Chiquita's challenges from European Union banana trade regulations in the 1990s

¶ … growth for Chiquita, the 90s brought about serious challenges for the company, where they refer to difficult international trade regulations and a strenuous situation with its main market, the European one, or simply an approach that did not pay off in many situations. The report below will detail the issues that the company is facing, alternative solutions that it may adopt, as well as the optimal solution and ways of implementing it.

Current Problems

As we have seen from the case study, the beginning of the 90s meant a serious decline in stock price from $40 to $13.63, as well as three consecutive years of losses subsequent to 1991. These financial problems had reasonable explanations.

Perhaps the most important one is related to the creation of the Common Market in Europe, through the Maastricht Treaty, to which all 12 countries members of the European Union at that time adhered. On July 1, 1993, the European Union (at that time the European Community), adopted regulations that imposed a new banana import regime. This had a straightforward expression in the form of Community quotas, especially on import from Latin America.

There were several major regions on the globe that produced and exported bananas. The most important of this was Latin America, with 75% of the total global volume of shipments, followed by the Philippines (10%) and Africa, the Caribbean and the Pacific (ACP-10%). Because many of the countries in the ACP group had been former English, French, Spanish or Portuguese colonies, the European Community had every intention and every reason to favor them against Latin America, even if this would have brought about a commercial conflict with American companies, many of which had seriously invested in harvesting and production capacities in Latin America.

Indeed, the first step in this sense was made in 1975, when the European Economic Community signed with many of the ACP countries the Convention of Lome. According to this, countries in the ACP were granted tariff-free access to the European Community market. The problem did not reside necessarily in the fact that the imports from Latin America had to pay duty taxes, but more in the fact that several other trade restricting measures, namely indirect and non-tariff barriers were imposed and that these, in time, became more burdensome. As the case study mentions, these generally took the form of quantitative restrictions, import licensing requirements and import bans.

These were all represented in the Council Regulation 404/93 that became effective on July 1, 1993. Under this regulation, banana imports on the European market were divided into several categories, according to the country or region of provenience. The discrimination between Latin America and the ACP imports was more than obvious. First of all, on third country imports (Latin America), a 2 million ton quota was imposed, with an import tax of 100 ECU/mt. On the other hand, had no import taxes applied. Additionally, the banana imports from Latin America had to deal with the licensing problem as well.

The impact of these measures on Chiquita Brand activities was tremendous. First of all, it saw its trading limited to at most a share of the 2 million tons (one had to consider the other players who relied on Latin America as well), because the import taxes on the quantities that surpassed this quota were exorbitant. Second of all, it had to fight a serious battle in order to obtain a significant number of licenses, without which it could not export to the European market.

So, the first cause of the financial problems that the company faced was related to the restrictions the European Community imposed on banana imports from Latin America and to the changes the company needed to make in order to adapt to this. The second cause of the problem was the way Chiquita thought to react.

Indeed, while it filed Section 301 Petition in order to protect its interests, it also sought Senator Bob Dole's help. The way he did this was neither moral nor very ethical and it implied pressures, not necessarily on the European Union, too big and powerful to fall to blackmail, but to smaller countries in the Latin America area that had signed agreements with the European Union. These included threats to cut off financial aids to Columbia or Costa Rica, for example. As such, as the case study mentions, negative attention was brought on the company, a company that was more and more seen by the public as an economic player that brought little or no benefit to the United States.

Optimal Solution and Implementation

In my opinion, diversification should be a key strategic word for Chiquita. Diversification would refer in this sense, both to the production markets and to the output markets. Indeed, the fact that Latin America is almost the sole producers of Chiquita bananas was an extremely risky act in the first place and a gradual, smooth relocation is more than necessary. This would not necessarily mean abandoning Latin America production altogether, but finding different alternative centers of production, especially in the ACP markets.

Finding an alternative to the difficult European business environment is also necessary. Chiquita is relying too much on a single large market for its products. In many ways, the company showed no understanding of the hedging concept or the fact that diversification reduces business risk.