The Trade Flows: Linking the Supply to the Demand Side

This chapter focuses on countries’ geographical positions and political relationships with the EU. Thus, the following countries are selected from European producers and dollar and ACP countries.

- Dollar countries: Colombia, Ecuador, and Costa Rica

- ACP countries: the Windward Islands, Jamaica, Cameroon, and the Ivory Coast - European producers: French Overseas Territories and the Spanish Canary Islands On the supply side, exporting countries’ production levels are based on historical foreign investment in plantations⁸¹ and small- and medium-sized local producers⁸². As a result, different countries can be classified according to their dominant production structures, whether based on foreign or domestic capital. This issue is analyzed more in Section III.4, when firms’ strategies are considered.

III.1.2 The Trade Flows: Linking the Supply to the Demand Side

Banana producing/exporting countries need specific quality standards (and more recently environmental and social standards) in order to be successful in international markets. These standards force producers to continually enhance productive processes if they want to reach the highest-demanding, best-paying countries.

Consuming more than 70% of the world’s exports, the European Union, North America, and Japan lead banana imports. Other exporting countries with lower quality, environmental, and/or social standards compete at lower prices in less selective markets such as South America, the Near East, the Russian Federation, China, and Eastern Europe.

81 Plantations are defined as extensive cultivation of approximately 4,000 to 6,000 hectares (Roche 1998, p. 14).

82 For a historical prespective of the banana market structures, see, for example: Buchelli (1997), Clegg (2002), Davis (1990), Ellis (1983), Larrea (1987), Striffler (2002) and Striffler & Moberg (2003).

Graph III.2 Locations of Banana Producers, Exporting and Importing Countries

Source: Author’s elaboration.

III. DETERMINANTS OF COMPETITIVENESS

The map in Graph III.2 shows the main producing, exporting, and importing countries⁸³. Graph III.3 takes trade flows into account to show the main exporting and importing countries/regions and their respective market shares. The dependency of regions like the ACP and European producers, which export exclusively to the EU, can be seen here. In contrast, Latin-American countries are more regionally diversified and, because of their high quality standards, more dependent on the most-demanding markets, in the EU, North America, and Japan.

Graph III.3 Banana Trade 2002

Source: Author’s elaboration based on UN-Comtrade data

As the main exporting regions are dollar zone Latin American, ACP African, ACP Caribbean, Asian⁸⁴ (the Philippines), and European producer countries, how to deal with the USA as a banana “supplier” becomes a problem. The USA neither produces nor exports bananas, but the two main transnational companies (TNCs), Dole and Chiquita, are headquartered in the USA, while a third, Fresh Del Monte has substantial business interests in the American market (though it is a Chilean-Palestinian based

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83 For the locations of banana plantations, see Annex B.

84 Because the emphasis of this research is addressed to EU trade flows, Philippine exports are not taken into account.

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company). Therefore, the role of the USA in the supply side has political rather than economic implications.

At the beginning of the development of the industry, the banana sector was classified as producer-driven because of the TNCs’ high involvement in production. However, recently the banana value chain has been transformed into a buyer-driven industry, mainly for two reasons: first, TNCs have withdrawn from production to focus on marketing, transport, ripening, and wholesaling⁸⁵; and second, the market power of retail sales is held by only a few supermarket chains⁸⁶. Compared with the production stage, the last stages of the value chain promise high margins and low risks. Despite the fact that only anecdotal information exists on market concentration, some authors (Van der Kastelee 1998; Read 2002) claim that between marketing and wholesaling more than 70 percent of the market share belongs to TNCs. These relationships of market power and political influence are the confirmation of the competition forces detailed in Section II.3.1. Furthermore, they are one of the explanations for the divergence between companies’ strategies and governmental policies developed in the “banana wars”⁸⁷. Graph III.4 shows the actors in the value chain, from producers to final consumers. The banana chain is a complex process in which many actors intervene and TNCs compete with independent domestic firms. As will be examined further, these relationships are some of the important external determinants of competitiveness in the analysis of the banana trade value chain.

Foreign dominance and vertical integration are two common characteristics of the trade structures of all countries. The highly perishable banana needs organizational structures that guarantee the final consumer minimum defects, so speed has been the key delivery issue since the beginning of the business (UNCTAD 2005). Few companies can afford the necessary vertical integration, and normally firms from developed countries dominate the market.

85 Labor and disease risks in the production stage are quoted as the main reasons to the withdrawal of TNCs from production (Wiley, 1997:71). TNCs, unlike domestic exporters, can diversify risk not only by basing production in different countries, but also by producing a range of fruits in addition to the banana (Cruz, 1996).

86 According to the UNCTAD (2003:32), the concentration of market power in retailers is particularly active in Europe. The top 10 grocers increased their market share from 28.8% in 1992 to 41% in 2001. Furthermore, the shares of the top 30 increased from 51.5% to 68.5% during the same period.

III. DETERMINANTS OF COMPETITIVENESS

Graph III.4 Actors in the Banana Industry Value Chain

Source: UNCTAD, 2003

Control of all stages of the value chain was the rule at the beginning of the business, the 1900s. Transnational companies owned plantations and transportation infrastructure in the producer countries. In Costa Rica and most other Central American countries, the United Fruit Company (UFCo, later Chiquita) was the only company with this capacity.

However, antitrust laws in the USA in 1954 changed this structure (Roche 1998:48).

Since then Standard Fruit (later Dole) and Del Monte have gained part of the business in Central America.

One of the main profit margin stages in the value chain is transport. According to NERA & OPM (2004), transport costs depend on multiple factors: the shipping distance from the origin country to the destination; port infrastructure, which can reduce time-costs and thus improve shipping; and ship sizes, which can decrease float time-costs per unit of production. At the ripening stage, facilities on the ships and in importing countries also affect the consumers’ price. However, there is little research deal with this topic for

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87 A more detailed analysis of the banana wars is presented in Section IV.1.

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the banana trade. In this research it is assumed that the ripening process at the destination has similar costs in all countries.

The conflicts between countries’ policies and firms’ strategies complicate the banana trade. The following sections use cluster-value chain analysis to combine the internal determinants of competitiveness within the countries, investigate their effects on firm strategies, and analyze interactions with external determinants.