South-Western College Publishing - Economics  
Going Bananas Over Tariffs
Subject Trade Restrictions
Topic International Trade
Key Words Trade Restrictions, Tariffs, Quotas, Balance of Trade
News Story

The U.S. is threatening to place prohibitive tariffs on millions of dollars of European products in retaliation for the European Union's (EU) decision to place trade restrictions on banana imports. The Clinton administration hopes that the prospect of 100% tariffs will cause the EU to change its mind about banana restrictions. The administration's moves could have the opposite effect - it could cause Europe to counter by raising tariffs on a number of U.S. goods.

The banana dispute is somewhat strange because neither the U.S. nor EU member countries produce a significant amount of bananas. The EU measure is an effort to aid banana growers in former European colonies and countries that have special relationships with Britain and France. These countries are located in parts of Africa, the Caribbean and the Pacific Islands. If bananas from these counties have a price advantage as a result of these measures, then American companies, such as Chiquita Brands International and Dole Food Co., that sell bananas from Latin American countries, will lose business. The threat of punitive tariffs on European imports is what the Clinton administration is hoping will change the EU's policy.

The United States has brought this issue to the World Trade Organization and has successfully argued its case. The EU was supposed to modify its policies but according to government officials, didn't. U.S. officials argue that the imposition of punitive tariffs is within its rights because of Europe's noncompliance. European officials have threatened to challenge these tariffs at the World Trade Organization.

(Updated December 1, 1998)
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 Paul Blustein, "U.S. to Threaten EU With Tariffs", The Washington Post, November 10, 1998.

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