Editorial

Carib should take damaging rum subsidies to WTO

Sunday, May 13, 2012    

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CONVENTIONAL economic wisdom advises developing countries to accept the erosion of preferential trade arrangements and seize the opportunities offered in the global economy by exporting.

This is obviously easier said than done because it is no easy task for small developing countries, like Jamaica and other Caribbean territories, to produce and export internationally competitive products.

However, the Caribbean has accomplished this for a narrow range of products, both traditional and non-traditional. Unfortunately, in many instances developed countries pursue policies which foreclose the export options of developing countries. The most pernicious of these unfair measures is the use of subsidies, despite them being outlawed by the World Trade Organisation (WTO).

The United States has pursued such policies which seek to shut down options for the Caribbean to export goods and services to the global economy. The most glaring examples are offshore financial services under the rubric of tax havens and gaming.

Even when the right to export these services has been upheld by the WTO — as in the case of Antigua & Barbuda versus the US — there are still punitive bilateral actions.

Nearer home to Jamaica, the export of rum from certain Caribbean countries to the US is especially threatened by subsidies.

The US Virgin Islands and Puerto Rico are benefiting from massive subsidies to their rum industries, in some cases exceeding 100 per cent of the fixed and variable costs of production for rum destined for the American market. These subsidies are funded by the US excise tax on rum, most of which is returned by the United States to the USVI and Puerto Rico governments.

The programmes have already begun to have significant harmful effects on the Caribbean rum industry, and these effects can be expected to worsen as subsidised rum production continues to expand. To restore a competitive market, all producers must have the same terms and conditions of access to the market. The US Government must eliminate all production subsidies and compensation should be provided to the Caribbean countries for any subsidies which have not been eliminated.

There is no debating the significant damage caused by these subsidies to the vital Caribbean rum industry. Several rum producers have lost long-term contracts to supply bulk rum. This trend will continue because subsidised production capacity is larger than the existing market share of Caribbean rum exports. This excess capacity will first disrupt the US market but inevitably affect all export markets.

The governments of Caricom must launch a diplomatic campaign to get the US to change its policy. This is going to be difficult because it will be opposed by the beneficiaries, which include the largest multinationals in the spirits business and the authorities in the USVI and Puerto Rico.

To strengthen its case, Caricom should immediately take the issue to the WTO.

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