Geographic Indications and International Trade (GIANT)
TED Case Studies
CASE NUMBER: 553
CASE MNEMONIC: PISTACHIO
CASE NAME: IRAN and Pistachio Trade
The [Pistachio] Nut Case
I. Identification
In 1996, Israel was faced with a problem; one of its majortrading partners, the US, presented Israeli officials with damaging evidenceregarding ineffective import practices over inspection of pistachio nuts. The US provided evidence that large volumes of Iranian pistachio nuts wereentering the Israeli market illegally through a third trading partner,the European Union. The politics and economics of the pistachio caseshall be discussed in more detail below in order to provide a greater understandingof the significance of the case to US-Israeli relations.
1. The Issue
The US and Israel have always had strong politicalties. The US was one of the first nations to recognize Israeli independencein 1947 and has continued to support Israel both politically and militarilyin its conflicts with neighboring countries. The two countries haveremained politically and militarily linked and the partnership expandedin the early 1980s to include trade. Through many years of toughnegotiations to lower trading barriers and open up domestic markets (especiallyagricultural products), the US and Israel came to a mutually favorabletrade agreement in 1985 (US-Israeli FTA). However, in early September1996, the trading partnership that took years to build was under greattension. Israel found itself faced with growing allegations regarding itstrade practices. The USDA Foreign Agricultural Service, with thehelp of US pistachio growers, presented Israeli Ministry officials withmounds of evidence against Israeli import inspection; the US provided evidencethat the import inspection process was inefficient because it allowed Iranianpistachio nuts to enter the country undetected. Israeli law prohibitsthe importation of goods and services from Iran, thus not only effectingUS interests but violating Israeli national law. Three importantquestions can be derived and answered from this pistachio case: 1.What were the US's allegations and solutions to the Israeli import inspectionproblem? 2. How did it affect the US-Israeli political andeconomic partnership? and 3. Why was the US so devoted to makingsure Israel changed its inspection practices?
2. Description
Israel, as one of the largest markets for pistachionuts, was and still remains a focal point of interest for US trade objectives.Since the 1985 US-Israeli Free Trade Agreement and the 1994WTO/GATT Uruguay Round Agreement, the US has been working hard to developa closer trading relationship with Israel. The evidence collectedby the USDA Foreign Agriculture Service and various US pistachio growersorganizations, predominately the California Pistachio Commission, focusedon the various reasons why Israel needed to rethink their import inspectionprocedures. Import of Iranian pistachios not only challenged Israelilaw; but since they were sold at a 20% discount in the Israeli market,undermined the world price (Staff, 11/19/96). According to USDA data,Israeli importers purchased approximately $10 million worth of Iranianpistachios annually because of the reduced price (Tirschwell, 1997). In effect, the discounted Iranian pistachios sold in the Israeli marketnot only undermined the world price but also US opportunities to compete. How could US pistachio growers compete with this reduced price set by theIranian exporters? The reduced price and high domestic demand forthe Persian pistachio nuts created unfair competition for US pistachioexporters/growers and strained trading relations between the US and Israel.
