October 24, 2002
G302 Breakout Session
9: International: Chiquita Banana Case
Goal of this session: To appreciate the importance of government trade policy to a company’s profits, and thus the importance to the company of trying to figure out why protectionism happens and how to counteract it.
Handouts for students: none.
Handouts for TA's: Nov. 29, 2001, Seattle Times article "Chiquita Files for Chapter 11".
Overheads: Exhibit 1, income statement.
Chiquita Brands Case Write-up Questions:
1. What is the European Union's past and present policy on banana imports? How would you defend their 1993 policy?
2. What problems does Chiquita have in this case? Look ...view middle of the document...
(Ex 7) (not 6, as in teaching notes)
EU Trade policy.
After you have this list up, or enough of it, ask
Q. Exactly how does the EU trade policy work?
This is a big question, so more than one student will be needed to handle it. You can stop somebody halfway through, and have someone else continue, or start with one person, and then ask for corrections or elaboration.
A. There are 4 categories (p. 9 of the text):
1. EU bananas (limited to traditional levels, no tariff)
2. Traditional ACP bananas (Africa, Caribbean, Pacific) (limited to traditional levels, no tariff)
3. Non-traditional ACP bananas (in excess of traditional production levels) (part of the 2 million ton quota, but no tariff)
4. Third country bananas (part of the 2 million ton quota, with a tariff off 100 ecus, 30% of the old price)
If anyone wants to import bananas beyond the quota, they pay a huge tariff of 750 or 850 ecus, so nobody will want to do that.
The allocation of the 2 million ton quota is by licenses. Effectively, US companies get 1.3 million tons, EU companies .7 million, and new entrants almost nothing.
Then, in March 1994, (p. 10 of the case), Costa Rica, Columbia, Nicaragua, and Venezuela signed the “Framework” agreement to raise the quota to 2.1 million, but to give those 4 countries about half the quota—more than their share before the quotas were imposed in the first place.
(The provisions on p. 22 are complicated, and not important for us for the case, but what they are doing is splitting up license priorities among operators that grow their own bananas, operators who do not, etc.)
Q. How will this affect Chiquita?
A. In 1991, 2.4 million tons were exported from Latin America to Europe, of which 960,000, 40%, came from Chiquita. If Chiquita only sells 40% of the 1.3 million ton quota in the future, that is just 520,000 tons. The rest have to be dumped in the rest of the world. And the other companies will be dumping their former EU bananas in the rest of the world too, depressing prices.
Moreover, Chiquita grew relatively few bananas in the “Framework” countries of Costa Rica, Columbia, Nicaragua, and Venezuela, so it would have to cut back on EU exports more than other US companies.
(10 mins) Causes of the Problems
Q. How much of Chiquita’s poor financial position is caused by the EU quota?
A. Not all of it. Chiquita has been declining since 1991, and the EU policy only came into effect in 1993. Chiquita had a loss of 284 million dollars in 1992, and the banana prices started falling then.
Q. So what else besides the EU quota has been hurting Chiquita?
A. Falling banana prices. As Ex. 7 shows, banana prices go up and down all the time.
The teaching note suggests that Lindner’s youth (age 35) and mismanagement might be part of the problem. I’m skeptical. The only...