A rum tale of subsidisation
By Debbie Ransome
It’s a trade development that pits rum-producing nations against their US Caribbean neighbours.
And it is also a trade rivalry between non-US Caribbean nations and the United States.
The fact is that the latest trade battle threatening to bring the Caribbean and the US before the World Trade Organization (WTO) is as complicated as the great banana trade war and other battles of the past.
At issue is the current subsidy being given by the US to multinational spirits companies which produce rum in the US Virgin Islands and Puerto Rico.
This is done under America’s “cover-over” programme.
In April of this year, the US Senate and House of Representatives introduced legislation to extend the cover-over of the excise tax to Puerto Rico and the US Virgin Islands for two years to January 2014.
What this means is that $13.25 tax per proof gallon on all rum imported into the US would be handed back to Puerto Rico and the USVI, based on their proportion of rum production.
Diageo v Bacardi
Despite battles between rival giant rum producers, the family-owned Bacardi (Caribbean rum operations based on Puerto Rico) and British multinational Diageo (Caribbean rum production based in the USVI), the US Virgin Island delegate to Congress, Donna M Christiansen, said the two territories shared an interest in the importance of the US legislation to their economies.
“Despite our differences, on other issues related to the cover-over, we stand together as the programmes undergo review,” she told Tax-News magazine.
According to rum producers in the rest of the Caribbean, these subsidies are inconsistent with WTO rules, involve “prohibited export subsidies” and make use of “discriminatory taxation”.
In essence, Caribbean rum producers are accusing the US government of taking 98% of taxes collected on foreign rum sales in America and using these to subsidise the rum competition in the US Virgin Islands and Puerto Rico.
The West Indies Rum and Spirits Producers Association (WIRSPA) estimates that remittances given by the US to the two territories from excise taxes amounted to $450m in 2010.
WIRSPA Chairman Dr Frank Ward told Caribbean Intelligence© that the association did not see this as a “battle” with others in the industry.
“What the WIRSPA is saying is that the subsidies violate a number of obligations which the US government has at the WTO,” he said.
Cover over status
The WIRSPA seeks to separate this current cover-over support to the two countries as part of a new contractual arrangement with America’s large multinational producers.
It said that the US Virgin Islands and Puerto Rico had, since 2008, offered “extremely generous concessions, subsidies and long-term support, in exchange for them [the multinationals] agreeing to site, or maintain, their distilleries and production facilities in these territories”.
The Association also expresses the concern that the USVI and Puerto Rican governments are “ratcheting up the levels of incentives and subsidies.”
Dr Ward explained that the WIRSPA was not questioning the overall cover-over programme, which had been used in the past for “developmental purposes”.
He told Caribbean Intelligence©: “What has changed the equation is the magnitude of the subsidies.”
He explained the increases have led to a situation that he described to Caribbean Intelligence© as “totally unacceptable”.
The 15-nation Caribbean Community (Caricom) grouping has lodged its concerns with the US Trade Representative’s office.
Other US consultations are expected to lead to the issue being discussed in the US Congress, with follow-up from Caricom diplomats based in Washington.
The head-on battle had been taken up over the summer by wider trade grouping Cariforum and the WIRSPA.
Cariforum, which is Caricom plus the Dominican Republic, and the WIRSPA have stepped up their campaign during August.
This followed what is being perceived in the trade as a threat by US drinks giant Diageo.
Diageo – producer of the world’s second best-selling rum, Captain Morgan – told trade magazine BeverageDaily.com that Caricom rum exports to the US had risen by 39% over the first four months of this year.
It said that any talk of a WTO challenge to the US cover-over programme could force Diageo “to re-evaluate its activities in the Caribbean”.
This is where the rum-producing inter-marital relationships make this trade dispute more difficult than previous WTO challenges, such as the epic banana trade fight in which the US and Latin American took on the Caribbean.
Not only is Diageo the US giant, but it has also been an investor and purchaser of bulk rum from Cariforum rum producers.
Diageo depicts the current cover-over programme as the development of an established 100-year old system, which started as a manufacturer tax on the sale of US spirits and then became discretionary government spending to help the US Virgin Islands.
