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 major trading partners, the US, presented Israeli officials with damaging evidence regarding ineffective import practices over inspection of pistachio nuts.  The US provided evidence that large volumes of Iranian pistachio nuts were entering the Israeli market illegally through a third trading partner, the European Union.  The politics and economics of the pistachio case shall be discussed in more detail below in order to provide a greater understanding of the significance of the case to US-Israeli relations.
 

1. The Issue


The US and Israel have always had strong political ties.  The US was one of the first nations to recognize Israeli independence in 1947 and has continued to support Israel both politically and militarily in its conflicts with neighboring countries.  The two countries have remained politically and militarily linked and the partnership expanded in the early 1980s to include trade.  Through many years of tough negotiations to lower trading barriers and open up domestic markets (especially agricultural products), the US and Israel came to a mutually favorable trade agreement in 1985 (US-Israeli FTA).  However, in early September 1996, the trading partnership that took years to build was under great tension. Israel found itself faced with growing allegations regarding its trade practices.  The USDA Foreign Agricultural Service, with the help of US pistachio growers, presented Israeli Ministry officials with mounds of evidence against Israeli import inspection; the US provided evidence that the import inspection process was inefficient because it allowed Iranian pistachio nuts to enter the country undetected.  Israeli law prohibits the importation of goods and services from Iran, thus not only effecting US interests but violating Israeli national law.  Three important questions can be derived and answered from this pistachio case:  1. What were the US's allegations and solutions to the Israeli import inspection problem?  2.  How did it affect the US-Israeli political and economic partnership?  and 3. Why was the US so devoted to making sure Israel changed its inspection practices?
 

2. Description


Israel, as one of the largest markets for pistachio nuts, was and still remains a focal point of interest for US trade objectives. Since the 1985 US-Israeli Free Trade Agreement and the 1994 WTO/GATT Uruguay Round Agreement, the US has been working hard to develop a closer trading relationship with Israel.  The evidence collected by the USDA Foreign Agriculture Service and various US pistachio growers organizations, predominately the California Pistachio Commission, focused on the various reasons why Israel needed to rethink their import inspection procedures.  Import of Iranian pistachios not only challenged Israeli law; 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 Iranian pistachios annually because of the reduced price (Tirschwell, 1997).  In effect, the discounted Iranian pistachios sold in the Israeli market not only undermined the world price but also US opportunities to compete.  How could US pistachio growers compete with this reduced price set by the Iranian exporters?  The reduced price and high domestic demand for the Persian pistachio nuts created unfair competition for US pistachio exporters/growers and strained trading relations between the US and Israel.


Initially, Israeli officials acted swiftly by putting together an investigation team to look at the US allegations and evidence.  The Journal of Commerce ran headlines reading "Israel Probes Allegations of Indirect Trade with Iran" in early November which demonstrated the Israeli's commitment to trying to get to the bottom of the situation.  However, the Israelis explained to US officials that the main problem with the import inspection procedure was the port authorities only kept records on embarkation ports.  There are no records that can trace the origin of the good or service entering the country.  For this reason, the evidence produced by the US that most of the imports came from the European Union did not surprise Israeli officials.  Israel and the European Union negotiated a free trade agreement opening up trade; Israel was more willing to accept imports that came from EU member countries (Tirschwell, 1997).  What evidence did US officials have that lead them to believe Iranian pistachios were being imported into Israel via the EU? The main fact is that European nations are on friendly terms with Iran and have open trade agreements.  Next, most of the pistachio exports originated from Northern European nations.  If pistachio exports came from Greece and Italy (two countries with favorable climates for growing pistachios), then the imports into Israel could have been pistachios from Southern European pistachio growers.  However, the US discovered and presented to the Israelis evidence that proved to the contrary.  The US provided statistics that over 70% of pistachio imports originated in Northern European nations, such as Germany and Great Britain (Staff, 11/19/96).  Pistachio nuts require a warm but desert like climate to grow.  Northern European countries do not have the appropriate climate to grow pistachio nuts; plus, these nations import pistachios from Iran.  The USDA found that 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, the Israeli government finally realized that Iran, an enemy of the state, had infiltrated their markets.  In order to salvage the US-Israeli trading partnership, Israeli officials began to recognize the need for tougher import inspection standards.
 

