A recent book review and an article in today’s Financial Times provoke a short essay on wine exceptionalism.

Bad Samaratans

Choice magazine, a publication of the Americal Library Association, recently asked me to review a book called Bad Samaratans: The Myth of Free Trade and the Secret History of Capitalism by Ha-Joon Chang of the University of Cambridge.  I was happy to do this and gave the book a generally favorable review because the message is a useful one that I have written about in the past.

The advocates of hyper-globalization often tout totally free markets as the only way forward, but the “secret history of capitalism,” as Professor Chang calls it, is that there are plenty of examples of countries that only advanced when they adopted protective measures that gave domestic firms room to grow.  This lesson goes back as far as Alexander Hamilton in the United States, Friedrich List in Europe (and so is not really a secret) and lives today in the economic miracles of Japan and Korea. This  doesn’t mean that protectionism is always good, only that is is not always bad.  Life is complicated.  Deal with it.

I think this view is true in general, but is it also true about wine?  Or is there such a thing as wine exceptionalism?  An article in today’s Financial Times makes we wonder.

Indian Wine Tariffs

The article reports on a dispute between the European Union and India that is apparently headed to the World Trade Organization.  The issue is Indian wine tariffs.  India has tariffs on imported wine and high taxes on domestic products, which is perhaps not unexpected, given India’s low per capita income.  You might expect a country like India to impose high excise taxes on luxury goods as a way of funding needed government programs.  I imagine that wine is a luxury for most Indian households, so a high tariff would be a way of taxing the affluent to benefit the poor.  Wine consumption is very low in India (5 million liters per year, which is practically zero per capita, given India’s huge population) and the high tax is one reason for this.

But the India market is growing, expected to double in the next two years, so there is something at stake here.  More to the point, however, the Indian taxes are not for revenue only — some are intended to protect the nascent Indian wine industry.  That’s the rub.

WTO rules allow countries to have tariffs, but require that they satisfy a “national treatment” rule.  This means that, once foreign products have entered the country and paid the duty, they must be taxed and regulated just like domestic goods.  This is where India has run afoul of the WTO.

According to the Financial Times article, three Indian states, Goa, Maharashtra and Tamil Nadu, which represent important potential import wine markets, impose additional discriminatory domestic taxes on foreign wines, while exempting domestic wines to try to encourage the growth of the industry.    The FT reports that

India imposes customs duties of up to 150 per cent on bottled wines and spirits at the border. These are supposed to be equivalent to the excise duties paid by domestic producers.

But the EU says Maharashtra is imposing a special fee on imported wines and exempting local producers of wines and spirits from excise duty. Goa and Tamil Nadu are charging extra import fees while Tamil Nadu continues to operate restrictions on the sale of imports.

This is contrary to WTO rules, if the accusations are true, and hence bad trade policy. But is it good economic development policy?  That is, is it a good idea way to build the Indian wine sector? Or is wine different?

Vino Exceptionalism

I have to admit that my answer is, no!  I have studied a lot of countries that have chosen to try to protect their domestic wine industry from foreign competition and I am not aware of a single case — not one — where it was effective.  Captive markets (in wine if not more generally — sorry Prof. Chang) seem to breed what Albert O. Hirschman used to call “lazy monopolists.”  The wines they produce are easy money — made to appeal to a least common denominator market and quality products are neglected in a sort of tragedy of the vineyard commons.

Quality wine emerged only when competition was introduced.  This was true for Argentina, Canada, New Zealand, Washington State and now, I believe, in Languedoc in the South of France, although it is still too soon to tell how EU market reforms will work there.  If vino exceptionalism holds for India, then I suspect that their protective policies will not benefit them much.  Indian wine drinkers may thank the EU in the short run for its vigorous prosecution of WTO rules.  Indian wine producers may also thank them in the long run for forcing them to focus on quality in order to compete with imports.