Impact International / June 15, 1997
By Larry Luxner
WASHINGTON -- U.S. liquor distillers trying to sell their brands in Latin America face many obstacles, from pisco protectionism in Chile to burdensome labeling require-ments in Mexico. One organization, the Distilled Spirits Council of the United States -- known as DISCUS -- is hoping recent moves toward hemispheric integration will eliminate such trade barriers and finally crack open the elusive Latin market to member companies.
In mid-May, DISCUS will send its assistant director for trade, Paul W. Moore, to the Brazilian city of Belo Horizonte. There, the trade ministers of 34 Western Hemisphere nations are gathering to discuss a thorny but far-reaching topic: how to negotiate a Free Trade Area of the Americas (FTAA) by the year 2005.
Observers say the upcoming ministerial could make or break the FTAA -- a tariff-free zone first proposed by President George Bush in 1992. President Clinton has already begun efforts to win fast-track negotiating authority in Congress to expand the North American Free Trade Agreement to Chile and other countries. Yet some observers warn that as Congress drags its feet on the NAFTA issue, Brazil is quietly gaining influence at Washington's expense through the expansion of the Mercosur trade bloc to other countries such as Chile and Bolivia. Less than a year remains before formal FTAA negotiations are kicked off, in March 1998, at the next Summit of the Americas meeting in Santiago, Chile.
"Latin America represents only 3% of our export market, but it's certainly a market that's been targeted for growth," said Moore during an interview at his Washington office. "Our approach to better positioning our industry is to take advantage of bilateral or multi-lateral issues such as FTAA. We see the FTAA as an opportunity to position our hemispheric-wide objectives. If we do it at an early stage of the process, our issues and objectives will be well-known."
In 1996, U.S. exports of distilled spirits to Latin America and the Caribbean came to $37.4 million, up from $25.4 million in 1995 and only $15.2 million in 1994. A "good percentage of that growth," said Moore, is due to exports of ethyl alcohol to Mexico.
In fact, 43% of the distilled spirits shipments destined for Latin America last year went to Mexico (see accompanying charts). Another 12% went to the Netherlands Antilles, a duty-free shopping port and transshipment center for the Venezuelan market. Likewise, most of the liquor exports going to Panama and Paraguay -- each taking a 5% share -- ended up elsewhere. Panama's Colón Free Zone distributes liquor to Colombia, Peru, Ecuador and various Central American countries, while the Paraguayan port of Ciudad del Este sells much of its liquor and other merchandise to neighboring Brazil.
By category, the most important U.S. distilled-spirits exports to Latin America last year were rum ($7.6 million), bourbon/Tennessee whisky ($6.1 million) and ethyl alcohol. Cordials, blended whisky, vodka, brandy and gin accounted for lesser amounts.
Moore -- a 32-year-old ex-Commerce Department official with a master's degree in Latin American studies -- plans to outline his lobby's chief concerns in a position paper to be presented during the Belo Horizonte ministerial.
"The combined effect of high tariffs and taxes is the most significant impediment to open and fair competition in the Latin American market," the paper argues. "Of primary concern to the distilled spirits industry is the abundance of discriminatory excise tax systems in the region. Brazil, Chile, Colombia and Uruguay all employ liquor tax systems that discriminate between distilled spirits products and, in certain countries, protect domestic production. DISCUS seeks equal tax treatment of all spirits -- both domestic and imported -- throughout the hemisphere, through the adoption of a single specific rate of tax based on alcohol content."
DISCUS, which represents 23 U.S. companies, adds that "while trade liberalization has led to a significant reduction in tariffs, many Latin American and Caribbean countries apply rates to distilled spirits that exceed the average duty levels. Tariff elimination is the most basic element of a free-trade agreement. Therefore, we believe tariff negotiations should be one of the first priorities when formal negotiations commence."
