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Chiquita Going Bananas over Quotas
Subject Quotas
Topic International Trade
Key Words Trade Restrictions, Tariffs, Quotas, Balance of Trade
News Story

Chiquita Brands International, the largest and most well known producer of bananas in the world, is threatening to declare bankruptcy. Its financial crisis stems from the European Union's (EU) decision to place trade restrictions on banana imports. The EU quotas have cost Chiquita $200 million a year since 1992. Although the U.S. has brought complaints before the World Trade Organization and has imposed punitive tariffs on a wide range of European goods, Chiquita chairman, Carl Lindner, contends that the Clinton Administration has not done enough. Chiquita wants the U.S. to impose even tougher restrictions so the EU rescinds its quotas.

Europe has been an important market for Chiquita for many years. According to Chiquita, Europe accounted for half its sales and a substantial portion of its profits. In the early 1990s, the EU imposed import restrictions in order to favor Europe's banana-growing former colonies in Africa and the Caribbean.

The United States brought this issue to the World Trade Organization and successfully argued its case. The US was given permission to impose retaliatory tariffs that were supposed to cause the EU to modify its policies. It didn't work. In December, European ministers proposed to drop the colonial preferences and assign import quotas on a first-come first-served basis. Chiquita rejected this proposal. It wanted import quotas based upon pre-quota market shares. Chiquita is also suffering from the weak euro and its ambitious expansion in the 1980s. As a result, Chiquita is deeply in debt and its share prices have fallen precipitously.

(Updated February 1, 2001)

Questions
1. Draw supply and demand curves for a good. What is the relationship between the domestic price and the demand for imports of the good?
2. Assuming no trade restrictions, how is the world price for the good determined?
3. What happens to the price of a good when a tariff is placed on it?
4. What is a quota? What is the impact of a quota on the price of the good?
Source Anthony DePalma, "Citing European Banana Quotas, Chiquita Says Bankruptcy Looms," The Washington Post, January 17, 2001.

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