URBANA, Ill. – When you sit down to a nice dinner and sip a glass of wine, do you choose a bottle from France, Australia or South America? Chances are the fancy drink you’re tasting is imported from a major global wine producer.
Wine is one of the most traded commodities in the world. It is also a prime target for import tariffs, although wine is only rarely involved in the disputes that trigger these measures.
A new study from the University of Illinois explores the economic costs of wine tariffs to producers and consumers in the global marketplace.
“Wine often becomes a punching bag in commercial disputes. It is targeted with cross-retaliatory measures and punitive tariffs imposed by the parties in conflict,” says William Rileyassistant professor of agricultural and consumer economics at the U of I and senior author of the paper, published in Food policy.
Why is wine a popular target for these trade disputes?
One of the reasons is that wine producers are highly dependent on export markets. And wine is a culturally important product for many countries, says Ridley.
The European Union produces 60% of world wine and represents 67% of world exports. The other major producers are the United States, with 8.2% of world production and 5% of wine exports, as well as Australia, Argentina, Chile and China.
Wine has been caught in the crossfire of several recent trade disputes. In their study, the researchers focus on the impacts of two ongoing conflicts.
The United States and the EU recently became embroiled in a years-long dispute over Boeing and Airbus aircraft subsidies. Both sides imposed tariffs on unrelated products in cross-industry retaliation. US tariffs targeted $4.5 billion in food and agricultural exports from Europe; wine accounted for a third. In 2019, the United States imposed a 25% tariff on beverages containing up to 14% alcohol. Both the United States and the EU had planned additional tariffs on the import of wine from each other, although these measures were suspended when the parties reached a temporary truce in 2021.
Another major dispute arose between China and Australia, where China passed tariffs of up to 212% on Australian wine imports. China claimed this was in response to dumping (Australian wine producers selling wine at an artificially low price), but it also aligns with ongoing political tensions between the two countries. China is the biggest overseas market for Australian wine, and the tariffs have effectively halted that trade.
These instances of collateral retaliation in wine imports have resulted in substantial economic losses, researchers say. The US-EU dispute cost $190m in trade losses, while the Sino-Australia dispute cost $149m – a total of $339m per year in trade disruptions; that is to say exchanges which no longer take place and which are not redirected elsewhere.
Consumers in importing countries also suffer the consequences. American wine consumers experienced a 4.1% reduction in consumer welfare, as measured by changes in consumer prices. EU consumers, on the other hand, are better off. Because the tariffs hurt producers and lead to lower exports, more wine is available on the domestic market. The EU exports far more wine to the US than the other way around, which benefits European consumers more. The results are similar for the Sino-Australian conflict, with Chinese consumers bearing the brunt of the economic impact.
Ridley and his colleagues also ran counterfactual simulations to show what would happen if there were no import duties at all. They found that fully liberalizing trade would result in approximately $76 million in new trade worldwide and a 4% increase in wine consumer welfare.
Ridley says the findings can lead to policy recommendations.
“The World Trade Organization sets the rules for how trade disputes can play out, and cross-retaliation is one of the tools it allows countries to adopt,” he says.
“However, tariffs are inherently distortive and have a negative net effect. You can say that tariffs protect certain domestic industries, because you protect them from foreign competition. But you’re making it worse for your own consumers, because you’re putting a tax on the products they buy. It is not difficult to show that the negative effects almost universally outweigh the positive effects.
Tariffs, including those on wine imports, have also contributed to economy-wide inflation that has persisted in recent months, Ridley says.
“When imports are subject to tariffs, consumers have to pay higher prices whether they buy foreign or domestic goods. Although this is not the sole cause of recent inflation, it is undoubtedly a contributing factor,” he concludes.
The paper“Wine: the punching bag in commercial retaliation”, is published in Food policy [https://doi.org/10.1016/j.foodpol.2022.102250]. The authors are William Ridley, Jeff Luckstead and Stephen Devadoss.
The research was supported by the USDA National Institute of Food and Agriculture, Agricultural and Food Research Initiative Competitive Program, Agriculture Economics and Rural Communities, Grant # 2022-67023-36382.
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