Statement of the Hon. Donna M. Christian-Christensen,
Delegate, United States Virgin Islands

Testimony Before the Subcommittee on Trade
of the House Committee on Ways and Means

Hearing on Summit of the Americas and Prospects for Free Trade in the Hemisphere

May 8, 2001

Mr. Chairman and distinguished colleagues, I am pleased to participate in this important hearing on the future of hemispheric trade relations under a renewed Andean Trade Preferences Act ("ATPA") and a future Free Trade Area of the Americas ("FTAA"). In particular, I am grateful for the opportunity to explain to the Subcommittee on Trade the critical importance of retaining the current treatment for rum in any renewed ATPA and of opposing future tariff reductions for rum in the context of the FTAA.

I am accompanied today by Mr. Andrew Wechsler of the Law & Economics Consulting Group, who is currently conducting an updated economic analysis of rum tariff issues for the Governments of the Virgin Islands and Puerto Rico. Mr. Wechsler would be pleased to answer any specific questions that the Subcommittee may have. In addition, I am submitting a written statement from Virgin Islands Governor Charles W. Turnbull, which I respectfully request be included in the record of this hearing.

In 1991, after very careful consideration by Congress and the Administration, rum was expressly excluded from duty-free treatment under the ATPA. At that time, the Ways & Means Committee explained that this action was necessary to preserve the benefits that Congress has provided to Puerto Rico, the Virgin Islands, and the Caribbean basin countries. Rum is a product which the ITC has identified as benefiting most from duty-free treatment under the CBI. . . . Andean rum producers have significant natural resource and cost advantages over their Caribbean and U.S. Territorial counterparts as well as large excess production capacity.

Developments over the last decade -- particularly a landmark 1997 international trade understanding and agreement on rum tariffs -- have made the retention of current tariff preferences on rum even more imperative for the Virgin Islands and the Caribbean region as a whole.

Rum has been produced in the Caribbean for centuries and is an important part of the history, lore and economic fabric of the region. Today, rum is the second most important industry in the Virgin Islands, surpassed only by tourism. Rum also provides an essential revenue source for the Virgin Islands government. Under a congressionally mandated program for the development of the Islands, federal excise taxes on rum shipped to the United States are returned to the local treasury. These funds currently account for more than 15 percent of the Virgin Islands total budget.

Rum has played a particularly critical role in the economic and budgetary health of the Virgin Islands over the last decade. During that period, the Islands have struggled to recover from the massive destruction and economic dislocation caused multiple natural disasters, including two of the most devastating hurricanes of the century.

Most rum produced in the USVI is at the low-price end of the market and is sold as unaged bulk rum to regional distributors in the United States. Because it is sold as a commodity without name-brand recognition, this rum cannot command premium prices. It is also extremely price-sensitive and vulnerable to imports from low-cost countries. As Congress recognized in 1991, Andean and other non-CBI producers have significant natural resource advantages in the production of rum. These advantages -- which continue today -- include large, indigenous sugar cane industries, inexpensive fuel, low wages, and substantial rum and alcohol production capacity. Without current U.S. tariff preferences, these low-cost regional producers can be expected to overwhelm Virgin Islands and CBI producers of low-value rum in the U.S. market.

This Congress and successive Administrations have repeatedly recognized the vital role which rum plays in the economies of the Virgin Islands, Puerto Rico and the Caribbean region, and have consistently resisted making significant changes to tariff preferences for rum. In addition to excluding rum from duty-free benefits under the ATPA in 1991, Congress has also adopted and maintained a special compensatory program for Virgin Islands rum in the context of the CBI program. Throughout the 1980s and 1990s, successive Administrations also repeatedly rejected various GSP petitions for duty-free entry of rum produced by non-Caribbean producers. All of these decisions reflect a recognition that rum is highly import sensitive. They were also the result of a carefully considered judgment that the likely harm to the Virgin Islands and the island nations of the Caribbean far outweighs any potential policy trade benefits from tariff liberalization.

 The unique and critical role of rum in the Caribbean region -- and the importance of maintaining preferences for low-value rum -- was most recently affirmed in a landmark 1997 understanding between the United States and the European Union. In WTO tariff negotiations in 1996, U.S. and EU negotiators had initially agreed to phase out all tariffs on rum and other "white spirits" by 2000. This unexpected development was met with alarm by Caribbean governments, Administration officials and Members of Congress. They emphasized to the trade negotiators that such a drastic change in the tariff structure for rum would deal a severe blow to the economies of the USVI, Puerto Rico, and the Caribbean.

In response to this outcry, U.S. and EU negotiators, as well as Caribbean governments and producers, revisited rum tariffs in complex and delicate discussions aimed at addressing the special role of rum in the Caribbean region. These discussions, which involved officials at the highest levels of the various governments, resulted in a carefully constructed compromise for rum. Under this compromise, the United States agreed to substantially liberalize duties on expensive rum. However, to protect the interests of the USVI and other Caribbean island producers, the United States also agreed to maintain existing MFN duties on low-value bottled and bulk rum.

This 1997 agreement on rum forms the basis for current U.S. tariff preferences on rum. In this landmark agreement, the United States and key trading partners struck a careful balance between tariff liberalization and the unique concerns of the Caribbean region. Any efforts to eliminate current tariff preferences for rum in the context of ATPA renewal or FTAA negotiations will upset this careful balance and will result in serious damage to the Caribbean region.

In 1991, this Committee wisely decided to exclude rum from duty-free treatment under the ATPA. This decision reflected a longstanding concern by the United States that trade preferences for rum are vitally important to economies of the Virgin Islands, Puerto Rico and the island nations of the Caribbean. The wisdom of this decision has been confirmed by developments since 1991. In particular, the 1997 agreement on rum between the United States and the EU reflects the understanding that tariff liberalization for rum must be tempered with an appreciation for the special role that rum -- particularly low-value rum -- plays in the Caribbean region. For these and other reasons, Congress must assure the current, carefully considered tariff preferences for rum are not disturbed by the ATPA or by other regional trade arrangements.

Mr. Wechsler and I would be pleased to answer any questions.