Thursday, November 15, 2018

Trump, tariffs, and trade barriers to U.S. wine in France: the real facts

Annoyed by French President Emmanuel Macron's ability to stand in the rain and honor World War I dead, our own President Donald Trump tweeted about unfair trade barriers that have prevented French people from drinking more U.S. wines:
A clutch of Francophiles hit social media in the aftermath because they hate Trump and assume he's wrong about everything. But he's not. He's a little off base, because tariffs are not the issue, but this is not a bad tweet by Trump's standards. Let's look at the real facts.

1. Trump starts off absolutely correct. France does make excellent wine, and so does the U.S. Don't lose sight of that.

2. French people would drink U.S. wine if it were cheap enough -- at the low end. Don't kid yourself about the glories of Burgundy and the Jura blah blah blah. French farmers have been overturning tanker trucks bringing cheap bulk wine from Spain because that wine has been taking away their market.


French farmers stopped this Spanish truck and dumped its contents
The U.S. can make cheap bulk wine too. French consumers buying boxes of Spanish bulk wine off the bottom supermarket shelf aren't particularly picky by definition.

3. Let me clear this up right now: the U.S. does not negotiate directly with France over wine. We negotiate with the E.U.

That said, there has been trade friction between the U.S. and the E.U. over wine, and France has been the source.

Most of the complaints have been from the French side. The French would like us to stop calling carbonated grape juice "Champagne," but our negotiators have successfully fought for improperly used place names like that to be grandfathered in.

However, Trump is not wrong that U.S. negotiators have been upset over access to the E.U. market.

4. The E.U. does place higher tariffs on U.S. wine than we place on E.U. wine. This is unfair according to the WTO. Trump is not wrong about this.

Those E.U. tariffs don't sound particularly high: from $0.11 to $0.29 on a 750 ml bottle of wine. But U.S. tariffs are only $0.05 for still wine and $0.14 for sparkling wine.

The good news is we can double our tariffs -- a real possibility after that Trump tweet -- and you might not see any increase in the retail price of European wines.

5. However, higher tariffs are not what U.S. negotiators think is holding back U.S. wines.

Here's a link to the Wine Institute page on world wine trade. It's worth reading, but the short version on market impediments in Europe is this:

* The E.U. heavily subsidizes wine production and marketing in many ways: $1.4 billion worth in 2016. In the U.S., our government treats our wine industry with suspicion, not support.

Wine lovers would not like it if the E.U. stopped these subsidies -- I wouldn't like it -- but that doesn't make them fair.

* The E.U. requires documentation of chemical analysis for all wines imported from the U.S. The U.S. does not require this from Europe. That is an unfair trade barrier, period.

6. It's highly unlikely the U.S. would start a trade war with the E.U. over wine, even though Trump owns a winery in Virginia. In the big picture of trade, wine is unimportant to U.S. negotiators.

Wine is a much more important part of the economies of France, Italy and Spain, and the E.U. is not going to start a trade war with the U.S. that ends up hurting its own member nations, who enjoy good access to the U.S. right now. So a trade war is unlikely.

7. If there is a trade war, impartial wine lovers will root for the E.U.

The U.S. is on the wrong side of most non-economic wine issues: we want to be able to call jugs of chemically treated white wine from Fresno "Chablis." We're even on the wrong side of the definition-of-"organic" issue, because the E.U., where wine is a better understood commodity, has always understood that sulfites are an important addition to organic wine.

8. But don't expect a trade war over wine unless Trump wants it himself.

Very few U.S. companies would benefit from lower European tariffs on wine. Tariffs are not a barrier to Napa Valley wines, because what's another 30 cents on a $30 bottle? This is true of every U.S. wine you have heard of. Tariffs are not a barrier to the wines we drink, which is why most American commentators couldn't see them as a barrier at all.

In fact, for fine wine from California, Oregon and elsewhere, Europe is just a fun little additional market. The U.S. domestic wine market is the largest in the world, and it's robust for wines over $20. And if U.S. wineries are looking elsewhere to sell wines over $20, China, not Europe, is top of the list.

However, there is a market in Europe for our bulk wines. I often see boxed U.S. wines in European supermarkets with pictures of the Statue of Liberty or the Golden Gate Bridge. We compete at the low end with Spain, France, Chile and Australia, and at that level, 15 cents per 750 ml does make a huge difference.

However, there are only three U.S. wine companies big enough to take advantage of lower E.U. tariffs: Gallo, Constellation and The Wine Group.

Gallo, with its longtime relations with San Joaquin Valley mass growers, is best positioned to take advantage of lower E.U. tariffs to ship more cheap wine there. But the few extra bucks Gallo could make in the E.U. would not make up for the loss of U.S. sales for its now extensive import portfolio.

Constellation doesn't have the access to grapes that Gallo does, and its main focus lately is beer and spirits anyway. A trade war would just be a distraction.

The Wine Group -- sure, it would benefit. It does have imports, but The Wine Group still specializes in efficiently making cheap wine. It's a lean, profitable company operating in a space most others have left (not Bronco; maybe they could make "Two Euro Chuck.") However, unlike Gallo, which has long been influential on both the Wine Institute and the federal Alcohol and Tobacco Tax and Trade Bureau (TTB), The Wine Group has never been known to exercise political clout. It's hard to see them starting here.

In short, there isn't a constituency of U.S. wineries begging for a trade war, outside of Trump Winery in Virginia. And I doubt that tariffs are any impediment at all to its sales in France. It's fashionable to mock Trump wine, but its sparkling wine is competent and the extra $0.30 would make little difference in the price. Just like Americans, French people will buy Trump wine or not based on how they feel about Trump.

Which brings me full circle. People online reacted to Trump's tweet based on how they feel about Trump. Give some credit to whatever advisor told the teetotaling President that "France makes excellent wine." At least he got that right!

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BradK said...

Blake, Thank you.

I understand the economics of producing wine here in the US. I've always felt that I'm at a competitive disadvantage against other regions. Your story is confirmation.

Bob Rossi said...

A very good analysis of the issues. I think that at mid-price level, the quality of French wines kills similarly-priced California wines, so that's not where California could compete with France in France. At the higher levels, it may be even, or even a nod to California, but that's not what I drink. And when I visit France I don't buy the bottom-of-barrel stuff at the large grocery stores, so I can't say how it compares to California low-end wine (which I also don't drink). But given how much bulk wine is produced in France and Spain, I'm not sure France would be much of a market for comparable California wine.

Rob McMillan said...

Really well done article Blake. Spot on. Thank you.