The Washington Diplomat / February 2013
By Larry Luxner
Arguing about who bottles the best rum in the Caribbean is sort of like debating which country produces the tastiest gourmet coffee, or who exports the finest cigars.
Ever since the 17th century, when slaves on West Indies sugar plantations began fermenting molasses into rum, connoisseurs have pondered that question — with modern contenders for the “best rum” title ranging from Jamaica’s award-winning Appleton Estate and Haiti’s legendary Rhum Barbancourt to pricey Mount Gay Rum from Barbados and the three Bs of the Dominican Republic: Bermudez, Brugal and Barceló.
Within the 15-member Caribbean Community (Caricom), however, few would dispute the biggest threat facing the rum industry today: Washington’s generous excise-tax rebates that are used to subsidize rum production in Puerto Rico and the U.S. Virgin Islands.
Despite its relative obscurity, the surprisingly emotional issue — replete with arcane terms like rebate caps, cover-overs and zero-sum incentives — has done more than just spark a spirited trade debate. It has galvanized the Washington-based ambassadors of all 15 Caricom member nations like never before. Together, they’ve gone up to Capitol Hill, pleaded their case with the administration, and brainstormed on ways to get U.S. policymakers to pay attention to an issue that may be obscure to most Americans, but one that means big business for their small island states.
These countries, ranging in size from tiny St. Kitts and Nevis (population 53,000) to Haiti (population 10.2 million), accuse the United States of violating World Trade Organization rules by essentially subsidizing domestic rum production. And they threaten to pool their collective clout and take their case to Geneva if the situation is not resolved to their satisfaction.
“We have had four legal opinions, and it is quite clear that while there may be different approaches, the WTO would probably rule in our favor,” said John Beale, the ambassador from Barbados. His is one of the countries most affected by U.S. subsidies, since 90 percent of rum produced in Barbados is exported, either in bulk or bottled form.
Beale was among a group of Caribbean ambassadors who spoke for The Washington Diplomat’s exclusive group cover about an issue that has threatened the region’s vital rum industry. The issue is complex but comes down to subsidies — or a roundabout version of them. The United States currently charges a $13.50 excise tax per gallon on all rum produced in or imported to the United States. That money — amounting to hundreds of millions of dollars — then gets funneled to the U.S. territories of Puerto Rico and the U.S. Virgin Islands, which in turn use it to offer generous tax breaks to international rum producers that have set up shop on their territories.
Despite their extensive campaign, Caribbean nations such as Barbados, Trinidad and Tobago, Guyana, Jamaica and others failed to convince the U.S. government that the tax amounted to a subsidy. Buried in the so-called fiscal cliff tax deal that passed Congress in early January was a provision extending the rum excise tax.
Now, Caribbean states are left pondering whether to haul the United States before the WTO to resolve the row, though doing so would be a costly, lengthy undertaking.
At the 35th meeting of the Caricom Council for Trade and Economic Development, which was chaired by Jamaican Foreign Affairs Minister A.J. Nicholson, delegates urged the trade bloc to “pursue all avenues available” to secure a resolution “that restores the competitive balance in the marketplace.”
Beale warned that Barbados and its fellow Caricom states could very quickly find themselves priced out of the market if cheaper rums from Puerto Rico and the U.S. Virgin Islands are allowed to flood U.S. liquor-store shelves thanks to unfair and possibly illegal trade preferences.
“This is not just a subsidy to assist someone. It completely distorts and wipes out the competition,” Beale complained. “Diageo has more money than we can ever dream about. Something seems a bid odd there. Something doesn’t add up.”
Added Trinidadian Ambassador Neil Parsan: “The Diageo plant’s production capacity is far greater than the total production capacity of the Caribbean. There’s an economy of scale coming out of the U.S. Virgin Islands that renders the [rest of the] Caribbean uncompetitive.”
Diageo, for those not familiar with the drinks world, is a British conglomerate and the planet’s largest producer of spirits, with annual sales of $17 billion — an amount that far exceeds Jamaica’s annual GDP. Its brands include Smirnoff (the world’s best-selling vodka), Johnnie Walker (the world’s best-selling Scotch whisky), Baileys (the world’s best-selling liqueur), and Guinness (the world’s best-selling stout).
