Rum-producing countries of the Caribbean Community and Common Market (CARICOM) may have to take the U.S. to arbitration at the World Trade Organization (WTO), unless diplomatic efforts settle a looming problem before it concretizes.
At stake is rum production in several CARICOM countries, together with the foreign exchange earnings and employment that it generates.
The problem has not arisen out of direct action by the U.S. government. It has originated in the U.S. Virgin Islands (USVI) and Puerto Rico, both of which have been long-time rum producers in competition with CARICOM manufacturers. But, now, these two U.S. affiliates are taking advantage of U.S. government refunds to them, of excise taxes on rum, to subsidize vastly increased rum production and marketing in their territories. The huge increase in rum exports to the U.S. mainland, at a subsidized cost, would squeeze-out CARICOM rums; and subsidized marketing would make it virtually impossible to compete.
The U.S. Virgin Islands, adversely affected by the closure of the oil refinery on St. Croix, is desperate to create opportunities for employment and economic growth, and it has hit upon the idea that it could use the refund of the U.S. excise taxes called "the rum cover-over" program to lure large rum producers by offering them huge incentives and subsidies. The USVI government actions, originally caused protests from rum producers in Puerto Rico before that island's government joined in using the proceeds of the "cover-over" program to subsidize its own rum producers.
An already concluded-contract in the USVI with one big company alone will add 20 million proof-gallons of rum production capacity in the region - more than 50 percent of the current U.S. market. Moreover, known and reported subsidies to other producers in the USVI and Puerto Rico are resulting in additional new capacity for existing facilities. The enlarged production from this new capacity will affect not only the U.S. market, but other world markets as well, since the U.S. cannot absorb all the rum that can be produced at these new or expanded subsidized facilities.
Further, the USVI governor has stated publicly that the new contracts will raise the island's "cover-over revenue" from $90 million to $240 million per year. With much of that money dedicated to subsidizing production and marketing of rum, producers from CARICOM countries simply cannot match it.
If the USVI and Puerto Rico are allowed to continue to use the U.S. mainland's refund of the excise taxes to subsidize both the building of greater rum producing capacity and marketing, the U.S., by allowing it, could be in violation of WTO rules in three ways.
These are: Article 3.1(a) of the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement) which prohibits all subsidies that are "contingent, in law or in fact, whether solely or as one of several conditions, upon export performance"; while GATT Article III:8(b) does permit WTO members to provide subsidies exclusively to domestic producers, the WTO Appellate Body has already ruled, in previous cases, that this exception does not justify subsidies that amount to the direct remission of excise taxes to domestic producers.
Thus, the USVI contracts may not be defensible under this provision; and Article 5 of the SCM Agreement prohibits WTO members from using actionable subsidies to cause "adverse effects to the interests of other members." Because all the subsidies in the USVI contracts are specific to the rum industry, they surely meet the test of being "actionable" subsidies.
Additionally, the magnitude of the subsidies is so large - approaching 100 percent of the cost of production in some cases - that the subsidies are certain to cause substantial competitive harm to the rum industries in CARICOM countries.
Rum-producing CARICOM governments would have little option but to file for a dispute settlement with the U.S. at the WTO. The governments could not sit by idly while CARICOM rum producers lose their market share in the U.S. mainland due to unfair subsidies, and probably face collapse with consequential foreign exchange and job losses. But, the WTO process would be a long and costly exercise for all the governments concerned.
This, of course, highlights the inadequacy and unfairness of the WTO remedies for developing countries when its rules are violated by rich nations.
But, that is another issue.
The record of the U.S. at the WTO in relation to the interests of small CARICOM countries - on bananas and Internet gaming - has been harmful.
Additionally, the U.S. has made no major contribution to economic development in CARICOM countries in recent times. If this is official U.S. policy, it is perplexing. If it is an accidental position, it needs correction. For, unless the U.S. has decided to leave Caribbean development - and therefore co-operation and mutual assistance - to others, the Caribbean could become as indifferent to U.S. goals, as the U.S. now appears to be to Caribbean aspirations. This would be a shame given the long and traditional links and values that the U.S. and the region share and which could be strengthened and expanded to their joint benefit.
There is a clear need for renewed and improved relations between the U.S. and CARICOM countries particularly in economic matters that improve the areas and levels of aid and investment.
The current situation over rum offers a special opportunity for all the players to come to the table to discuss how the rum market in the U.S. mainland can be shared in a mutually beneficial way. In particular, CARICOM foreign ministers and trade ministers and the U.S. secretary of state and U.S. trade representative should hold meaningful discussions on how best to avert a WTO case, while addressing the issue of no unfair advantages to producers in the USVI and Puerto Rico.
If they fail to do this, relations between the U.S. and CARICOM will sour with the Caribbean, once again, feeling let down.

o Sir Ronald Sanders is a business executive and former Caribbean diplomat who publishes widely on small states in the global community. Send responses to: www.sirronaldsanders.com.

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