Caribbean exporters are ready to rumble with the US over rum ‘subsidies’, writes Dentons lawyer David Williams.


Rum, the heady sugar cane-based spirit famously described in historical records as “a hot, hellish and terrible liquor”, is at the centre of a simmering trade dispute between legislators in Washington and exporters in the 15-member Forum of the Caribbean Group of African, Caribbean and Pacific (ACP) States (Cariforum).

The Cariforum producers, based in the former English Caribbean colonies, as well as Haiti, Suriname and the Dominican Republic, say they are being priced out of the US market by rival rum exporters from Puerto Rico and the United States Virgin Islands (USVI), because of the federal government’s rum excise tax rebates to the two US-Caribbean territories under the ‘cover over’ programme.

The immediate impact is likely to be on the trade prospects for Cariforum-produced rum in the US. But the legal and commercial repercussions of this dispute, involving a flagship, export-driven industry for many Caribbean countries, could also undermine attempts to develop potential trade-related financing opportunities for agribusiness in a geographic sub-region already comparatively low on the priority list for trade and commodity financiers.

Trading punches

In purely legal terms, the dispute is between Cariforum governments and the US (Puerto Rico and the USVI being US possessions). The cover over programme, in place for Puerto Rico since 1917, and for the USVI since 1954, provides for excise taxes collected on rum imports into the US mainland to be remitted to those two US-Caribbean territories to assist in their general economic development. There are no restrictions on how the rebates can be used, and in recent years a large portion of those funds has been dedicated to providing incentives to improve the competitiveness and marketing of local rum producers.

But Cariforum rum exporters view the excise tax rebates as a subsidy, within the definition set out in the World Trade Organisation’s (WTO) agreement on subsidies and countervailing measures. Their concern, they say, is not with the cover over programme per se, but with the level of the “subsidies” – US$371mn to Puerto Rico and US$99.5mn to the USVI in 2008 – and the resulting “distortion” of the US rum market.

There has been little public comment from Washington regarding the federal government’s position on the dispute. At the domestic level, however, the USVI governor John P de Jongh Jr has openly defended the cover over programme as a fulfilment by the US Congress of its constitutional obligation to provide a “consistent and reliable means of funding our local territory governments”. The arrangement, he argues, does not involve a prohibited export subsidy since “rum shipped from the USVI to the US mainland is not an ‘export’ and without an ‘export’ there simply cannot be an export subsidy”.

Over the past several months, there have been unsuccessful attempts between Caribbean diplomats and the office of the US Trade Representative (USTR) to reach a negotiated settlement. Meanwhile, as part of the 11th-hour deal to avert the fiscal cliff in January 2013, the US Congress extended by a further two years the limit of the rum excise tax rebates in the American Taxpayer Relief Act 2012. The dispute now looks destined to be thrashed out at the WTO. It is not clear the specific extent of any economic harm Cariforum governments are alleging, nor precisely what legal remedies they would seek, though they are almost certain to request an end to, or some reduction in the level of, the ‘subsidies’. If Washington is found to be violating its WTO obligations then the panel should call on it to “bring its measures into conformity with the WTO agreements”. Should the US fail to comply, Cariforum countries would then be entitled to impose retaliatory trade measures. But given the economic and geopolitical realities, the effectiveness of such retaliatory measures would be doubtful, effectively rendering a favourable legal outcome at the WTO a hollow victory.

Of relationships and rivalries

Beneath the legal complexities lies a wide minefield of commercial relationships and rivalries. Puerto Rico and the USVI have previously had their own falling-out over the cover over programme. In 2011, British beverage giant Diageo turned down a new package of incentives offered by its then host government in Puerto Rico and relocated its rum production to St Croix in the USVI, where a more appealing raft of incentives – funded from the cover over rebates – was on offer. The production capacity of Diageo’s new Captain Morgan distillery in St Croix now presents a formidable challenge to the Puerto Rico-produced Bacardi, another world-famous brand, owned by the world’s third largest spirits company.

The West Indies Rum and Spirits Producers’ Association (WIRSPA), the body spearheading trade facilitation and advocacy for national associations of rum distillers, exporters and marketers in 13 non-US Caribbean countries, says it has seen a loss of US market share as a direct result of Diageo starting up production and export operations in St Croix. But the commercial picture isn’t so straightforward. Diageo buys bulk rum from a number of Cariforum producers, “valuable relationships” which the company warns could be disrupted and which it could be forced to “re-evaluate” if a formal complaint is filed before the WTO. And there are deep rivalries, too.

