David Ricardo to Donald Trump: Global Wine Trade and Its Discontents

5788597-mWhen David Ricardo wanted to make the logic of his famous Theory of Comparative Advantage crystal clear he knew what example to choose: wine. It was obvious that Britain should import wine from Portugal in exchange for cloth rather than trying for vinous self-sufficiency. Any fool could see that!

Make Great Britain Great?

But wine wasn’t really the point of his example. He was more concerned about the Corn Laws, a set of trade barriers designed to choke off agricultural imports and promote higher prices for domestic grain (lining the pockets of rural landowners in the process). If Britain should trade cloth for wine, then why not trade cloth for wheat and other grains as well?

The wine story was good enough to convince Ricardo’s economist colleagues, but not so much those in parliament. The Corn Laws lasted from 1815 until 1846. Economic logic triumphed over vested interests in the long run, but the human cost of the trade barriers to urban workers and their families in terms of higher food costs and lower living standards was very high.

Britain really didn’t fulfill the promise of its Industrial Revolution until the Corn Laws were repealed. It is fair to speculate that Parliament could have acted to Make Great Britain Great much sooner if they had been guided by the economic logic of wine trade.

Wine is perhaps a good guide to British political economy today, too. Brexit, which was promoted as a way to Make Great Britain Great Again, seems to have instead made British families poorer even though the change in trade policies has not yet been enacted or even agreed.  Rising import prices and stagnant wages have squeezed consumer budgets for wine as for many other items (sound familiar?). Tesco, the upscale supermarket giant, is reportedly planning a discount chain of its own to compete with increasingly popular “hard discount” Aldi and Lidl stores.

Make American Wine Even Greater?

The wine trade has lessons for the United States, too. Or at least that was my takeaway from two speakers at the “State of the Industry” session at the recent Washington Winegrowers Convention and Trade Show. 

Glenn Proctor of The Ciatti Company presented a very interesting survey of global wine market conditions. There are only two big wine markets that are growing in terms of total consumption, Proctor said: China and the United States. The Chinese market is particularly attractive because of the large rising middle class and potential for further growth.  French wines are top of the import table in China, followed by Australia and Chile — two countries that have benefited from free trade agreements with China.

Indeed, China is now the #1 export market for Australian wine, accounting for 33 per cent of exports, ahead of the US (18%), UK (14%), Canada (7%), and Hong Kong (5%). The Chinese market has powered Australia’s resurgence as a global wine power and the free trade agreement is an important part of the story.

The United States? Well, the U.S. has no free trade agreement with China and President Trump pulled the U.S. out of the Trans-Pacific Partnership negotiations — which could have opened up Asian markets — on his first day in office. Partly as a result, I suppose, the U.S. ranks #6 on the China import list. Australia wine sales volumes are more than ten times the U.S. amount.

If recent import trends continue for a couple of years, U.S. sales to China may be surpassed by relatively tiny Georgia. Georgian wine sales to China have surged (up 45%) in part because of the Georgia-China free trade structure that went into effect at the beginning of the year. The U.S. wine industry is clearly handicapped in foreign markets where other producers have preferential access.

John Aguirre, President of the California Association of Winegrape Growers, also highlighted  the importance of trade agreements for the wine industry. President Trump has raised doubts about  U.S. – Korea free trade (the Korean market has lots of potential for U.S. wine) and launched negotiations to revise NAFTA. Since Canada is the largest export market for U.S. wines, it is essential that NAFTA maintain open cross-border access.

The wine industry would suffer if the NAFTA negotiation somehow collapse, although the negative impacts would obviously be less than agriculture generally and the automotive industry, both of which have become dependent on efficient trans-border industrial integration in order to compete with efficient producers in other parts of the world.

I am hopeful that the NAFTA negotiations will be successful at updating the treaty since there is so much at stake. But my confidence is shaken somewhat by President Trump’s actions to block new appointments to the World Trade Organization’s appeals body — the entity charged with enforcing the rules of the trade game.  This will make it more difficult for the U.S. wine industry to pursue its complaint against the British Columbia wine regulators concerning their discriminatory supermarket wine sales policy, which favors B.C. wines relative to imports in clear violation, in my view, of the WTO’s non-discrimination principle.

What’s the bottom line? If President Trump: wants to Make American Wine Even Greater, he might take a lesson from David Ricardo and re-think administration actions and policies regarding global trade agreements.

5 responses

  1. Hello, a very nicely written article, offering insight to learn from history!

    I have been wondering in the past years if I agree or not with free wine trade or not, tending more to agree with it, because of the possibilities it offers both to consumers and producers. However, there is an aspect to which I am becoming more and more sensible to, that of the CO2 emissions. This issue concerns all of us on earth and tends to dictate less travel, less emissions, less free trade for a better planet, so I am being divided: to transport or not to transport wines and how? (sometimes trucks are emitting more CO2 than cargo ships)…

    If economic growth is expensive in emissions, where does the balance stand?

    • Thanks for your comment. I agree that emissions are a serious concern that affects decisions about all economic activity. The good news is that many in the wine industry are very sensitive to this issue. The bad news is that emissions are everywhere in the product change. Sometimes the biggest carbon footprint is from the consumer who drives a heavily polluting car or truck to the store to buy a single item! Everyone needs to do more and make better decisions. Thanks again and best wishes.

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