But its opponents throughout the Caribbean paint Diageo officials as modern-day pirates, looting their struggling countries’ treasuries of hard-earned foreign currency in the corporate quest for more and more profits.
In 2009, Diageo rocked the beverage industry when it announced it would move production of its popular Captain Morgan Spiced Rum from Puerto Rico to a sparkling new distillery in St. Croix in the U.S. Virgin Islands (USVI). The drinks giant had considered Honduras and Guatemala as possible low-cost options as early as 2007, but decided on the USVI after the territory’s government agreed to provide it with $2.7 billion in tax benefits over a 30-year period.
The move prompted bickering between the two U.S. possessions amid calls for a boycott of Diageo products by the New York-based National Puerto Rican Coalition (see sidebar).
Frank Ward, chairman of the Barbados-based West Indies Rum and Spirits Producers’ Association (WIRSPA), said the Diageo deal in St. Croix “opened the floodgates” — much to the Caribbean’s disappointment.
“The USVI started the ball rolling, and Puerto Rico began matching it dollar for dollar,” he complained. “The money being diverted to those two territories is globally distorting our trade. It’s also a violation of America’s WTO obligations.”
Ward, who’s been chairman of WIRSPA since 2007, said rum exports generate about $700 million a year in foreign exchange and more than $250 million in tax revenues for the 15 Caricom states and the Dominican Republic, which together comprise the Caribbean Forum (Cariforum).
At least 15,000 workers are directly employed in rum production throughout the region, and another 60,000 people indirectly hold jobs in that sector — though some countries are more vulnerable to large-scale competition than others.
“The Barbados rum industry is severely threatened by subsidies given to Puerto Rico and the USVI,” Ward said. “Our beef is really with the subsidies given to the rum companies, not with the program itself. Some of our member companies have already seen massive losses because of their inability to compete on price.”
In an interview with BeverageDaily.com, however, Diageo countered that the firm sourced the same amount of rum from Caribbean producers that WIRSPA reported its members exported to the U.S. market.
Caricom rum exports to the United States also rose 39 percent in the first four months of 2012, the firm said, before warning: “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 also defended Washington’s “cover-over” program and said its distillery in St. Croix has to date only produced branded rum for the premium U.S. market.
“This means that Diageo is not flooding the U.S. market with rum, and Diageo’s premium rum does not compete with, much less displace, the bulk rum produced by WIRSPA members,” the company said in a press statement. “And none of Diageo’s USVI rum is sold outside of the United States.”
Nevertheless, Bill Watson, a trade policy analyst at the Washington-based Cato Institute, called the rum excise-tax rebates “a tool of industrial policy and corporate welfare.” In a Jan. 3 story headlined “Rum Subsidies Included in Fiscal Cliff Pork,” he warned that “the potential for an embarrassing WTO challenge grows greater now that the program has been extended.”
An article in the New York Times suggests an even bigger fallout here at home.
“The aftershocks could even change what people drink in the United States,” writer David Kocieniewski predicted back in October 2010. “The tax incentives are so generous that Virgin Islands producers might ultimately try to use highly subsidized sugar cane to make blended whiskeys, vodka and gin, distillers on the mainland say. That could threaten the jobs of grain farmers and distilleries in the American heartland.”
At the heart of this complex issue is the U.S. excise tax on rum, which stands at $13.50 per proof gallon (roughly $2 a bottle). This amount is collected on all bulk and bottled rum produced in, or imported into, the United States. Permanent law stipulates that $10.50 of that $13.50 must be returned or “covered over” to the governments of Puerto Rico and the USVI to be used any way they choose. Under the program, each receives a share of the money based on how much rum it produces relative to the other.
Since the Clinton administration, however, temporary law — which expires annually and requires recurring congressional approval — provides an additional $2.75 per proof gallon, meaning the two territories get a total of $13.25 per proof gallon.
“The additional $2.75 lapsed in Congress at the end of 2011, but was among dozens of temporary tax breaks renewed through 2013 under the cliff deal,” reports Caribbean Business, a San Juan weekly newspaper, noting that the Washington Post cited the rum extender as one of the “10 weirdest parts of the fiscal cliff bill.”
How much does all this add up to? Quite a lot. In fiscal 2011, Puerto Rico, which has benefitted from this program since 1917, received more than $449 million in rum excise tax rebates. The USVI, which began receiving similar benefits in 1954, got $133.5 million in revenues in fiscal 2011.
