Rum facing double whammy

Earnings and employment generated by the rum industry in 14 CARICOM countries and the Dominican Republic (collectively CARIFORUM) are under siege and the entire industry could be severely diminished in a few years unless the governments of these countries take swift action.{{more}}

In previous commentaries, I have drawn attention to the devastating effect on CARIFORUM countries if the US Virgin Islands (USVI) and Puerto Rico (PR) are allowed to continue current arrangements, in which the governments of those two US possessions unfairly use a tax rebate from the US Federal Government to provide huge benefits to companies to produce and market rum for the US market. Now, a comprehensive report, commissioned by the Commonwealth Secretariat, highlights a major threat to exports of CARIFORUM rum to the 27-nation European Union (EU).

The Commonwealth Secretariat report, The Impact of EU Bilateral Trade Agreements with Third Countries on the Caribbean Rum Sector, points out that even though CARIFORUM countries have signed an Economic Partnership Agreement (EPA) with the EU and currently enjoy tariff preferences in four rum categories, a range of Free Trade Agreements (FTAs) between the EU and third countries threatens to erode these preferences.

The report stresses that “if these other countries do not have to pay duties, this will mean that EU importers will face an increase in the relative price of Caribbean rum and a decrease in the relative price of rum imports from other sources”.

The Caribbean countries most vulnerable to FTAs are DR, Bahamas, Jamaica and Guyana. But, they are by no means alone. Total rum exports are a particularly important category in merchandise exports for Antigua and Barbuda where, in 2001, it was 29.9 per cent of all exports – the highest level of all CARIFORUM countries. Barbados was next with its total rum exports representing 13.3 per cent of its exports of goods.

In the case of Guyana, while in 2011 its total rum exports were 3.8 per cent of total exports, rum is significant because of the number of people employed by the industry (4.6 per cent of the country’s work force).

Worryingly, the report points out that the poverty rate in CARIFORUM countries is about 19%, (about 5 million people) and if the rum market in CARIFORUM collapsed, “the drop in GDP per capita deriving from direct effects would increase the number of poor people by 40,000”.

No CARIFORUM country would be immune from the erosion of preferences in the EU market. The biggest losers in export earnings would be the Dominican Republic (US$81.2 m), followed by Bahamas (US$28.1 m, Jamaica (US$14.1 m, Guyana (US$11.4) and Barbados (US$8.1 m).

When losses from the US market – that are now very real because of the actions of the USVI and PR – are added to the potential losses from the EU market, DR remains the biggest loser in money terms (US$88.2 m), Bahamas second (US$34.9 m), followed by Jamaica (US$25.4 m), Barbados (US$25.3 m) and Guyana (US$16.08 m).

It has to be said that in 2003, the EU provided a four-year package of transitional support for the CARIFORUM rum sector worth US$90 million. CARIFORUM rum producers themselves contributed US$84 million to the programme to upgrade and modernise rum production; advance management skills; and to market and distribute value-added rums.

There can be no quarrel with the EU on the way they have tried to help prepare the CARIFORUM rum industry for competition. The rum producers also deserve credit for putting up almost an equal sum of money as the EU to improve their industry.

But, it will be difficult – if not impossible– for the relatively small producers in the CARIFORUM countries to compete against much larger producers from Brazil and other Mercosur countries, as well as Colombia, and Peru with whom the EU will enter FTAs, if they also lose market share in the US. The reduction of sales in the US market will have an adverse effect on their financial capacity to survive, let alone continue to manufacture rum for the EU market at a competitive price. This is particularly true for Barbados, for whom the US is the biggest rum market, worth US$17.2 m, or twice as much as the EU market, in 2010.

This is why all CARIFORUM countries should be pursuing a complaint at the World Trade Organisation (WTO) against the United States over the “actionable” subsidies that the USVI and PR are giving to rum companies.

A recent legal opinion from the Advisory Centre on WTO Law (ACWL) confirms that CARIFORUM countries have a solid case for the US government to answer. The Centre states clearly that, under the terms of the Subsidies and Countervailing Measures Agreement, the rum incentives, given by the USVI and PR, provide a specific benefit to rum producers in their territories and “cause adverse effects in the form of ‘serious prejudice’ to the interests of other WTO members”.

The WTO complaint has to be taken against the US government (and not PR or the USVI), because in 1947 the US accepted the General Agreement on Tariffs and Trade “on behalf of itself and all its territories”.

CARIFORUM governments have tried talking with the representatives of the US Trade Representative’s office and they have got no indication that the US government will act to stop the actions of the USVI and PR. In the light of legal opinions from lawyers representing the West Indies Spirits and Rum Producers Association (WIRSPA) and now the ACWL, CARIFORUM governments have every reason to proceed to pursue a complaint against the US at the WTO.

The government of the Dominican Republic has shown its readiness to go. CARICOM governments remain hesitant. But, they hesitate to the detriment of their rum industry, revenues and employment. Further, if they continue not to act, they face a disastrous double-hit to their rum companies which will be unable to compete in the EU market as a result of their loss of preferences when the EU signs FTA’s with their competitors.

(The writer is a Consultant and former Caribbean Diplomat)

Responses and previous commentaries at: www.sirronaldsanders.com