In Chile, for instance, the organization's biggest problem is with pisco, a popular drink similar to brandy. Moore -- who worked at the Commerce Department for five years on such issues as NAFTA, the Caribbean Basin Initiative and the Andean Trade Preference Act before coming to DISCUS -- says his group may support a European Union petition before the World Trade Organization against recent Chilean proposals to settle a dispute over ad valorem taxes.
Last year, the United States exported just over $1 million in distilled spirits to Chile -- mostly bourbon -- a fraction of the amount exported by Great Britain. At present, Chile taxes whisky 70%, while taxing gin, vodka, rum, brandy, cognac and tequila 30%, and pisco only 25%. As a result, pisco today controls a whopping 84% of the domestic market.
In September, the government of President Eduardo Frei and domestic pisco makers agreed to change the system to one that taxes drinks by alcoholic content rather than by category. But foreign firms say the new system is worse in some ways because it would subject white spirits to even higher taxes than at present.
"We're looking at the European action," he said. "If they do formally petition the WTO, then we would consider supporting that petition. But I think it has to be EU-led."
Another category of obstacles concerns standards and technical barriers to trade.
According to DISCUS, "differing and sometimes antiquated beverage alcohol product standards have either deterred or prevented the introduction of new products" in some markets. A case in point is Mexico, where a new law -- known as Norma 042 -- restricts the output of superior alcohols, which in bourbon and Tennessee whiskey happens to be very high.
"Under this proposal, these wouldn't get a sanitary regulation," says Moore. "They're also proposing limits on certain additives such as citric acid, ascorbic acid which limit exports of coolers and pre-mixed cocktails."
An unrelated regulation, Norma 050, requires Spanish translation and product-content information for all imported merchandise, including alcoholic beverages. Those rules require Spanish lettering to be of equal size to the original English-language label. Enforcement of the rule begins July 1. Rules of this type, say DISCUS, "can force U.S. distillers to bypass potentially lucrative markets, due to the production expense of conform-ing with an individual country's product standard." Instead, says Moore, "our proposal is to provide industry as much flexibility as possible as to what's on the label and applying it to the product."
Another DISCUS gripe is the need for old-fashioned bottle stamps in Mexico, Brazil and other countries to prove the appropriate tax has been paid. Moore calls this "just another burdensome, unnecessary cost of doing business."
But perhaps the organization's most serious concern is the application of punitive tariffs on distilled spirits by Mexico. In December, the Mexican government announced a series of tariff hikes on various U.S. products in retaliation against Washington's equally protectionist decision to raise import duties on Mexican-made brooms.
The Mexican tariffs hit brandy, wine coolers and Tennessee whisky, among other items (notebooks and wooden furniture were also targeted). As a result, Jack Daniels whisky, which previously entered Mexico duty-free, now carries a 20% levy. Moore says it's "too early to tell if it's had an effect," though officials of Brown-Foreman Corp., owners of Jack Daniel Distillery, concede that the higher tariffs have affected sales.
"We're concerned that Mexico may impose new standards on tequila which may affect bulk shipments," says Moore. "It's a violation of NAFTA for Mexico to say all tequila has to be bottled in Mexico. They're always raising this in the context of intellectual property rights, but they've not implemented any restrictions yet that would limit the shipment of bulk exports."
Few industry executives doubt that a Free Trade Area of the Americas encompassing everyone from Alaska to Argentina would erase such trade barriers. The question is whether Latin leaders are ready to move forward on an idea that still exists only on paper.
"The FTAA offers an excellent opportunity for industries to secure improved market access conditions in Latin America on a comprehensive scale," concludes Moore. "We urge the ministers to reinvigorate the FTAA process in Belo Horizonte by securing, at a minimum, agreement on a date for the launching of negotiations. In addition, we strongly urge the ministers to agree to additional measures which will secure improved market access conditions during the negotiating process, so that globally minded industries such as ours can begin to take full advantage of the opportunities for growth within the hemisphere before the turn of the century."