Traditional rum producers in Cariforum territories are increasingly owned or controlled by multinationals or have some form of joint venture arrangement with them – such has been their confidence in the prospects for the rum trade. The French beverage producer, Rémy Cointreau, for example, has owned Barbados’ Mount Gay Distilleries since the late 1980s, and the Jamaican sugar cane producer and rum distiller, J Wray & Nephew, was acquired by Italy’s Gruppo Campari in late 2012.

With commercial considerations so intricately in the mix, a purely legal solution looks unlikely. Despite a number of legal opinions reportedly very favourable to the Cariforum exporters’ case, it is widely accepted that trading punches before the Geneva-based referee of global trade disputes would be a bruising, long, hard slog. Memories are still fresh in the Caribbean of the 20-year-long banana trade wars in which Latin American banana exporters challenged European Union (EU) tariffs designed to protect small growers in the former European colonies in Africa and the Caribbean. Caribbean banana exporters saw an erosion of preferences and a loss of market share as a result.

As it stands, most governments in the Cariforum group seem to prefer exploring, if not exhausting, all other options first, rather than filing a WTO complaint without further delay. Given the limitations of going the WTO route, there is some merit in the alternative approach of seeking to garner support among congressional leaders, including within the Congressional Black Caucus, US government departments such as the USTR, Commerce and Treasury, and even multilateral organisations like the International Monetary Fund (IMF) and the World Bank which would take an interest in the negative economic effects of this dispute on the Commonwealth Caribbean region.

One way or the other, time is not on the side of Cariforum producers. The retired Caribbean diplomat and trade specialist, Sir Ronald Sanders, has warned Caribbean governments that they “hesitate to the detriment of their rum industry, revenues and employment”. Rum is, after all, the region’s fourth highest foreign exchange earning goods export, surpassed only by receipts from sugar, bauxite and bananas. While the EU is the largest of the three traditional markets for Caribbean rum, one of every three Cariforum territories – including Barbados, Belize, St Kitts and Nevis and Trinidad and Tobago – exports more rum to the US than to the EU or Canada.

On ice

Already the negative effects are being felt. In Barbados, which holds a special claim to being the birth place of rum, the industry earns around US$60mn a year. The island’s finance minister, in a mid-August budget presentation, spoke of “significant pressure” for the local and regional rum industry. The minister, previously a trade and development specialist by profession, told parliament that the US subsidies are eroding competitiveness and market share to the extent that local and regional producers are being left with “considerable stocks of rum” they cannot sell.

So the stakes are high in this rumble over rum tax rebates. Rum is one of the Caribbean’s few agribusiness export success stories and could potentially benefit from further financing both at the structured trade and supply chain finance levels. On the whole, Cariforum countries export only a small number of commodities, and economies in the region are typically viewed as overly-dependent on export of services, mainly tourism, international business and financial services. This need not be so. In many instances, diversification and export growth for goods has been stymied by the lack of trade-related financing, which is more critical for developing trade in goods than for trade in services.

A long-running dispute surrounding the Cariforum rum industry would inevitably create uncertainties around production and trade prospects for one of the Caribbean’s signature exports, the fallout from which may be irreparable whatever the ultimate outcome of the dispute. But there is also the risk that this wrangling over rum could overshadow and detract from promising emerging developments in other areas of the region’s agribusiness sector where trade finance could potentially have a transformational impact, for example, West Indian Sea Island cotton, the rare, premium fibre produced in Barbados, Antigua and Jamaica, and its cotton seed oil by-products, and St Lucia’s orchids and other tropical blooms.

Faced with this threat to their rum exports, Cariforum governments therefore need to seize the initiative: on the one hand, jealously safeguard the future of their rum industry to the extent that they are able to do so, and on the other, redouble their efforts to raise the Caribbean’s profile as a sub-region not to be too readily dismissed when it comes to viable opportunities for financiers of trade in goods. The result otherwise could be further marginalisation, rather than closer integration of the Caribbean’s small and vulnerable economies into global trade.