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 carefully at the numbers in the exhibits.
3. What did Mr. Lindner do about the EU's banana policy? What should he have done?
The Chiquita case teaching notes are quite good. All of the questions I have below are important. Chiquita’s appropriate response is perhaps the least important, since it isn’t clear there is much they could do. Be sure and save time for your wrap-up at the end.
(5 minutes) Administration
We will post the midterm scores on Oncourse when they are available. That could be as early as Friday, but since they are machine-graded, there is always a chance of a glitch.
(20 mins) Chiquita's Problems
Q. In 1994, Keith Lindner has lots of problem. What are they?
A. Here you want to put a list up on the board. The Harvard teaching note has a good list, and the students are supposed to have written answers to this question anyway.
3 Years of losses. (Ex. 1)
Stock price down from $40 in 1991 to $13.63 in 1994. . (Ex. 1)
Lost $284 million in 1992, and kept losing in 1993 and 1994. (Ex. 1) Cash balances down to $179 million from $712 million. (Ex. 2)
Current part of LT debt more than doubled since 1991 (Ex 2) Market value of equity fell from 1,997 million to 671 million (ex 1)
Prices down from 548 to 399 in constant dollars, 1991 to 1994. (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 mismanagement sign I can see is perhaps not foreseeing the price decline and not foreseeing the EU quotas. The teaching note also suggests political causes, but doesn’t really give any. Students may bring it up, but make it clear that we are asking what ELSE besides the quota put Chiquita into decline.
Q. What caused the EU quota?
A. Britain and France want to help their former colonies. Why? – guilt, or friendliness, or to get concessions from them that help British and French companies. Germany and Denmark would prefer free trade, but they must have gotten concessions from Britain and France on other issues in exchange for going along with the banana policy.
Something the teaching note does not say, but I find plausible, is that the falling banana prices of 1992 were the impetus for the quotas. All banana producers were hurting then, and that made it more important to Britain and France to help their former colonies. It also made it less painful to consumers, since banana prices were low to begin with.
(10 mins) Solutions
Q. What should Lindner be doing about the EU quotas?
A. 1. Business responses. Shrink Chiquita production, and try to shift to Framework countries. But the company has 1.3 billion in debt and only 178 million in cash by 1994, so getting supplies from new places might be financially difficult.
2. Political responses. Lindner bought a Section 301 complaint in the US, and enlisted Senator Dole. Students might suggest a WTO complaint too, which Chiquita did bring later--- after the WTO was created.
It was hard for Chiquita to get US support, though, because though it is headquartered in the US, it does not have input suppliers or workers in the US who would support its lobbying. Without a broad base of support, its lobbying just looks entirely self-interested.
Chiquita could try lobbying Europe, but it seems too late for that. Perhaps a campaign to German consumers would help. It looks as if Chiquita ought to have been lobbying the EU more in the past.
(5 mins) Wrap-up.
Chiquita’s Section 301 complaint was rejected. The US government did agree to bring the case before the newly created WTO in 1996, and in 1997, Chiquita won. But the US and Europe only agreed to gradually roll back the quotas, eliminating them in 2006.
Chiquita did have a profit in 1995, but it went into Chapter 11 in November 2001. Perhaps it was too drained by its losses in the quota era.
Points to get across: 1. Lobbying was Chiquita’s top priority in the 1990s—and maybe should have been earlier. 2. Trade barriers have a variety of motivations. For France and Britain, it was foreign aid. For Germany, getting concessions from France and Britain for other things. For Costa Rica and the other Framework countries, it was making the best of a bad situation by getting improved quotas at the expense of other exporters. 