Initially, Israeli officials acted swiftly by puttingtogether an investigation team to look at the US allegations and evidence. The Journal of Commerce ran headlines reading "Israel Probes Allegationsof Indirect Trade with Iran" in early November whichdemonstrated the Israeli's commitment to trying to get to the bottom ofthe situation. However, the Israelis explained to US officials thatthe main problem with the import inspection procedure was the port authoritiesonly kept records on embarkation ports. There are no records thatcan trace the origin of the good or service entering the country. For this reason, the evidence produced by the US that most of the importscame from the European Union did not surprise Israeli officials. Israel and the European Union negotiated a free trade agreement openingup trade; Israel was more willing to accept imports that came from EU membercountries (Tirschwell, 1997). What evidence did US officials havethat lead them to believe Iranian pistachios were being imported into Israelvia the EU? The main fact is that European nations are on friendly termswith Iran and have open trade agreements. Next, most of the pistachioexports originated from Northern European nations. If pistachio exportscame from Greece and Italy (two countries with favorable climates for growingpistachios), then the imports into Israel could have been pistachios fromSouthern European pistachio growers. However, the US discovered andpresented to the Israelis evidence that proved to the contrary. TheUS provided statistics that over 70% of pistachio imports originated inNorthern European nations, such as Germany and Great Britain (Staff, 11/19/96). Pistachio nuts require a warm but desert like climate to grow. NorthernEuropean countries do not have the appropriate climate to grow pistachionuts; plus, these nations import pistachios from Iran. The USDA foundthat in 1995 alone more than 5 million pounds of pistachios, worth around$14 million, were imported from Northern European countries into Israel(Staff, 11/19/96). As more and more evidence kept piling up, theIsraeli government finally realized that Iran, an enemy of the state, hadinfiltrated their markets. In order to salvage the US-Israeli tradingpartnership, Israeli officials began to recognize the need for tougherimport inspection standards.
The History of the Disputed Nut
Pistachionuts originally came from the Holy Lands of the Middle East, growing wildlyin the high desert areas that covered the region. The pistachio madeits way over to the US in the 1880s, imported by American traders to satisfythe growing Middle Eastern population in the states. However it wasnot until the 1930s, due to the efforts of US scientist William E. Whitehorse,that the first pistachio production began in America. In 1929, hespent six months in Persia studying and collecting seeds in order to producea distinct type of pistachio nut to bring back to the US (www.pistachios.org). By the 1930s, his efforts succeeded and trial plantings began in the desertregions of California. Since it takes a good 7 - 10 years for pistachiotrees to mature, the first trial plantings did not look promising. It was not until the early 1950s, with the emergence of the Kerman pistachiotree, that pistachio production became a reality. [The name Kermancomes from the plains in Iran, where the pistachio seeds collected by Dr.Whitehouse were found]. Pistachio production in California flourishedduring the 1950's and continued to gain strength and recognition throughoutthe 60's and 79's. By the 1990s, the US climbed the charts to becomethe world's second largest producer and exporter of pistachio nuts. To illustrate the rapid development of California's pistachio production,in 1976 the first commercial crop harvested approximately 1.5 million poundson less than 1500 acres of land (www.pistachios.org/industry.html). Today, there are over eighty-two thousand acres harvesting more than onehundred times the amount of pistachio's averaged in 1976 (www.pistachios.org/industry.html). The US demonstrated in a short period of time its ability as a pistachioproducer to compete domestically and internationally with producers aroundthe world.
US Solutions to the Israeli Nut Problem
Israel claimed early on in the case that they could notdetermine the origin of the pistachio nuts entering the country since mostwere imported from Europe. The US pointed out three different waysthe Israeli inspection system could determine the origin of imported pistachionuts. According to research compiled by the USDA and US pistachiogrowers, Israel could determine the origin of a pistachio nut through 1. visual identification, 2. volume and 3. chemical (Tirschwell,1997). Due to the small number of countries that produce and exportpistachio nuts, it is relatively easy to narrow down and identity the originof the imported nut. Pistachio nuts are grown around the world, specificallyin Greece, Italy, Syria, Turkey, Iran and the US. The last two countrieslisted are the two largest and most competitive producers and exportersin the pistachio industry, Iran ranked number one. These two giants,in the industry, hold 70% of the world production of pistachio nuts (Tirschwell,1997). The last type of identification available deals with a chemicaltest of the pistachio nuts. The US Customs Agency developed, in the1980s, a chemical test for the purpose of insuring that Iranian pistachiosdid not enter the country. It was discovered during the early 1980sthat large quantities of Iranian pistachios were entering the country illegally,violating the numerous trade embargoes against Iran (Tirschwell, 1997). The chemical test basically determined the type of soil and weather conditionsused to produce the pistachio nuts. Iranian and US (specificallyCalifornia) climates and soil differ greatly, helping to prove that designinga simple chemical test can easily solve the problem of illegal pistachioimports.US-Israeli Free Trade Agreement of 1985 and the Effectsof the Uruguay Round Talks in 1994
