there is no single accepted index of its wholesale price in the EU or elsewhere. The Commission decided to use FAO price statistics as the source of its estimates that were computed over the period 2000-02 which the Commission interpreted as landed, duty-paid prices Free on Truck (FOT) in Hamburg for bananas from Latin America (all LA origins combined) whose average price over the period 2000-2002 was (€890). The Commission then applied three “adjustments” to arrive at a price of €789 (see

19Based on GTAP data, Borrell and Hanslow (2004) suggest supply estimates of around 3.0 for MFN suppliers and African ACP suppliers but much lower ones around 0.3 for the Winward islands and for most EU producers.

20 This fear about simulation methods was voiced by the WTO (2005) arbitrator award (WT/L/616, para. 79) of its decision when it “notes that the benefits from their [referring to simulation models] use must be carefully balanced against the technical hurdles and uncertainties posed by the choice of parameters and data”. Raboy (2004) also expresses doubts about the use of simulation methods that rely on elasticities that may be hard to estimate because of the poor quality of the data on prices.

23 series (b) in table 4).²¹ Though authoritative, FAO price series are not the only ones. An alternative are the World Bank estimates from their “pink sheet” series based on an average of the three major brands (Chiquita, Dole and Del Monte) sold in Hamburg FOT/FOR. These are reported as series (a) in table 4.

For the calculation of the EP, annex-5 of the WTO guidelines stipulates that

“External prices shall be, in general, actual average CIF unit values for the importing country. Where average CIF unit values are not available or appropriate, external prices shall be either

(a) the appropriate average CIF unit values of a near country; or

(b) estimated from average FOB unit values of (an) appropriate major exporter(s) adjusted by adding an estimate of insurance, freight and other relevant costs to the importing country.

The guidelines’ first choice is the CIF unit value of the TRQ-constrained product on the importing country’s market exclusive of duties and quota rents. The guidelines requiring the use of unit values in the importing market considerably narrows the choices in computing the PG. In accordance with the guidelines, the Commission used Eurostat CIF unit values of MFN (TRQ-constrained) bananas as its proxy for the external price. Details were not given but the Commission’s average value for 2000-2002 was €559 per ton for the EP, a figure lower than an alternative based on the EU-15 (see table 4). Given their IP estimate of €789, the Commission’s PG estimate was €230 per ton. While acceptable and in line with the guidelines, depending on the choice of series, the PG estimate would vary by 17% as shown in table 4(a).

While the EU Commission did not divulge its objectives in using the PG method, the other estimates in table 4 reflect the objective of the authors. These ranged from NERA’s (2004) estimates with as objective to maintain the marginal Caribbean (i.e. Winward islands) in business to those of Raboy (2004) and Borrell and Bauer (2004) who were interested in estimating the TO that would maintain imports of MFN suppliers. NERA estimated the competitiveness gap of the marginal supplier by computing the difference between the fob prices of the marginal Caribbean suppliers and the fob prices of the MFN suppliers which they estimated at €259/ton (an ad-valorem TO of 46% calculated on the basis of a cif price of €560/ton) .

At the other end, estimates that would maintain MFN supplies were around 10%. Raboy (2004) looked for an index of the price of the high-cost marginal producers (i.e. the producers in the EU territories). Unable to get estimates of EU producers, he used the cif price of ACP bananas as reported by EUROSTAT. For the EP he started using the unit value for Norway, a neighboring country with no restrictions. Faced with an outlier estimate for the 2002 unit value (see table 4(b)),

21The adjustments were minor and consisted of: (i) adjusting for discrepancy between FAO and EUROSTAT data for LA exporters; (ii) correct for higher prices in Germany on the basis of undisclosed data; (iii) taking into account the newcomers in the EU had lower prices. Cumulating these downward adjustments resulted in a multiplicative factor of .94 on the FAO statistics.

24 he used the US price adjusted for transport costs. Since African ACP producers were getting increasingly competitive, this gave him an estimate of €68 per ton (called “unadjusted” in table 4b).

To this estimate he added an estimate of the protection afforded by the tariff which he argued might be either half or the full value of the MFN tariff (i.e. either €75/ton or €37.5/ton) giving him an estimate in the range of €106-€143/ton.

Table 4 Price-Gap Estimates

(b) FAO series, duty paid as modified by European Commission

4(b) Raboy (2004)

(c)Adjusted PG estimate: €(68+37.5)=€106<PG<(68+75)=€143

4(c) Borrel and Bauer (2004)

External price (fob LA suppliers) 262

Price gap 259

25 As pointed out by Borrell and Bauer (2004), this amounted to “dirty tariffication” or double counting since the IP captures the effects of all border measures. That ACP producers would be unable to capture 15% of the MFN tariff would then reflect the bargaining power of banana importers relative to ACP producers. Borrell and Bauer used the same approach but relied on prices estimates from their (unspecified) model to obtain an estimate of €64/ton of 11.4% (table 4c). The obvious problems are that neither the model nor the underlying data are provided to the reader.

Moreover, these findings were inconsistent both with the large sums expended on electoral campaigns in the US and with the anecdotal evidence that MFN suppliers were disposed to pay between €100/ton and €120/ton (FAO(2004), p.13) to obtain licenses to sell in the EU.