US subsidies continue to hurt Caribbean rum industry

It is alarming that Barbados’ Ambassador to the United States, John Beale, has publicly stated that CARICOM (the 15-nation Caribbean Community) is “inactive” and needs to take a position on the issue of Caribbean rums being wiped-out of the US market.

Inactivity is not in the interest of CARICOM rum producers and governments.  They have much to lose if their US sales continue to decline because of unfair competition from rum-producing companies in the US Virgin Islands (USVI) and Puerto Rico.

These companies, the giant Diageo and Cruzan Rum, are given huge subsidies by the governments of the USVI and Puerto Rico.  The two US territories use US Federal Government tax refunds, called “cover over”, now in the sum of US$580 million annually to subsidize the operations of their rum producers.

But, there appears to be no enthusiasm for robust resistance by CARICOM governments collectively.

Effects of US rum subsidies

Ambassador Beal revealed that Barbados’ rum exports to the US have dropped by 21 percent and he warned that the industry is in danger of being ‘wiped-out’.  This latest statement from the Barbados Ambassador should be no surprise to anyone.  Throughout 2012, I and my friend and fellow columnist, David Jessop, wrote repeatedly about the grave dangers confronting the CARICOM rum industry by the subsidies to large rum producers in the USVI and Puerto Rico, and we urged robust action by CARICOM governments collectively.

Amongst the vital considerations we pointed out were the following: CARICOM countries and the Dominican Republic (DR) – collectively known as ‘CARIFORUM’ – stand to lose US$700 million in foreign exchange annually, the jobs of 15,000 workers directly employed in the rum industry and another 60,000 jobs that benefit from it. Governments will also lose over US$250 million in annual tax revenues.

I had also emphasised that the CARIFORUM country that would be the biggest loser is Barbados whose exports to the US market in 2010 were worth US$17.2 m – twice as much as its exports to the European Union market.   This latter observation has now come to pass as Ambassador Beale has confirmed.

Attempts at diplomatic resolution

On December  18, 2012, it was encouraging that Barbados Prime Minister, Freundel Stuart, stated in Parliament that, “we cannot rule out the prospect of this matter reaching the WTO” although he added “but that is not the first resort expedience”.  Clearly, while the Prime Minister had in mind challenging the US government in the World Trade Organisation (WTO) over the rum subsidies, he was inclined to pursue the route of consultations with the US government – most likely the US Trade Representative’s office.

Having personally been through the experience of ‘consultations’ with the US government on a trade dispute (the Antigua and Barbuda Internet Gaming case against the US at the WTO that I led in 2003-2004 as Ambassador), I was aware that such consultations on the rum subsidy issue would find little meaningful response.  After all, the US could hardly be expected to side with CARIFORUM countries against their own territories.

By that time several diplomatic efforts had already been made.  John Beale had been particularly active in Washington. Further, St Lucia Prime Minister Kenny Anthony, as Chairman of CARICOM at the time, had written a letter on August 24, 2012 to US President Barack Obama about the issue.  It remained unanswered. A previous letter on August 9, sent by CARIFORUM Ambassadors in Washington to the US Trade Representative, Ron Kirk, received a non-committal reply in October.

There was a forlorn hope expressed at the time that the US Attorney-General, Eric Holder, would be helpful because “his parents were born in Barbados”.  But, of course, nothing came of that hope.  Mr Holder, after all, is an American and the Attorney-General of the US – that is where his loyalty lies.  In any event, consultations with the US had clearly come to nought at that time.

In May 2013, CARICOM’s Council for Trade and Economic Development (COTED) – effectively its foreign trade ministers – discussed the rum issue again.  They issued a statement saying that CARICOM “is determined to seek a satisfactory solution to the matter of trade-distorting subsidies being granted to USVI and Puerto Rico rum producers that threaten the long-term viability of the rum industry in the Caribbean”.  From Ambassador Beale’s lament, it would appear that, in the ensuing year, nothing has come from the trade ministers’ efforts.

CARICOM divided on a WTO challenge

Much valuable time has been lost and the rums of CARIFORUM countries are being displaced in the US market. Meanwhile, Diageo has been particularly aggressive in its marketing in the US mainland, as it has been forthright in intimidating both rum producers and individual CARICOM governments.  For instance, in August 2012 Stuart Kirby, spokesman for Diageo Latin America and the Caribbean, said that the British multinational company, which also buys bulk rum from CARICOM producing companies, said  “these valuable relationships could be disrupted by a CARICOM challenge at the WTO which would force Diageo to re-evaluate its activities in the Caribbean.”

Diageo can hardly be blamed for its forceful stance.  As a publicly listed company in London and New York it has a responsibility to protect its shareholders’ interests.  It also has clout and is not afraid to employ it. Where the issue lies is in the subsidies that this company with profits of US$24.21 billion in 2012 is getting from the USVI government using US Federal government tax refunds – subsidies that have given it a price advantage and harmed CARICOM rum exports.

CARICOM governments have clearly been divided on whether to take the matter to the WTO for arbitration since it would involve a complaint against the US government – not the governments of the USVI or Puerto Rico that have no international standing on their own.   The cost of doing so would be a deterring factor for any one government. Other governments to whom rum sales in the US market is negligible probably see no gain in it for them. Consequently, there has been no appetite by all CARICOM governments to act jointly in seeking a ruling by the WTO.  Yet, that was the response that was needed.

Ambassador Beale, like the Barbados Minister for International Business, Donville Innis, in bemoaning the absence of strong action in defence of their rights by CARICOM countries, called on the private sector to join governments to fight what is clearly an injustice.  Regrettably, however, it would seem that by virtue of uncertainty, lack of cohesion and delay, the opportunity for such a fight may have passed to the detriment of rums produced in CARICOM and the DR.