In 1985, the US and Israel came to an agreement that wouldslowly open up their domestic markets and create a closer union betweenthe two countries, both politically and economically. However, underArticle VI, Israel was able to maintain some control over agriculturalimports from the US. US exports of fresh produce and processed foodswere barred from Israeli markets (State Department, 1999). In 1995,the trade relationship between the two countries progressed even furtheras Israel participated and signed on to the Uruguay Round Table Talks thatset up the WTO (World Trade Organization). These negotiations committedmembers of the GATT/WTO to the abolition of almost all import quotas anda reduction of tariff rates on trading partners over time, to increasecompetition. Therefore Article VI of the US-Israeli FTA was in violationof the WTO negotiations, and in 1996, US and Israeli officials revisedthe FTA. This revision allowed the bilateral free trade agreementto be compatible with the WTO multilateral agreement. The new five-yearagreement on Food and Agriculture committed Israel to reducing its quotarestrictions on food and agriculture, in other words opening its marketup to US commodities (State Dept., 1999). US agricultural exportswere now able to enter Israel without any quota restrictions. Inthe case of US nut exports (including pistachios), Israel eliminated allduties on imports from the US as of January 1995; this gave the US a considerablecomparative advantage compared to other Israeli trading partners. For instance, the European Union still had to pay close to 15% duty taxon nut imports and other nations, such as Turkey, had to pay a duty taxapproximately as high as 22.5% (State Dept., 1999).
California Pistachio Commission
The California Pistachio Commission emerged in 1981, as an organizationwhose main mission was to assist pistachio grower members from California. The CPC continues in the 90s to promote and support marketing endeavors,public relations, and government relations (http://www.pistachios.org). It also works to obtain funding for special research projects that focuson improving production. The Commission's work on government relations,especially on the federal level, helps to ensure US pistachio growers'interests are noted and dealt with appropriately. For instance,over the years CPC has worked hard to maintain the US pistachio industry'scompetitiveness in domestic and world markets. By lobbying the federalgovernment in the interests of its members and providing other services,it helped expand the exporting opportunities of its members. Thepistachio case is a perfect example of the power and influence the CPChas within the federal government (Tirschwell, 1997). By workingwith the USDA, the CPC represented the US pistachio growers interests andwas able to bring about the necessary changes to increase its exportingopportunities in Israel and around the world.Iran and US
The pistachio case touches more than one nerve in the economic andpolitical spheres, especially when the explosive relationship between theUS and Iran is taken into consideration. Since the late 70's, theUS and Iran have not been on friendly terms. During the Carter Administration,the US broke diplomatic ties with Iran entirely due to the seizure of theAmerican embassy in Tehran and the detaining of American citizens (Brunner,1999). Carter later instituted an economic boycott on all productsfrom Iran. The tense history continues as in 1984 Iran was addedto a list of states who were involved in terrorism around the world. This prohibited the sale of weapons or financial loans to Iran from theUS and other international organizations, basically ending all assistanceto the nation (Office of Press Secretary, 1996). The US was not finishedwith Iran; in 1987, the government extended sanctions against Iran thatcontinued to prohibit the importation of goods and services from the enemynation. President Clinton, in 1996, continued the tradition by prohibitingall financial and commercial transactions with Iran (OPS, 1996). As Israel is added into the equation, the pistachio situation becomes tenser. By Israeli trading unknowingly with Iran, it not only violated Israelinational law (which deems Iran as an enemy of the state) but raised questionsconcerning the US-Israeli economic and political partnership. As a main receiver of US military and non-military aid, Israel should beconcerned with the issue, even if it is as small as pistachio nut imports.
