Most of the time when I start these posts, I have an econ lesson in mind first. This time, it’s the recipe I desperately want to share with you. This banana bread cream cheese roll from the latest Smitten Kitchen cookbook is amazing.
The econ lesson came from a little research and actually satisfies some of the requests I’ve been getting. What is going on with this trade war with China? What do tariffs / quotas do?
I’m going to begin by saying that as I started to dig into this, my eyes started to glaze over with every detailed article about the tariffs/quotas imposed. So, I’m going to keep things basic. If you want to get into the specifics, I’ve supplied a number of sources below that you can check out.
First. Let’s start with some definitions.
Exports– goods produced in a country and sold elsewhere. Example: bananas are produced in Latin America and exported to other countries.
Imports– goods purchased in a country that had been produced somewhere else. Example: The United States imports bananas from Latin America.
Tariffs– taxes on imports. Example: European countries placed a tariff of 150 ECUs on all bananas imported from Latin America.
Quota– limit on number of goods that can be imported. Example: Europeans placed a quota on the number of bananas that could be imported from Latin America at a low tariff rate.
Now let’s get into bananas. People like bananas. They are one of the most popular fruits in the United States. In 2017, bananas had the highest per capita consumption by pound of any fruit in the United States. There are some bananas grown in Hawaii and Florida, but most of our bananas are grown in other countries. In 2018, the U.S. imported $2,218,305,000 worth of fresh bananas, or 10,606,056,000 pounds.
That’s a lot of bananas.
Most often in the U.S., we see two stickers on our bananas, either Chiquita or Dole. These are both U.S. companies, but they grow bananas internationally.
Turns out, however, not just people in the U.S. like bananas. Europeans similarly consume 26 pounds of bananas per person each year.
Eighty percent of the world’s banana exports are from Latin America and the Caribbean. Ecuador is the largest exporter of bananas, maintaining 36% of world exports. Most of these bananas go to EU and Russia, but also some to U.S. Guatemala is the 2nd largest exporter, followed by Costa Rica.
Ok. Let’s review. North Americans and Europeans like bananas. They are grown in other countries besides the U.S. and Europe.
[Most of the information below on the European tariffs comes from this article.]
Prior to 1993, different European countries had their own banana trade policies:
- Germany did not impose any quotas on bananas imported into the country.
- A few countries imposed tariffs on bananas.
- A few other European countries had the tariff but also had a quota on bananas imported from Central and South America. Usually we think of countries imposing tariffs and quotas to protect the home country’s own suppliers of goods. In this case, the tariffs and quotas were helping to protect African, Caribbean, and Pacific countries (former European colonies).
In 1993, the European Union created a “Single Market” to enable free “movement of goods, services, people and money.” This movement led to some changes in international trade policies, including bananas. All European countries worked under the same trade policy:
- Bananas imported from African, Caribbean, and Pacific countries didn’t have to pay a tariff up to a certain limit. After that limit, they had to pay a tariff of 750 ECUs per metric ton.
- Bananas imported from other countries (think Latin America), had to pay 100 ECUs up to a certain limit and 850 ECUs after that.
Let’s slow down for a bit. Why are Latin American countries not so happy about this? As I mentioned, tariffs are taxes on goods that are imported. Bananas from the former European colonies are taxed at lower rates than those from other countries, which will likely result in them having lower prices. Which one are you going to buy, the one with lower or higher price? Clearly the one with the lower price. Fewer bananas from Latin America will be purchased.
A quota (similar to a tariff) restricts the number of goods (bananas, in this case) that can be imported. It also leads to an increase in price because at the original price there would be more people that would be willing to buy bananas than firms that would be willing to supply at that lower price.
You can imagine that the Latin American banana producers would not be so happy with this change. Bananas from the former European colonies got preferential treatment. So, those countries first came together and complained under the General Agreement on Trade and Tariffs (the GATT).
Later the U.S. got involved (remember Chiquita grows bananas in Latin America and is also a U.S. based firm. Chiquita was on the brink of bankruptcy before the trade war ended). A World Trade Organization (WTO) panel was convened and determined that the European trade restrictions did violate the rules under the GATT. The European Commission changed the trade agreements at least twice more, but the U.S. continued to be unhappy with them and felt they violated WTO agreements.
So, what did the U.S. do? Retaliate. Here is where the trade war ensues.
If European can impose tariffs. So. Can. We.
For some reason I find this funny - What goods did we put tariffs on? Goods you think of as European (and certainly not essential goods): French handbags, British bed linens, Scottish cashmere, and Danish hams. We imposed 100% tariffs on these luxury goods – in other words doubling their price. Who does this hurt? European producers of handbags, linens, cashmere, and hams. At twice the price fewer people in the U.S. are going to buy these goods. Yes, some U.S. consumers weren't so happy either, although, as mentioned, these goods are not essential.
You can imagine that the Europeans weren’t so happy with this tariff. Eventually in 2001, the EU and the US came to agreement about the banana tariffs and the US lifted its cashmere/handbag/ham tariff.
Banana Trade War Over.
So, how does this relate to the trade war we are in today? Things are a little bit different. To start, the trade war began because of two issues: desire to help U.S. companies and as retaliation to China for stealing intellectual property. In the U.S. someone with a new idea or product can get a patent on it and keep the profits made from it. China was (is) stealing technology and this intellectual property from US firms and getting profit from it. (News articles on intellectual property: Washington Post and Fortune)
I found the following timeline by CNN to be helpful.
First, we imposed tariffs on solar panels and washing machines.
Then steel and aluminum. In other words: We put tariffs on these goods to help our producers of steel and aluminum who can now sell more at a higher price than they could before. Producers of steel from other countries don't like this because now fewer US consumers will buy from them. However, it is also important to note that consumers of steel (which includes producers in the U.S.) don’t like this because now they have to pay more for steel.
China retaliated by imposing its own tariffs on US goods. We added more tariffs. They did the same. And we are left with higher prices and fewer imports and exports.
How will this end? I’m not so sure. But I’m sure we will be talking about it in future econ classes for years to come!
Now on to that banana bread cream cheese roll. It is amazing. Try it out!
Banana Bread Cream Cheese Roll
Slightly adapted from Smitten Kitchen
Also, check out Smitten Kitchen’s cookbook.
3 large eggs
1/3 cup (65 grams) brown sugar
1/3 cup (65 grams) sugar
2/3 cup (150 grams) ripe bananas mashed (lots of brown spots. What I do – when bananas get very brown, then put them in the freezer until I’m ready to use them. Then I thaw them out before putting them into banana bread.)
1 tsp. vanilla extract
1 tsp. baking soda
1 tsp. cinnamon
A sprinkle of allspice (if you have it)
¼ tsp. salt
¾ cup (100 grams) all purpose flour
8 oz. cream cheese, room temperature (if I forget to take it out of the fridge, then I’ll put it on the stove and let the heat from the oven warm it up a bit)
2 Tbsp. (30 grams) unsalted butter, room tempearature (same note as above)
¾ cup (90 grams) powdered sugar