The West Indies Rum & Spirits Producers Association (WIRSPA) has made it clear that the dispute over unfair subsidies being given to its competitors in the United States Virgin Islands (USVI) and Puerto Rico is between the CARIFORUM group of countries and the United States and not between rum producers.
The matter requires urgent action and early resolution if the CARIFORUM rum industry is to survive in its present form, WIRSPA said in a press release Monday.
The CARIFORUM group (the Caribbean Community plus the Dominican Republic), according to the WIRSPA release, explained that “this is because subsidies given to rum producers in the USVI and Puerto Rico from a US government programme threaten to damage an important sector of the Caribbean economy.”
Over the past several weeks, the release noted, stories have appeared in the Caribbean media and the international trade press about a possible WTO-related dispute between the CARIFORUM1 group of countries and the United States.
At issue is the WTO (World Trade Organization) compatibility of subsidies given to multinational spirits companies producing rum in the USVI and Puerto Rico under the US ‘cover-over’ programme
WIRSPA, the regional trade association for rum producers in the CARIFORUM group, said that in setting the record straight it had to make it clear that if not addressed, the cover-over programme has the capacity to damage terminally, rum production in these countries.
It stated also that CARIFORUM rum producers reject public threats by multinational distilling groups to withdraw commercial relationships if their governments seek to defend the interests of their rum industries at the WTO.
Moreover, WIRSPA pointed out that the allegation that CARIFORUM rum exports increased significantly in the first quarter of the year is misleading.
Issue at stake
At issue is the rum ‘cover over’ programme benefitting a number of multinational distillers which have a presence in the United States Virgin Islands and Puerto Rico, the release observed.
It stated also that the latest subsidies offered by the USVI and Puerto Rico to multinational rum producers are inconsistent with WTO rules in as much as they involve prohibited export subsidies, make use of discriminatory taxation, and use such subsidies which are expected to cause adverse effects to the interests of other WTO members, in this case the independent Caribbean countries of the CARIFORUM group.
Under the ‘cover-over’ programme, the US Government remits 98 per cent of all excise taxes paid on rums sold in the US back to the US territories of Puerto Rico and the USVI.
In 2010 the value of this amounted to approximately US$450M. In addition to these amounts, the USVI and Puerto Rico also receive 98% of federal excise taxes paid on the 3.1 million proof gallons of CARIFORUM rum sold in the US. This amounts to an additional $41 million in ‘cover-over’ revenues available to the USVI and Puerto Rico to subsidize competing production.
And in order to secure a greater amount of this ‘cover-over’ support the USVI and Puerto Rico have since 2008 entered into new contractual arrangements with major multinational producers and have offered extremely generous concessions, subsidies and long-term support, in exchange for them agreeing to site, or maintain, their distilleries and production facilities in these territories, the WIRSPA contended.
Unfair market
According to WIRSPA, it’s concern is that the USVI and Puerto Rican Governments are ratcheting up the levels of incentives and subsidies which are offered to multinational spirits producers willing to relocate in their jurisdictions. The levels of support now available to multinational companies are not compatible with a fair market place and fly in the face of the WTO commitments which the US Government has signed up to and its opposition to subsidies.
Estimates suggest that in some of these new contracts the value of the operating subsidies alone exceeds the actual production cost per litre of bulk rum, the release stated.
According to WIRSPA, an example of the extent of these subsidies is evidenced by the USVI offering companies based there a fixed price on molasses which is around 10% of the market price. Molasses is one of the biggest cost centres for rum production and this 90% subsidy is totally distortive to the regional market place, the release explained.
The combined new production capacity which is planned as part of the agreements is estimated to add the equivalent of 80% or more volume to the US market at its current size.
Such massive increases in production capacity can only result in major distortions to the regional market and the demise of many rum producers in independent Caribbean countries which are not being subsidized, WIRSPA maintained.
Matter for governments
WIRSPA said further that it understands that the Governments of CARICOM countries and the Dominican Republic have formally agreed that this issue needs to be resolved and their representatives have begun the first stage of discussions with the US Government which if unresolved will lead to the formal filing of a WTO complaint.
“Caribbean Governments recognise that the ‘cover-over’ programme as presently being used poses real dangers for the rum industry, the region’s largest agriculture-based export industry. Rum generates annually an estimated US$500m in foreign exchange for independent Caribbean countries, well over US$250m in tax revenues and makes a vital economic contribution to small vulnerable economies,” WIRSPA stated.
However, while CARIFORUM rum producers can appreciate the economic problems facing the USVI, the US Congress has allowed a programme to assist the development of the USVI spiral out of control, diverting hundreds of millions of dollars to support the largest distilled spirits companies in the world, irrespective of the consequences for the rest of the region.
The USVI subsidy programme and the expanded distillation
capacity that it created led to the creation of a very similar subsidy programme in Puerto Rico to rebuild the production lost to the new USVI facilities.
And by allowing the use of funds from the ‘cover-over’ programme to continue to be used in this way without reform, the US Government is damaging one of the few competitive industries that CARIFORUM countries have and which helps underpin the viability of their small and vulnerable economies, WIRSPA asserted.
This dispute is a matter for resolution by the Governments of the CARIFORUM group of countries and the Government of the United States and as an international trade dispute it goes beyond the immediate commercial interests of Caribbean rum producers and large multinational rum producers.
WIRSPA also highlighted as misleading recent statements that exports of CARIFORUM rum to the USA increased by 39% in the first quarter of 2012.
In reality the strong figures for the first quarter of 2012 hide the fact that this growth is nearly all attributable to a single country and is largely the result of a temporary change in inventory management rather than actual sales.
Outside of that country, all major CARIFORUM exports to rum in the first quarter of 2012 to the USA were down when compared to their average quarterly exports in 2011.
In the meantime, documented threats have recently been made in public against the rum industry in CARIFORUM countries. Such an approach, WIRSPA emphasized, threatens Caribbean economic sovereignty and suggests a failure by those involved to understand how small nations and their communities react to external hostility whether from multinationals or from governments. “Such an approach will only strengthen Caribbean resolve,” WIRSPA said.
