A rum distillery in St. Lucia. Credit: Gary J. Wood/cc by 2.0

By Bert Wilkinson
GEORGETOWN, Guyana, Nov 29 2012 (IPS)

Caribbean governments have begun a quiet lobbying effort to convince Washington to rethink the subsidies it grants to the rum industry in U.S. territories, or face a formal complaint in the World Trade Organisation.

At the heart of Caribbean fears are two companies, UK-based Diageo Plc brands and U.S.-owned Cruzan Rums, which like many Caribbean distilleries, export millions of gallons of white and dark rums to the U.S. mainland each year.

Irwin LaRocque, chief of the regional trade bloc Cariforum, told IPS the U.S. subsidies “have the potential for damaging the market for our 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.

“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,” he says.

The problem, says the Barbados-based West Indies Rum and Spirits Producers Association (WIRSPA), is that the U.S. has granted millions in annual subsidy payments to the two producers to build new distilleries and other equipment in the U.S. Virgin Islands and Puerto Rico.

The subsidies allow them to export rum to the U.S. market at a rate so much cheaper than their neighbours in the English-speaking Caribbean that WIRSPA’s own producers find themselves unable to compete.

Rum and spirits production date back nearly 400 years to the European colonial era. Collectively, the sector is worth more than 500 million dollars to the Caribbean’s economy.

The Dominican Republic, Guyana, Barbados and Jamaica are among the key exporting nations. About 80,000 people benefit directly and indirectly from the sector.

The issue appears headed to the World Trade Organisation (WTO) unless the Barack Obama administration and the U.S. Trade Representative’s office are prepared to sit down to review the policy in a way that is mutually beneficial, industry players say.

Thus far, the row has stayed relatively low key. Officials at the Guyana-based Caribbean trade bloc secretariat said that it came up briefly at the hemispheric Summit of the Americas this year in Colombia, with President Obama present at the meeting table.

Washington-based Caribbean ambassadors have also floated the topic to various tiers of administrative officials in the past year.

By all indications, they have made little headway. WIRSPA, and producers in the Dominican Republic who are also affected, say the road is being cleared for a trip to the WTO in Geneva if all else fails.

“We find that it is extremely difficult to compete and it is a challenge at this point in time. We feel that this is an iniquitous and pernicious use of subsidies for multinational spirit companies and their rum production,” Frank Ward, the head of WIRSPA, told IPS.

In the event that the U.S. digs in its heels – as it has done with the now destroyed banana and internet gaming sectors – WIRSPA and Cariforum say they have already done their legal homework and anticipate a favourable ruling at the WTO.

“We have had so far three legal opinions of the legality at the WTO of these subsidies which are being given by U.S. territories and all of them stated that there is a case to be made against the subsidies,” Ward said.

“One of the opinions came from the advisory centre on WTO law which is a body set up to advise individual countries on issues related to WTO laws. So we have a clear case there. We now need the political will to take it forward and time is not on the side of the industry,” he added.

The clearest indication that talks are a possibility has come from U.S. Assistant Secretary of State Roberta Jacobson, who said the U.S. preferred dialogue to legal action.

Industry officials and diplomats say frustration is rising in Cariforum because of the mixed signals from various levels in Washington.

The grouping of regional diplomats in the U.S. capital had earlier this year written to the office of the U.S. trade representative, Ron Kirk.

In the letter, they outline their case and detail the subsidies they allege are “covering 100 percent of all costs to build a state of art production plant in St. Croix and then providing an operating subsidy that would approach or exceed 100% of the cost of production of all rum exported to the United States.

“The generous tax breaks and incentives” could entirely destroy Caribbean rum as most have known it, the letter warns.

Ironically, some of the regional distillers like Guyana sell bulk rum to their now British and U.S. trade nemeses for onward production to bottled rum. They now have to face the possibility of a decline in business at the expense of their buyers if the matter is not resolved in the short term.

“Several rum producers have lost long-term contracts to supply bulk rum,” noted a recent editorial in the Jamaica Observer. “This trend will continue because subsidised production capacity is larger than the existing market share of Caribbean rum exports. This excess capacity will first disrupt the U.S. market then inevitably affect all export markets.”

P.J. Patterson, the former Jamaican prime minister, has had a long relationship with the European Union.

During his tenure as his country’s foreign minister, he served as president of the African, Caribbean and Pacific -European Union (ACP-EU) Ministerial Council and led negotiations for the ACP group with the EU. He also played a pivotal role in forging an agreement on the basic framework for the original Lome Convention that was signed in 1975.

So last week, when Patterson delivered the second Caribbean Academy for Law and Court Administration (CALCA) lecture on “International Law, World Trade Organization (WTO) – Interface with the Economic Partnership Agreement (EPA), it was clear that his words would resonate far beyond the Hall of Justice.