In response, the WIRSPA issued a mid-August statement warning that the current US cover-over programme “has the capacity to damage terminally rum production in Cariforum countries”.
The WIRSPA referred to Diageo’s suggestions to re-evaluate its role in the Caribbean rum industry as “public threats…to withdraw commercial relationships if their governments seek to defend the interests of their rum industries at the WTO”.
The Association says that Congress has allowed the cover-over programme for the USVI to “spiral out of control” and calls for early resolution if the rum industry in Cariforum countries is to survive in its present form.
Challenging the figures
WIRSPA figures also seek to challenge Diageo’s assertion that there was a sudden increase in rum exports at the start of 2012.
The Association’s figures show average first-quarter rum exports to the US going down.
“The strong figures….hide the fact that this growth [claimed by Diageo] is nearly all attributable to a single country and is largely the result of a temporary change in inventory management rather than actual sales,” the WIRSPA said in its statement.
Dr Ward told Caribbean Intelligence© that the increases in the amount of money being given to the USVI could “crowd Caribbean rums out of the marketplace”.
The PR battle being waged over the summer has also picked up on more than the monetary value of rum production.
The WIRSPA described rum as bringing “identity to the countries of Cariforum”.
Columnist Sir Ronald Sanders, who, as a former Caribbean diplomat based at the World Trade Organisation, has been involved in previous trade scraps between the Caribbean and the US, said in one August column that rum was “ingrained in the Caribbean culture”.
“It [rum] is as Caribbean as sunshine and sea,” he wrote.
“So, too, is the rivalry between Caribbean countries over which one produces the best rums.
“The loyalty to national brands among rum users is renowned. No Caribbean citizen would forgive the disappearance of national brands.”
Any Caribbean national who has whiled away happy hours winding up a national from another country about the superiority of one national rum over another will understand that this is more than a trade issue.
Public relations trade magazine PRWeek depicted the issue in August as a “multi-million-pound global brief”.
PRWeek told its readers that the WIRSPA’s PR brief was worth up to £4m ($US6.3m) and would run for almost three years.
“It calls for an agency to create an integrated marketing and [communications] campaign to raise brand awareness and promote the ‘authentic Caribbean rum (ACR)’ marque,” the PR paper said.
A PR campaign for Caribbean rum producers is one of the tools it still has while waiting for Cariforum governments to push their case with US authorities.
Asked by Caribbean Intelligence© whether the US will pay as much attention to the Caribbean rum industry as it did to its banana industry, Dr Ward said “The US has always been a champion of removing subsidies in the global trading arena.
“I do not see why it is unreasonable to ask to do the same on this.”
USVI v Puerto Rico
It might be unfair to make the comparison with the Caribbean’s impoverished banana industry, whose European subsidy was successfully challenged at the WTO by US and Latin American banana producers.
The Caribbean rum industry is worth millions.
Caribbean premium rums in particular have been carving a luxury niche in global markets, separating their products from the Bacardis and Captain Morgans.
Asked by Caribbean Intelligence© how long the Cariforum rum producers could hold out in a prolonged trade challenge, Dr Ward said: “That is a question I can’t answer. I don’t know.”
Diageo, meanwhile, defends its position on several fronts.
In case you haven’t guessed, the world’s largest rum producer is Bermuda-headquartered Bacardi, which moved there from Cuba after the Castro regime confiscated its Cuban assets in October 1960.
The Bacardi v Havana Club trade challenge is one of the longest-running rum trade battles.
In 2010, the USVI in 2010 fought for a share of the cover-over programme as its bid to revitalise its old rum distillery stock, but faced a Bacardi-backed campaign.
Bacardi, with diversified drinks interests in Martini, whisky and gin products, distills its main rum products in Puerto Rico, with other distilleries in Mexico and India.
The USVI campaign for cover-over funding had been to modernise its rum distillery capacity, in line with the world’s larger producers.
Diageo told Drinks International Magazine in June this year that its Captain Morgan sales would one day match those of Bacardi.
The battle between Bacardi and Captain Morgan, alongside the one between Cariforum rum producers and the US-subsidised parts of the industry, indicates the complexity of the trade challenges between the world’s largest rum producers.
It would have made the legendary pirate proud as rum producers continue to fire shots across one another’s bows.