Impact International / October 15, 1996
By Larry Luxner
SANTIAGO, Chile -- For more than a year, the U.S. wine industry has fought Chile's proposed entry into NAFTA, worrying that further trade advantages for low-cost Chilean wines would bury California vintners alive.
Now, U.S. whisky producers have their own gripes with Chile.
The Washington-based Distilled Spirits Council of the United States (DISCUS) says the Chilean government unfairly assesses an ad valorem tax of 70% on imported whisky, while taxing other spirits at at a rate of 30% and pisco -- a brandy-like national drink made from distilled grapes -- at only 25%. Such discrimination, says DISCUS, violates international norms and represents the industry's worst case of outright protectionism in Latin America.
"The Distilled Spirits Council, the Scotch Whisky Association and the Canadian Distillers Association have all at various times tried to convince Chile that this system is in violation of its trade obligations under GATT," says Paul W. Moore, the organization's assistant director for trade. "It's not a question of tax rate, it's a question of differentiating between two like products. Under GATT rules, products that are like or directly competitive and substitutable must be treated equally so as not to afford protection for domestic industry, and that's exactly what Chile is doing here."
According to DISCUS, some 454,000 cases of whisky and 1.1 million cases of pisco were sold in 1982, the year Chile's Finance Ministry started to treat the two categories differently. A decade later, sales numbers were completely reversed -- 169,000 cases of whisky and 3.55 million cases of pisco. Moore says at the moment, thanks partly to its lopsided tax advantage, pisco controls a whopping 84% of Chile's domestic liquor market, followed by whisky (6%) and white spirits like gin, rum and vodka (2.5%).
Unlike the California vintners, however, DISCUS members aren't fighting to keep Chile out of NAFTA. "On the contrary, we're lobbying for Chile's accession so that this issue will be brought to the negotiating table," says Moore, whose organization has 23 companies representing 90% of U.S. industry sales. "In order to join NAFTA, Chile will have to bring its tax system into conformity with both GATT and NAFTA."
Moore said his group's recent victory at the WTO against unfair Japanese protectionism of shochu sets a precedent that should be followed by Chile.
Nevertheless, last November, the Chilean government put forth a complicated proposal that would make things even worse for foreign whisky distillers. Under that proposal -- which has since been withdrawn because of pressure from the Clinton administration -- the tax rate would be determined by alcohol content, with the rate jumping by 5% for every 1% increase in alcohol content. Since most pisco sold in Chile has an alcohol content of 35° or less, that pisco would continue to be taxed at a rate of 25%, while U.S. distilled spirits such as Bourbon, rum and vodka -- which must under Chilean law contain at least 40° alcohol -- would be locked into a tax rate of no less than 50%.
"Pressure from the United States and the results of the Japanese liquor case persuaded enough people in Chile to withdraw that proposal in late July," said Moore, though he noted that "so far, they've managed to resist" making liquor taxes more fair.
Moore added that his group supports Chile's entry into NAFTA because it would "provide for the adoption by Chile of internationally recognized product standards for distilled spirits" and open up the way for imports of coolers, since under existing beverage law, imports of these products aren't permitted since no definition exists at all.