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Issued : Thursday, December 13, 2012 09:15 AM
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Caribbean rum war still simmering

By CB Online Staff

Caribbean Community (Caricom) nations are once again raising red flags about the threat of federally funded subsidies given by the Puerto Rico and U.S. Virgin Island governments to rum producers in the two U.S. territories.

Caricom’s Council for Trade & Economic Development (COTED) underlined in a meeting in Guyana this week that rum production and export are critical to the social and economic well-being of the region. In addition to being the largest agriculture-based export industry in Caricom, the rum industry is a substantial employer and a major contributor to foreign exchange earnings and government revenues.

At risk are the jobs of the 15,000 workers directly employed in the industry and another 60,000 job that benefit from it, they say.

“Therefore, Caricom continues to have serious concerns about the threat to the competitiveness of Caribbean rum in the U.S. market resulting from the massive subsidies provided by the governments of the USVI and Puerto Rico to multinational rum producers in those territories. The nature and scale of these subsidies are such that they threaten to distort rum markets not only in the U.S. but elsewhere,” COTED said in a statement.

Caribbean leaders have stepped up attacks on the sweet subsidies Puerto Rico and the USVI are offering their rummakers, a move that could imperil the lucrative federal rum-rebate program that pumps hundreds of millions of dollars into both territories each year.

Officials from the 15-member Caricom have been complaining to U.S. officials about the subsidies since last spring. Countries are now considering making formal complaints about the issue before the World Trade Organization (WTO).

“Time is not on the side of the Caribbean rum industry,” COTED said Wednesday. “We strongly support the deep commitment of Caricom countries to pursuing all avenues available to secure a resolution of this matter that restores the competitive balance in the marketplace.”

The entity called on the U.S. government to engage early with Caribbean rum-producing countries with a view to achieving an outcome that will support the continued competitive access for Caribbean rum to the U.S. market.

The moves come as the region’s rum producers are already feeling the impact in the form of cancelled supply contracts because they can’t match or beat the price of the subsidized competition coming from Puerto Rico and the USVI, according to Ronald Sanders, a business consultant and former diplomat.

Increasing portions of the deep federal rum rebates — Puerto Rico received $452 million and the USVI received $133.5 million in 2011 — are being funneled directly to rum producers, a development that Puerto Rico officials worry could jeopardize the program.

Resident Commissioner Pedro Pierluisi sees the complaints by Caribbean public officials as legitimate and says the “unreasonable subsidies” provided to rum companies in the two territories are a direct result of the 2008 deal reached between Diageo and the USVI.

That deal sparked a “rum war” between the two territories when Diageo moved production of Captain Morgan rum from Ponce to St. Croix, after landing huge incentives from the USVI government, which basically split the rum-rebate revenue between the government and the liquor producer. The USVI also entered into a similar deal with Fortune Brands, which produces Cruzan rum in St. Croix.

In response, Puerto Rico passed basic incentives worth 46% of the rum-rebate revenue generated from branded-rum sales and 25% from bulk-rum sales, which is rum produced for third parties. The USVI sweetened its deal with Cruzan to keep the company on a competitive footing with Puerto Rico-based producers after local incentives kicked in.

Caricom leaders met with the office of the U.S. Trade Representative (USTR) in June to complain that using rum-rebate funds to grant huge subsidies to rum producers violated international trade agreements, but won no firm commitment for action by the USTR.

The Dominican Republic has taken a further step by asking the WTO Advisory Center on WTO law for an opinion, a stepping-stone to making a formal complaint.

Pierluisi and Puerto Rico-government officials have complained the excessive subsidies granted by the USVI to rum producers could endanger the entire rum-rebate program.

The resident commissioner continues to support legislation he introduced in Congress that would cap the subsidies granted to rum producers at a reasonable level, but the measure hasn’t been taken up by the House or Senate.

Sanders says Caribbean nations have no problem with the rebate of rum taxes to Puerto Rico and the USVI for infrastructure and other projects but rather with using the rebate funding to subsidize rum production and marketing at a level that threatens other regional producers.

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