Interestingly, Cuba, the Caribbean’s largest island and one of the world’s top rum exporters, couldn’t care less about U.S. excise-tax rebates because Washington’s 50-year-old trade embargo prevents it from selling a single drop of rum in the United States anyway. Nevertheless, its Havana Club brand, which the Castro regime produces in a joint venture with French drinks giant Pernod Ricard, ranks third in international sales — right behind Bacardi and Captain Morgan — and enjoys particularly strong sales in Spain and Italy.
Beale said he and his fellow Caricom ambassadors have met with the U.S. Trade Representative’s Office to plead their case, but to no avail.
“Back in June, WIRSPA came up here and met with people from the State Department and the USTR. My background is in business, and it was quite clear to me that the USTR is in no position to take on something that is absolutely minuscule. We would get nowhere with them,” he told us. “We should consider going to the WTO, because that’s the only way to get Washington’s attention.”
Bayney Karran, Guyana’s ambassador to the United States, agrees with Beale.
“In Guyana, such a large part of our economic output is agriculture-based, and we suffer from the lack of value-added products. Sugar is the largest sector of our economy, and rum adds value. When our exports of rum are affected, it has consequences on employment,” he explained.
Guyana, unlike most of its fellow Caricom members, isn’t an island but a poor, tropical South American country nearly the size of Great Britain (and its capital, Georgetown, happens to be home to Caricom’s gleaming new headquarters).
Although Guyana’s El Dorado and Demerara premium brands are known worldwide, most Guyanese rum is exported in price-sensitive bulk form — leading industry leaders to warn that unfair competition from Puerto Rico and the USVI could further impoverish Guyana, where per-capita GDP stands at only $2,700 a year.
“We’re struggling to increase our GDP and develop our economies for the benefit of our people,” said Karran. “It’s hardly acceptable that we would have setbacks because other countries are flouting the WTO rules.”
Meanwhile, the Caribbean ambassadors seem to have found an ally in U.S. Rep. Yvette Clarke, a Democrat who represents New York’s 9th District in Congress.
“The Caricom nations have a very valid concern, and I certainly want to use my office to get to the bottom of the thinking of the USTR,” the congresswoman from Brooklyn told the New York Carib News. “The competition Caribbean rum producers would face because of the subsidies would not make their rum industry sustainable, and at some point we would face a major collapse of the bulk rum industry in the Caribbean if something isn’t done.”
But the issue is more than economic, say the ambassadors. It’s also an emotional one, given the central role that rum has played in shaping Caribbean history for the past 400 or so years. It’s hard to find a country in the region that doesn’t produce its own rum — and these include not only giants like Bacardi and Havana Club but also lesser-known brands like English Harbour (Antigua and Barbuda), Chairman’s Reserve (St. Lucia), One Barrel (Belize) and Black Cat (Suriname).
“Rum creates jobs, taxes and foreign exchange, but in the case of Barbados, it goes even beyond that. It’s a question of psyche,” said Beale. “Rum was created in Barbados. It’s a traditional product involving sugar cane, agriculture and manufacturing. If Barbados cannot compete in rum, what can we compete in?”
Dominican Ambassador Anibal de Castro, who’s also passionate about this topic, told The Diplomat that “rum is part of our culture and tradition. It is deeply associated with our history, so when we talk about rum, we’re talking about the Caribbean.”
In 2011, the Dominican Republic exported $120.6 million worth of rum, mainly to Spain, Chile, the United States, Haiti and Italy; the U.S. share of that total was $8.7 million. Rum accounts for 2 percent of total Dominican exports and 7 percent of the country’s agricultural exports — yet that percentage will grow as demand ramps up.
“The Dominican Republic is very much in favor of free trade, and the Dominican rum industry has invested a lot of money in the last few years to improve the capacity and quality of Dominican rum,” said de Castro. “But this is an obstacle to compete on equal terms. This subsidy eliminates the competitive advantage and goes against the rules of free trade. We hope the Americans will pay attention to our demands, and that they will accept that it’s a mistake and will take the necessary measures to eliminate it.”
Adds Guyana’s Karran: “We are in the process of dialogue with the U.S. and we want to resolve the matter in an amicable way. Our objective is to sit down as friends.”