Ironically, the lecture was being held at the same time that the Caribbean Forum of African, Caribbean and Pacific States (CARIFORUM) and the EU convened the Second Meeting of the Trade and Development Committee (TDC) under the EPA, which both sides later described in a joint statement as “successful”.

But while Patterson acknowledged that his remit did not oblige him to engage in a detailed examination of the EPA, he nonetheless pointed out some “startling differences” between the negotiating framework and outcomes, previously outlined for Lomé and EPA which was concluded in 2008.

While in most nations the application of the agreement is “currently provisional”, he said, even the least “sceptical person or most difficult juror to persuade” must by now realise that the determination of EU to create regional EPAs was for one single purpose.

“To dismantle the formidable arsenal of the ACP combined, to fragment its collective power and then defeat us one by one,” Patterson argued, adding “suffice it to be reminded that none of the other six ACP Groups, each negotiating separately, has yet concluded a comprehensive EPA to accord with the EU’s allotted time-frame.

“In all the other regions, limited Interim Agreements covering mainly trade in goods have been initialed and/or are still the subject of negotiation in efforts to conclude full EPAs,” he said, recalling earlier pronouncements that the EPA is a legally binding international treaty.

“It purports to be of indefinite duration. So too did the Sugar Protocol of 1975, which has now been abrogated unilaterally (by the EU). It seems to go well beyond the realms of trade and economic relations to encompass issues of shared sovereignty and areas of supranational governance,” Patterson said.

He said that storm clouds have begun to appear, making references to the rate and pace of tariff adjustments in the face of existing budgetary requirements and tight fiscal constraints; the absence of funding obligations as part of EPA that were reflected in the European Development Fund (EDF) as part of the Cotonou Agreement, and what he refers to as “an area of great potential – services” while asking the question “who will really qualify for access from the Caribbean?

“Link that to the requirement for EU firms to receive the same treatment as local or regional firms. The concept of proportionality has been thrown out of the window. Indeed, some are more equal than others. Inequality is evident – no visas are required for entry in most of our countries – while we need a Schengen Visa or UK Permit to step foot on European soil.”

Patterson said the Caribbean Community (CARICOM) will need to address without further delay “such issues as investment, competition policy and government procurement to avert the danger of undertaking obligations or conferring rights on others that do not yet exist within the Community but already fall within the framework of the EPA”.

The St. Kitts-Nevis government has already signalled its intention to seek an extension in implementing certain measures under the EPA.

Prime Minister Dr. Denzil Douglas, in a local radio interview last week, said his administration would be approaching the European authorities on the accord that allows for the removal of tariffs and import duties on goods traded between European and CARIFORUM countries.

St. Kitts and Nevis is among the eight Caribbean countries that have not yet removed tariffs from goods coming into the country from the EU under the agreement.

“We would always be mindful of our international obligations and in bilateral and multilateral situations involving the EPA,” Douglas said, adding, “What I would say is that before we can just simply and dramatically hurt ourselves, the appropriate economic analysis will have to be done.”

His International Trade, Industry and Commerce Minister Dr. Timothy Harris said recently that the government would have to deal with the loss of revenue as a result of the removal of the tariffs.

“Naturally we would be very concerned about the loss of revenue from the tariff that we would normally collect and we make sure as we implement these we find other ways to make up the shortfall in revenue,” Douglas said.

“We just can’t say we’re doing it and hurt ourselves without knowing how we are going to have the appropriate corrective measures introduced,” he said, adding that he does not contemplate introducing any new taxes to make up the shortfall.

According to the joint statement issued at the end of the CARIFORUM-EU meeting here over the weekend, the committee crafted a number of joint decisions for adoption by the Second Meeting of the Joint CARIFORUM-EU Council (JC), which will be held in Brussels on Oct. 26.

But the statement also noted that “while there was agreement on submitting certain items for endorsement by the JC, some issues will be subject to further negotiations as they were not resolved”.

The statement noted that with respect to development cooperation, CARIFORUM reiterated its commitment to regional cooperation and integration, and that projects have been identified with respect to 82 percent of resources under the Regional Indicative Programme of the 10th EDF.

But CARIFORUM also warned that the action of the EU in the area of differentiation impacts on the region’s capacity to implement the EPA.

The statement said that while the EU “took note” of the CARIFORUM concerns, there was agreement that the upcoming JC would allow for “an opportunity to exchange views on the implications of differentiation for the region’s economic development and its capacity to implement the EPA”.

But as Patterson warned, what has become evident is that within CARIFORUM there is the need to create “the range of skills necessary to engage in the proper interpretation of the EPA, the enforcement of the provisions, the settling of disputes which are bound to arise”.