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WIRSPA weighs in on danger of US rum subsidy

Published:Wednesday | August 22, 2012 | 12:00 AM

The West Indies Rum & Spirits Producers Association Inc (WIRSPA) says while it has no dispute with rum producers in the United States it is nonetheless warning that subsidies given to US-based producers could damage Caribbean economies.

WIRSPA said it is possible that the issue could be raised at the World Trade Organization (WTO) as a trade dispute between Cariforum countries and the US over the compatibility of subsidies given to multinational spirits companies producing rum in the US Virgin Islands and Puerto Rico under the US 'cover-over' programme.

But WIRSPA, the regional trade association for rum producers in the Cariforum group, said the dispute is between the governments of these independent Caribbean countries and the US and not between rum producers.

"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," it said, warning that if the matter is not addressed "the cover-over programme has the capacity to damage terminally rum production in these countries."

WIRSPA said that rum producers in Cariforum "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".

Cariforum comprises the 15 members of Caricom and the Dominican Republic.

"The allegation that CARIFORUM rum exports increased significantly in the first quarter of the year is misleading. The matter requires urgent action and early resolution if the Cariforum rum industry is to survive in its present form," WIRSPA said in a statement issued on Monday.

Following the CARICOM summit in St Lucia in July, regional governments, worried that their traditional markets could be further eroded by a US-based global rum producer, said they were seeking talks with the US Trade Representative.

CARICOM Secretary General Irwin La Rocque said that the regional leaders had been briefed on the rum situation in a report submitted by the Prime Ministerial Sub Committee on External Negotiations headed by Jamaican Prime Minister Portia Simpson Miller.

He said that the issue, involving Diageo, the global rum producer, continues to threaten Caribbean rum into the US market, and the leaders agreed that "strong and urgent political intervention was needed to address that issue.

"There is a concern with regards to some subsidy that is being provided for Diageo, the multilateral and one of the largest rum producers which is currently located in St Croix in the US Virgin Islands," said La Rocque.

"There is an arrangement in the US government that allows for resources to be provided based on the exports of rum from the Virgin Islands, but more than that the resources are being used to provide a direct subsidy for a modern rum factory that is being constructed in St Croix," he said.

The subsidies could potentially damage the market for rum producers in the region — "a market that we have been cultivating over the years, a market which they are seeking to upgrade by exporting brand rum rather than bulk rum", La Rocque said.

"This is a matter of grave concern and it is agreed there needs to be some intervention of some sort to inform the United States of our concerns."

La Rocque said that any subsidy provided to any competitor puts rum producers at a disadvantage.

WIRSPA said at issue is the rum 'cover-over' programme benefitting a number of multinational distillers which have a presence in the USVI and Puerto Rico

Inconsistent

It insists 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."

Under the programme, he said, 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.

WIRSPA said that in 2010 the value of the subsidies amounted to approximately US$450 million. It said in addition to these amounts, the USVI and Puerto Rico also receive 98 per cent of federal excise taxes paid on the 3.1 million proof gallons of CARIFORUM rum sold in the US.

"This amounts to an additional US$41 million in cover-over revenues available to the USVI and Puerto Rico to subsidise competing production," said the association.

"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," WIRSPA said.

The Caribbean rum group also said it was concerned that the USVI and Puerto Rican governments are "ratcheting up the levels of incentives and subsidies" offered to multinational spirits producers willing to relocate in their jurisdictions.

"The levels of support now available to multinational companies is 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," WIRSPA said.

It said that 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.

WIRSPA said that 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 per cent of the market price. "Molasses is one of the biggest costs, centres for rum production and this 90 per cent subsidy is totally distortive to the regional marketplace. The combined new production capacity which is planned as part of the agreements is estimated to add the equivalent of 80 per cent or more volume to the US market at its current size," said WIRSPA.

"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 subsidised."

Rum generates an estimated US$500 million annually in foreign exchange for independent Caribbean countries, and well over US$250 million in tax revenues, the rum association said.

- CMC