The History of the Disputed Nut

Pistachio nuts originally came from the Holy Lands of the Middle East, growing wildly in the high desert areas that covered the region.  The pistachio made its way over to the US in the 1880s, imported by American traders to satisfy the growing Middle Eastern population in the states.  However it was not until the 1930s, due to the efforts of US scientist William E. Whitehorse, that the first pistachio production began in America.  In 1929, he spent six months in Persia studying and collecting seeds in order to produce a 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 desert regions of California.  Since it takes a good 7 - 10 years for pistachio trees to mature, the first trial plantings did not look promising.  It was not until the early 1950s, with the emergence of the Kerman pistachio tree, that pistachio production became a reality.  [The name Kerman comes from the plains in Iran, where the pistachio seeds collected by Dr. Whitehouse were found].  Pistachio production in California flourished during the 1950's and continued to gain strength and recognition throughout the 60's and 79's.  By the 1990s, the US climbed the charts to become the 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 pounds on less than 1500 acres of land (www.pistachios.org/industry.html).  Today, there are over eighty-two thousand acres harvesting more than one hundred 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 pistachio producer to compete domestically and internationally with producers around the world.
 

US Solutions to the Israeli Nut Problem

Israel claimed early on in the case that they could not determine the origin of the pistachio nuts entering the country since most were imported from Europe.  The US pointed out three different ways the Israeli inspection system could determine the origin of imported pistachio nuts.  According to research compiled by the USDA and US pistachio growers, 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 export pistachio nuts, it is relatively easy to narrow down and identity the origin of the imported nut.  Pistachio nuts are grown around the world, specifically in Greece, Italy, Syria, Turkey, Iran and the US.  The last two countries listed are the two largest and most competitive producers and exporters in 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 chemical test of the pistachio nuts.  The US Customs Agency developed, in the 1980s, a chemical test for the purpose of insuring that Iranian pistachios did not enter the country.  It was discovered during the early 1980s that 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 conditions used to produce the pistachio nuts.  Iranian and US (specifically California) climates and soil differ greatly, helping to prove that designing a simple chemical test can easily solve the problem of illegal pistachio imports.

US-Israeli Free Trade Agreement of 1985 and the Effects of the Uruguay Round Talks in 1994

In 1985, the US and Israel came to an agreement that would slowly open up their domestic markets and create a closer union between the two countries, both politically and economically.  However, under Article VI, Israel was able to maintain some control over agricultural imports from the US.  US exports of fresh produce and processed foods were barred from Israeli markets (State Department, 1999).  In 1995, the trade relationship between the two countries progressed even further as Israel participated and signed on to the Uruguay Round Table Talks that set up the WTO (World Trade Organization).  These negotiations committed members of the GATT/WTO to the abolition of almost all import quotas and a reduction of tariff rates on trading partners over time, to increase competition.  Therefore Article VI of the US-Israeli FTA was in violation of the WTO negotiations, and in 1996, US and Israeli officials revised the FTA.  This revision allowed the bilateral free trade agreement to be compatible with the WTO multilateral agreement.  The new five-year agreement on Food and Agriculture committed Israel to reducing its quota restrictions on food and agriculture, in other words opening its market up to US commodities (State Dept., 1999).  US agricultural exports were now able to enter Israel without any quota restrictions.  In the case of US nut exports (including pistachios), Israel eliminated all duties on imports from the US as of January 1995; this gave the US a considerable comparative advantage compared to other Israeli trading partners.  For instance, the European Union still had to pay close to 15% duty tax on nut imports and other nations, such as Turkey, had to pay a duty tax approximately as high as 22.5% (State Dept., 1999).
 

California Pistachio Commission

The California Pistachio Commission emerged in 1981, as an organization whose 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 focus on 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's competitiveness in domestic and world markets.  By lobbying the federal government in the interests of its members and providing other services, it helped expand the exporting opportunities of its members.  The pistachio case is a perfect example of the power and influence the CPC has within the federal government (Tirschwell, 1997).  By working with the USDA, the CPC represented the US pistachio growers interests and was able to bring about the necessary changes to increase its exporting opportunities in Israel and around the world.

Iran and US

The pistachio case touches more than one nerve in the economic and political spheres, especially when the explosive relationship between the US and Iran is taken into consideration.  Since the late 70's, the US 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 the American embassy in Tehran and the detaining of American citizens (Brunner, 1999).  Carter later instituted an economic boycott on all products from Iran.  The tense history continues as in 1984 Iran was added to a list of states who were involved in terrorism around the world.  This prohibited the sale of weapons or financial loans to Iran from the US and other international organizations, basically ending all assistance to the nation (Office of Press Secretary, 1996).  The US was not finished with Iran; in 1987, the government extended sanctions against Iran that continued to prohibit the importation of goods and services from the enemy nation.  President Clinton, in 1996, continued the tradition by prohibiting all 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 Israeli national law (which deems Iran as an enemy of the state) but raised questions concerning the US-Israeli  economic and political partnership.  As a main receiver of US military and non-military aid, Israel should be concerned with the issue, even if it is as small as pistachio nut imports.

