WASHINGTON — Killing two birds with one bottle of rum, the genial ambassador from Barbados offered me both a drink and a call to arms.
“We are prepared to go to the World Trade Organization and file a complaint against the United States. This is about subsidies that go beyond subsidies and will put our people out of work,” said John Beale, a bearded former banker, holding up a bottle of Mount Gay Rum.
Mount Gay, which is made on tiny Barbados (pop.: 275,000), is the oldest rum brand and collateral damage in a low-profile, high-proof Caribbean battle. It not only pits
Davids versus Goliaths but the tale’s two Goliaths against one another.
“Yes, it is all strange,” says Bill Watson, a trade expert at the libertarian Cato Institute. He thinks the U.S. is likely violating WTO rules by illegally subsidizing exports, a view shared by John Schmidt, a Chicago lawyer and top Clinton administration trade negotiator.
The strangeness concerns a de facto subsidy granted since 1917 to Puerto Rico, to correct a supposed market imbalance, and extended to the Virgin Islands in 1954. Both are U.S. territories represented by nonvoting representatives in Congress.
They are the Goliaths.
That’s because when you buy imported rum, they benefit mightily from the excise tax of $13.50 per proof gallon, which works out to $2 a bottle.
Nearly all that money is given to Puerto Rico and the Virgin Islands based on a formula linked to how much rum each territory produces relative to the other. It’s essentially foreign aid to folks with sort-of American status, in theory to bolster overall development, schools and other basic needs.
It’s serious money for small island economies. In recent years, Puerto Rico has been getting between $350 million and $450 million, while the Virgin Islands got $107 million in 2011 and north of $225 million last year.
Meanwhile, small rum-producing Caribbean nations such as Barbados, Guyana and Jamaica get nowhere in arguing that the rebates are unfair subsidies that help underprice their rum exports. Despite mouthing plenty of platitudes about free and fair trade, Congress doesn’t give these Davids and this comparatively puny matter much thought — and keeps extending its largess every two years.
But what was a low-simmering feud turned into a full boil in 2008 with a canny move by the Virgin Islands (pop.: 110,000).
They used a big chunk of their excise tax share to lure London-based Diageo, the world’s largest producer of spirits (Johnnie Walker, Smirnoff, Guinness, among others), to move its Captain Morgan spiced rum plant from Puerto Rico to a new plant on St. Croix.
Yes, Captain Morgan: a big brand with a huge following. You’ve seen the TV commercials and subway ads, I’m sure.
The Virgin Islands’ corporate giveaway is worth nearly $3 billion over 30 years, and by guaranteeing greater production, it assured more excise taxes would return. The plant began full production last year, and the Virgin Islands’ take soared.
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