3. Related Cases
GERMBEER: German Beer Purity Law
4. Draft Author:
Mary-Frances Styczynski
04/11/99
II. Legal Clusters
5. Discourse and Status:
A severe frost in April of 1997 destroyed most of Iran'spotential harvest. This reduced the amount of Iranian pistachio nutson the world market, creating new opportunities for US growers. Iran'stroubles were not yet over; in September of 1997 Northern European countriesplaced a ban on Iranian pistachio imports after discovering the nuts containedhigh levels of aflatoxin (DGXXIV, 1997). The European Commissionsent a research team to Israel to investigate the Iranian inspection controlrun by the government. After visiting the Institute of Standardsof the Islamic Republic of Iran in Karaj and Ratsanjan, the research teamcame to a decision, Decision 97/613/EC (DGXXIV, 1997). The EC investigatorsfelt the evaluation of the pistachio nuts and production processes neededchanges in order to protect the nuts from high levels of aflatoxin or other potential problems. Based on the investigators decision,the Commission decided to maintain the ban on Iranian pistachio importsuntil changes were implemented by Iran. The combination of a poorharvest season and a crippling ban reduced the volume of Iranian pistachioexports drastically. For instance, the frost reduced Iran's pistachioharvest by 50 to 70%/ (USDA, 1997). This drop in production was verydramatic due to the fact that Iran was and still remains the world's largestproducer and exporter of pistachio nuts. Iran usually produced around180,000 to 200,000 tons of pistachio nuts in a given year, but after theseevents, the International Nut Council estimated the Iranian productionto be only 136,000 tons (USDA, 1999). The decrease in Iranian exportshelped lessen the tension between Israel and the US. US pistachiogrowers were now offered the opportunity to increase their exports to theIsraeli market. For instance, in 1998 the US provided closeto 40% of total imports of pistachio nuts to Israel (State Dept. 1999).The Israeli's also made sufficient changes in their import inspection procedures. In 1997 and 1998, the Israeli Customs Authority's increased security overimported products and began systematic checks of pistachio imports to determinetheir country of origin (State Dept. 1999). These checks helped filterout even more Iranian pistachios that were trying to enter Israel illegally.
6. Forum and Scope:
The US-Israeli pistachio case 96/97 did not violate anylegally binding agreements signed by the US or Israel concerning internationaltrade. The US, in its pursuit to change Israeli policy, did not inany way move to place sanctions or revoke special privileges from Israel,such as MFN status. Since the problem lied within the Israeli importpractices, it was at the Israeli's discretion to make the necessary changesdemanded by the US. Due to the sensitivity of the issue and the significanceof the trading partner, Israel asked for US assistance in improving importinspection policies.7. Decision Breadth: NA
8. Legal Standing:
The US-Israeli pistachio case is unique in that it deals with the violationof a national law. By allowing Iranian pistachio nuts to enterthe country, Israel was violating its own national law unknowing due toinefficient inspection procedures that determine the origin of the import. Even though the pistachio nuts entered Israel through Europe, the factof the matter remained that the pistachio nuts were originally from Iran.III. Geographic Clusters
9. Geographic Locations
a. Geographic Domain: Middle East
b. Geographic Site: NA
c. Geographic Impact: Israel and United States of America
10. Sub-National Factors: NA
11. Type of Habitat: Dry
IV. Trade Clusters
The Israelis pistachio case demonstrated the importancetrade plays in determining the terms of a relationship, especially whenconsidering agricultural products. US interests, politically andeconomically, were placed in jeopardy as the inefficiency of Israeli importpractices were revealed to the world. Israel responded by makingthe necessary changes to its import inspection procedures, saving itselffrom potential US retaliatory measures.12. Type of Measure:
NAAP
13. Direct v. Indirect Impacts: IND
The Pistachio case had an indirect impact on US trade. Since Israel's national law had been violated as Iranian pistachios enteredthe country undetected, the Israeli market was flooded with illegal pistachionuts. This flood of pistachio nuts from Iran left American pistachiogrowers and exporters with limited access to the Israeli market. The US export trade in pistachios was indirectly effected by illegal importationof Iranian pistachio nuts.14. Relation of Trade Measure to Environmental Impact
a. Directly Related to Product: No
b. Indirectly Related to Product: No
c. Not Related to Product: No
d. Related to Process: No
15. Trade Product Identification: NAAP
16. Economic Data
This table displays information on the exporting pistachiocountries around the world. The countries listed in the table are: Greece, Italy, Syria, Turkey and the US. Iran is notlisted here due to the fact that there is a limited amount of informationon Iranian available on Iran. Taking a closer look at the US exportdata, there is a progressive, positive increase in US exports over thethree fiscal years mentioned [See bottom of the table].