3. Related Cases

SOYBEAN:  Genetic Soybean Trade
QAT: Qat Trade in Africa
GERMBEER:  German Beer Purity Law
BORDER:  Border Waste Trade U.S. and Mexico
GROUSE:  EU Grouse Import Ban
IRANNUKE: Iran Nuclear Technology Imports

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's potential harvest.  This reduced the amount of Iranian pistachio nuts on the world market, creating new opportunities for US growers.  Iran's troubles were not yet over; in September of 1997 Northern European countries placed a ban on Iranian pistachio imports after discovering the nuts contained high levels of aflatoxin (DGXXIV, 1997).   The European Commission sent a research team to Israel to investigate the Iranian inspection control run by the government.  After visiting the Institute of Standards of the Islamic Republic of Iran in Karaj and Ratsanjan, the research team came to a decision, Decision 97/613/EC (DGXXIV, 1997).  The EC investigators felt the evaluation of the pistachio nuts and production processes needed changes 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 imports until changes were implemented by Iran.  The combination of a poor harvest season and a crippling ban reduced the volume of Iranian pistachio exports drastically.  For instance, the frost reduced Iran's pistachio harvest by 50 to 70%/ (USDA, 1997).  This drop in production was very dramatic due to the fact that Iran was and still remains the world's largest producer and exporter of pistachio nuts.  Iran usually produced around 180,000 to 200,000 tons of pistachio nuts in a given year, but after these events, the International Nut Council estimated the Iranian production to be only 136,000 tons (USDA, 1999).  The decrease in Iranian exports helped lessen the tension between Israel and the US.  US pistachio growers were now offered the opportunity to increase their exports to the Israeli market.   For instance, in 1998 the US provided close to 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 over imported products and began systematic checks of pistachio imports to determine their country of origin (State Dept. 1999).  These checks helped filter out 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 any legally binding agreements signed by the US or Israel concerning international trade.  The US, in its pursuit to change Israeli policy, did not in any way move to place sanctions or revoke special privileges from Israel, such as MFN status.  Since the problem lied within the Israeli import practices, it was at the Israeli's discretion to make the necessary changes demanded by the US.  Due to the sensitivity of the issue and the significance of the trading partner, Israel asked for US assistance in improving import inspection policies.

7. Decision Breadth: NA

8. Legal Standing:

The US-Israeli pistachio case is unique in that it deals with the violation of a national law.   By allowing Iranian pistachio nuts to enter the country, Israel was violating its own national law unknowing due to inefficient inspection procedures that determine the origin of the import.  Even though the pistachio nuts entered Israel through Europe, the fact of 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 importance trade plays in determining the terms of a relationship, especially when considering agricultural products.  US interests, politically and economically, were placed in jeopardy as the inefficiency of Israeli import practices were revealed to the world.  Israel responded by making the necessary changes to its import inspection procedures, saving itself from 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 entered the country undetected, the Israeli market was flooded with illegal pistachio nuts.  This flood of pistachio nuts from Iran left American pistachio growers and exporters with limited access to the Israeli market.  The US export trade in pistachios was indirectly effected by illegal importation of 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 pistachio countries around the world.  The countries listed in the table are:  Greece, Italy, Syria, Turkey and the US.    Iran is not listed here due to the fact that there is a limited amount of information on Iranian available on Iran.  Taking a closer look at the US export data, there is a progressive, positive increase in US exports over the three 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 the largest markets for pistachio imports.  For instance, Israel boasts a $13 million dollar market for pistachio nuts (State Department, 1998).

Iran and the United States are the two largest growers of pistachio nuts in the world.  Iran maintains the lead, even after a poor harvesting season in 1997 and crippling import bans.  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 temporary suspension of imports of
    pistachios and certain products from Iran." Food Control 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 Foreign Ministry.
    <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 pistachio imports."  The Journal of
    Commerce  03 April 1997, San Francisco ed.:  2A+.

Staff.  "Israel Probes Allegations of Indirect Trade with Iran."  The Journal of Commerce
    19 November 1996, Seattle ed.:  3A+.

Tirschwell, Peter.  "US queries Israel on pistachio imports; Alleged illegal trade with Iran
    may be harming US exports." The Journal of Commerce  01 April 1997, San Francisco
    ed.: 1A+.

USDA (United States Department of Labor).  FAS Online:  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 Situation and Outlook.  (February 2, 1999)
    <http://www.fas.usda.gov/htp/circular/1997/97-11/pistachi.htm>  (28 March 1999).

United States State Department.  Country Commercial Guides FY 1999: Israel.
    Washington: GPO, 1998.

United States Department of Treasury:  Office of Foreign Assets Control.  An Overview
    of O.F.A.C Regulations Involving Sanctions against Iran.  Washington:  GPO, February
    23, 1999.