Diageo is reported to have said that it would “re-evaluate” its relations with several rum producers in non-US Caribbean countries if their governments file a dispute against the United States government at the World Trade Organisation (WTO) over huge subsidies to rum producers (including Diageo) in the US Virgin Islands and Puerto Rico.
In other words, what Diageo is saying is that if the huge subsidy it is enjoying in the USVI is legitimately questioned by non-US Caribbean governments, it will retaliate by ceasing to buy bulk rum from producers in countries such as Barbados and Guyana and, maybe, by reviewing investments in Jamaica.
Why Diageo believes that it should rightly be entitled to unfair trade and market advantages that arise from export subsidies prohibited by WTO rules is a mystery. This is especially puzzling when it is considered that, in addition to getting back 98 per cent of all taxes on rum they sell in the US (about US$450m per annum), the USVI and Puerto Rico also receive 98 per cent of the US excise taxes paid on non-US Caribbean rum sold in the US (about US$41m per annum).
The fact of the matter is that, on the face of it, the US government is in breach of WTO rules by allowing Puerto Rico and the USVI to make use of a refund of excise taxes on rum to subsidise production and marketing of rum for the US mainland in direct competition with other Caribbean producers.
If Diageo is sure of its case, it should welcome arbitration of the matter at the WTO. One can only assume that it is uncertainty of its ground that has caused the company’s recent attempt to frighten non-US Caribbean governments into abandoning any notion of filing a case at the WTO.
Surprisingly, none of the governments of the 15-nation Caribbean Community (CARICOM) grouping has yet responded to the hostile Diageo statement. It has been left to the West Indies Rum and Spirits Producers’ Association (WIRSPA) to point out to Diageo in a public statement that “such an approach threatens Caribbean economic sovereignty”.
Diageo also appears to be taking advantage of its part ownership of Clarendon Distillers in Jamaica to divide responses by Jamaican rum producers and to influence the strength of the general response from WIRSPA as an organisation representing the interests of rum producers in the 15 CARICOM countries and the Dominican Republic.
It is perfectly understandable that Diageo, as a company concerned with its profitability and shareholder value, wants to protect and preserve the significant benefits it is garnering from the subsidies granted to it for production and marketing of rum from the USVI. But that desire does not justify the violation of WTO rules that places small rum producers in the non-US Caribbean countries at a severe disadvantage in the US market.
Diageo may also feel that because it buys bulk rum from producers in several non-US Caribbean countries, those countries would be well advised to accept the situation and be content with negotiating the best sales contracts they can. But, the effect of accepting the situation would be to harm the rum industry in the non-US Caribbean gravely if not fatally.
Very quickly, the already fragile rum industry would be crippled, significantly reducing the US$500m foreign exchange it earns for these economies and shrinking the US$250 million tax revenues to governments.
A further fall out for non-US Caribbean countries is cultural. Rum production and the use of rum in a variety of ways, including in making Christmas cakes, is ingrained in the Caribbean culture. It is as Caribbean as sunshine and sea. So too is the rivalry between Caribbean countries over which one produces the best rums. The loyalty to national brands among rum users is renowned. No Caribbean citizen would forgive the disappearance of national brands.
In all of this, it is regrettable that Diageo has taken such a frontal position in this dispute. It is not the only company getting unfair benefits from rum production in Puerto Rico and the USVI, and of all of these companies, Diageo, in the past, has at least sought to do business with producers in CARICOM countries. Any WTO action would not be directed at Diageo; it would be aimed at protecting the rights and interests of CARICOM countries and the Dominican Republic.
It is important to recall that the rum ‘cover over’ programme under which the US government returns excise tax on rum to Puerto Rico and the USVI was always intended to be used for improving infrastructure such as schools, roads and other public facilities. It was never intended to subsidise privately-owned companies or to finance unfair trade. No one in CARICOM or the Dominican Republic questions the original intention of the ‘cover over’ programme.
At their meeting last July, the heads of government of CARICOM countries and the Dominican Republic agreed to implement a number of measures to address this troubling situation, among them was a series of letters to senior officials of the US government including a letter to President Barack Obama from the current Chairman of CARICOM, Dr. Kenny Anthony, Prime Minister of St Lucia.
The CARICOM Secretariat has not announced whether all these letters have been sent. In any event, while necessary, the letters will not stop the violation of WTO rules that are now placing non-US Caribbean rums at a disadvantage and gravely threatening their survival and their important place in Caribbean economies and culture.
Governments of CARICOM and the Dominican Republic should move swiftly to protect their countries interest. That’s what the WTO is for – it will open the door for institutional consultation with the US government that cannot be ignored.
(Sir Ronald Sanders is a Consultant and former Ambassador to the World Trade Organisation)