01 August 2012

Rum parting the ways between US and the Caribbean

 By Sir Ronald Sanders
Sir Ronald Sanders is a business executive and former Caribbean diplomat who publishes widely on small states in the global community. Reponses to: www.sirronaldsanders.com

The rum industry in the non-US countries in the Caribbean is now under serious threat. At risk are the jobs of 15,000 workers directly employed in the industry and another 60,000 jobs that benefit from it. Apart from employment, non-US Caribbean countries face the loss, annually, of US$700 million in foreign exchange and over US$250 million in tax revenues at a time they can ill afford it.

There is evidence that Barbados is already being adversely affected and the Dominican Republic, Guyana, Jamaica, and Trinidad and Tobago are under immediate threat.

As I pointed out in a commentary in May this year, the problem has not arisen out of direct action by the US government. It has originated in Puerto Rico and the US Virgin Islands (USVI) both of which have been long-time rum producers in competition with other Caribbean manufacturers. Now, these two US affiliates are taking advantage of US government refunds to them of excise taxes on rum to subsidize rum production and marketing for huge multinational companies. The vast increase in rum exports to the US mainland, at a subsidized cost, will squeeze-out other Caribbean rums; and subsidized marketing will make it virtually impossible to compete.

The scale of the subsidies is huge, making it impossible for other countries to compete. In 2011, US$452 million and US$133.5 million were provided to Puerto Rico and the USVI respectively. 

The USVI subsidies alone will result in the addition of 28 million proof-gallons of new rum capacity which is about 80% of current US consumption. This new production for sale into the US market will be at little or no cost. 

Legal opinion suggests that these subsidies violate the US government’s international obligations as a member of the World Trade Organization (WTO). Indeed, at a meeting between officials of Caribbean governments and the office of the US Trade Representative (USTR) on June 14, there was no indication that the US disagreed with the legal analysis. However, they gave no indication that they could resolve the issue. They offered only to consult within the government and report in due course.

But, time is not on the side of the Caribbean rum industry. While the US government officials consult amongst themselves and no action is taken to halt subsidized production and marketing from the USVI and Puerto Rico, non-US Caribbean rum sales in the US market are beginning to suffer and, as the multinationals ramp up their activities over the next few months, they will effectively establish themselves unfairly, squeezing out other Caribbean rums.

Already, Caribbean producers have had supply contracts cancelled because they cannot match or beat the price of subsidized competition coming from Puerto Rico and the USVI. These contract cancellations have started in the price sensitive bulk rum market which is central to the economics and financial well-being of Caribbean rum industry. The industry in much of the Caribbean Community (CARICOM) countries is structured in such a way that exports are vital to its survival given the small size of most domestic markets. 

Over time, the USVI and Puerto Rico effect will spread to suppliers of bottled products as well. 

Unless these unjustifiable subsidies are stopped, they will force the closure of many Caribbean distilleries and create serious injury to the fragile economies of the region. 

The Caribbean countries have no problem with the rebate of the rum taxes to Puerto Rico and the USVI which have been in place for some time and were being used for infrastructural and other development projects. The Caribbean concern is with the use of the rebate to subsidise rum production and marketing and so distort trade to the detriment of non-US Caribbean rum producers.

What is to be done? Caribbean governments have agreed to write from a high level to various officials of the US government including President Barack Obama. The letters are necessary, but are unlikely to yield positive action. Elections for the US Presidency are around the corner. No one should realistically expect the US administration to touch this issue before February of next year unless it is compelled to do so. 

More needs to be done, and this should include sensitizing the media in the US to the problem, and, crucially, submitting it to the Dispute Settlement Body of the WTO. The longer that Caribbean governments wait to lodge this issue with the WTO, the longer will be the process of reaching a resolution. 

The settlement procedures at the WTO require a period of consultation that is itself drawn out, after which an Arbitration Panel has to be agreed by disputing parties, or appointed by the Director-General if they fail to reach agreement on the panellists. All of this is passing time during which the multinationals in the USVI and Puerto Rico will have cornered the market with subsidized rum and marketing. Therefore, the quicker the process starts the better, and the longer action is delayed the worse it is for non-US Caribbean producers. It should be clear that the only thing that will compel the US government to focus on this issue is the matter being taken to the WTO.

The Dominican Republic (DR) government is showing the way. While its representatives are talking with the US government, reports indicate that it has also contacted the Advisory Centre on WTO Law for an opinion. The DR government has not been shy to seek redress at the WTO on other trade violations, and it will undoubtedly move to safeguard its rum production. 

Other Caribbean governments would do well to join the DR in WTO action now, for only those countries that are party to the Dispute Settlement process can expect any kind of compensation should they successfully take the matter to arbitration. 

Delaying urgent action now would consign non-US Caribbean rum production to collapse in the face of what are clearly unfair and patently trade-distorting subsidies to Puerto Rican and USVI rum production and marketing. Both jobs and revenues are at stake.