17. Impact of Trade Restriction: NAAP
18. Industry Sector: N [FOOD]
Non-Durable Manufacturing: FOOD
19. Exporters and Importers:
Case Exporter : _United States_Case Exporter : _Iran_
Case Importer : _Israel_
Leading Exporters(#1) : _Iran_
(#2) : _United States_
The Israeli market is one of thelargest markets for pistachio imports. For instance, Israel boastsa $13 million dollar market for pistachio nuts (State Department, 1998).
Iran and the United States are thetwo largest growers of pistachio nuts in the world. Iran maintainsthe lead, even after a poor harvesting season in 1997 and crippling importbans. The US is ranked just below Iran and is a rising competitor.
V. Environment Clusters
20. Environmental Problem Type: NAAP
21. Name, Type, and Diversity of Species
Name: NAAP
Type: NAAP
Diversity: NAAP
22. Resource Impact and Effect: NAAP
23. Urgency and Lifetime: NAAP
24. Substitutes: NAAP
VI. Other Factors
25. Culture: No
26. Trans-Boundary Issues: No
27. Rights: No
28. Relevant Literature
"A Few Facts about Pistachio." Ripcorp <http://www.total.net/~ripcorp> (10 March
1999).Brunner, Borgna, ed. Time Almanac 1999. Boston: Information Please LLC, 1998.
Directorate General XXIV. "EC Mission to Iran on temporarysuspension of imports of
pistachios and certain products from Iran." FoodControl and Rapid Alert. European
Commission: October 13, 1997.
"Israel Information Service Gopher: Israel Foreign Minister."
<gopher://israel-info.gov.il:70/00/facts/econ/ec4> (5 April 1999).
"Israel-North America/US." Information Division Israel ForeignMinistry.
<gopher://israel_info.gov.il:70/00/facts/israel/an2a> (4 April 1999).
Office of the Press Secretary. Fact Sheet: Iran-Lybia Sanctions of 1996. August 5, 1996.
<http://www.state.gov/www/global/terrorism/Iranliby.html> (09 April 1999).
Staff. "Israel seeks US assistance to probe pistachioimports." The Journal of
Commerce 03 April1997, San Francisco ed.: 2A+.
Staff. "Israel Probes Allegations of IndirectTrade with Iran." The Journal of Commerce
19 November 1996, Seattle ed.: 3A+.
Tirschwell, Peter. "US queries Israel on pistachioimports; Alleged illegal trade with Iran
may be harming US exports." TheJournal of Commerce 01 April 1997, San Francisco
ed.: 1A+.
USDA (United States Department of Labor). FASOnline: Record US Pistachio Exports
Forecast in 1997/98. http://www.fas.usda.gov/htp/highlights/1998/98-03/pistachio.html>
(10 March 1999).
USDA. FAS Online: Pistachio Situationand Outlook. (February 2, 1999)
<http://www.fas.usda.gov/htp/circular/1997/97-11/pistachi.htm> (28 March 1999).
United States State Department. Country CommercialGuides FY 1999: Israel.
Washington: GPO, 1998.
United States Department of Treasury: Office of Foreign AssetsControl. An Overview
of O.F.A.C Regulations Involving Sanctionsagainst Iran. Washington: GPO, February
23, 1999.