The article is about some protectionist measures the European Union has taken against banana imports from Latin America. Protectionism is the economic policy of restraining trade between countries, through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to discourage imports, and prevent foreign take-over of native markets and companies. Europe had imposed a tariff on banana imports from Latin America in order to make the producers from Africa, the Caribbean and the Pacific more competitive, which pay no tariff. A tariff is a tax that is charged upon imported goods.
EU banana market (including ACP countries)
Bananas Sd+ACP countries (no tariff)
B Pw+176€(high tariff)
D F Pw+114€ (lower tariff)
Q'p Qp Qc Q'c tonnes of bananas
imports from non-ACP
imports from non-ACP
As illustrated in the diagram above, the world trade price for bananas before the tariff reduction was Pw+176€ and its supply Sw. Latin American producers were paying this high tariff and thus complained about it. Before the tariff reduction the consumer surplus was area A+B and producer surplus area C+G. The imports from non-ACP countries were Qc-Qp. After the tariff reduction the world price for bananas fell to Pw+114€. Now the consumer surplus is A+B+C+D+E+F and producer surplus G. Producers lose area C and the government loses revenue of area E. The imports are thus Q'c-Q'p.
This change causes European producers to sell less and foreign producers to sell more.
Consumers gain from this situation by buying more goods at a lower price (-12%) and this can also be seen from the diagram as consumer surplus is increased. In addition, social welfare is increased by D and F and there are no inefficiency gains from trade.
The reason that European Union has imposed the initial high tariff had to do with colonialism. Some European countries had established colonies in Africa and in some other regions in which the production of bananas is very crucial to their domestic economy. Subsequently these countries requested the European Union to be able to gain easy access to the European market.
Africa, the Caribbean and the Pacific countries (ACP countries) are developing countries that face many difficulties in achieving economics growth and development. Economic growth is the increase of per capita gross domestic product (GDP) or other measure of aggregate income. Economic growth refers only to the quantity of goods and services produced; whereas economic development is the increase in the standard of living of a nation's population with sustained growth from a simple, low-income economy to a modern, high-income economy. Its scope includes the process and policies by which a nation improves the economic, political, and social well-being of its people.
A barrier to economic growth and development that these countries face is the overdependence on primary goods. While the share of manufactured goods produced by developing countries of total world trade is growing, a number of developing countries are dependent on primary commodities for a significant share of their export revenue as is the case with ACP countries. They are heavily dependent on the banana industry for revenues. This overdependence is a serious problem due to commodities price fluctuations. When prices rise, then this will increase the rate of economic growth and if the revenues are used to fund health, education and infrastructure, this can lead to future growth and development. But if prices fall, then the terms of trade will deteriorate and economic growth will be hindered.
Also, no matter the commodities exported, another factor that places overspecializing economies at risk are environmental factors. Natural disasters and unpredictable weather can severely damage the crops of farmers who worked on them for a very long time and have no other source of income.
Consequently, the EU had cut the import tariffs to support those industries and imposed them on the Latin American producers to help ACP countries. While this may seem generous for the ACP countries, it is actually unfair for the Latin American producers who are the largest banana exporters. The US and Ecuador had previously complained about this in the WTO (World Trade Organization) to settle this issue.
In addition, after the tariff cut, the EU provided the ACP countries with a compensation package of 200m euros. This is also unfair and unnecessary as the EU has helped those countries enough throughout the years to grow and develop.
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