Friday, November 23, 2012

Bananas, Rum & the WTO

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Just as the twenty-year World Trade Organization case about bananas is being wrapped up, another trade dispute with deep-lasting repercussions for Caribbean nations is emerging.
This time, the small island states are the inadvertent casualties of U.S. policies toward its Caribbean territories, Puerto Rico and the U.S. Virgin Islands.

U.S. Rum Cover-Over Program
Since 1917, the U.S. federal government has returned to these two rum-producing territories about 98% of the excise tax that it collects on domestically produced rum sold on the U.S. mainland. This is known as the rum cover-over program, and is intended to provide development assistance to the territories.
Until 2008, the islands used most of the refunded taxes for public and social welfare projects. Approximately 10% provided marketing support and production subsidies to rum companies.
 This all changed when, to induce rum-producer Diageo to relocate from Puerto Rico, the U.S. Virgin Islands struck a deal that gave the distiller $2.7 billion in tax incentives, all paid for out of the rum cover-over monies. Under the deal, Diageo, the world’s largest distiller, is receiving, at US taxpayers’ expense, a new plant, 30-year exemption from all property and gross receipt taxes, 90% reduction in corporate taxes, and marketing support and production incentives totaling tens of millions a year.
Not to be outdone, Puerto Rico has struck similar deals with Bacardi and Serralés.
In 2010, the cover-over amounted to approximately $450 million. It is reported that the value of the operating subsidies being provided exceeds the actual production cost per litre of bulk rum. And the more rum that the territories export to the US mainland, the more cover-over revenue they receive in return.

Export Subsidies in WTO Law
The WTO defines an “export subsidy” as a benefit, conferred on a firm or industry by the government, that is contingent on exports. The subsidies being provided via the cover-over revenue meet this definition.
Under WTO law, a member whose industry is being harmed by a subsidy can bring a challenge using the WTO dispute settlement process. If the subsidy is found to be harmful to the complaining country’s domestic market the subsidy is offset in the importing country by “countervailing duties.” Where the subsidy is found to be harmful to the complaining country’s industry or in a third market where they also compete, it must be removed.

Rum from Bermuda, USVI, Barbados
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Rum Production & Export in the Caribbean
Anyone with even the remotest connection with the Caribbean probably knows something of the islands’ love affair with rum. Each island’s rum is integrated into its tourism experience.
An earlier post by fellow blogger, Marjorie Florestal, tells the Story of Rum as a
'global spirit with its beating heart in the Caribbean.'
The industry is also central to the islands’ economies. It is a major employer.

With bananas and sugar already an inadvertent casualty of earlier WTO rulings, rum is also now the region’s largest agriculture-based export industry. The islands’ small populations means that most of the rum is exported, a large portion to the United States. In the independent Caribbean countries, however, unlike the USVI and Puerto Rico, the industry is dominated by small local distillers. They are unable to compete against the subsidies being offered to the big multinational companies that all but cover their production costs.
Rum producers and governments alike have expressed deep concern about the current extent of the subsidies and the harm being caused to their industries. They want the United States to place a cap on the amount of rum cover-over monies that can be used to subsidize rum production in Puerto Rico and the USVI. Failing that, they want to bring the dispute before the WTO.

WTO Dispute Settlement System Needs Reform
Like the gambling case brought by Antigua and Barbuda against the United States in the WTO, this case would present another David v Goliath scenario -- a scenario that the rules on special and differential treatment (S&D) in the WTO dispute settlement process are intended to address. Unfortunately, these rules are either not being invoked or where invoked, not applied in disputes between developed and developing countries. This failure makes the provisions ineffective. Even an apparent win can be pyrrhic. The favorable ruling and its enforcement may come too late to save the failing industry. Such an outcome remains a very real possibility in this new trade dispute. My review of the Antigua - United States and other cases has led me to propose the following procedural changes to the WTO dispute settlement process to better safeguard the interests of developing countries in disputes with developed countries.

Strengthen the requirement that the countries enter into consultations before launching the dispute: 
►establish terms of reference that incorporate the developing country’s special development concerns in the issue;
►impose minimum meeting time requirements to allow the terms of reference to be addressed; and
►require the intervention of the Director-General before determining that consultations have failed.

Add procedural guidelines to the panel & appeal process:
►establish terms of reference that incorporate the WTO S&D provisions; and
►strengthen the role of the WTO Dispute Settlement Body (DSB) to ensure that the policy intentions of S&D provisions are met.

Have the DSB ensure that the policy intentions of the S&D provisions are incorporated into its rulings:
►require that the DSB confirm that the S&D issues in the terms of reference have been addressed prior to adopting the panel or Appellate Body report; and
►develop procedures to guide intervention by the DSB at the implementation phase as required by WTO S&D provisions.

Particularly in light of Diageo’s threat to retaliate should the countries resort to the WTO, such reforms can work to prevent yet another Caribbean industry from falling casualty to US policy, despite the rules intended to increase the benefits of trade to their economies.

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