Trade liberalization in the presence of domestic regulations: public policies applied to EU and U.S. wine markets

ABSTRACT

Wine is the highest valued product in the agricultural, food, and beverage sector traded between the United States and the European Union (EU) and wine faces a range of tariffs that are differentiated by country and product category. In addition, the production of wine grapes is heavily regulated within the EU and there are complicated state-level policies in the United States designed to limit the retail availability of wine. There continues to be economic and political pressure for reform to the tariffs between the United States and the EU, and to the domestic regulations in each region. We carefully develop parameters to characterize the effects of tariffs and domestic regulations that affect production and consumption of wine in the two regions. Simulation results show that reductions in tariffs would have relatively small effects in EU and U.S. wine markets, whereas reductions in EU domestic policies that affect wine grape production would have much larger trade and welfare implications.

KEYWORDS:

• Domestic regulations
• EU–U.S. trade
• non tariff barriers
• simulation model
• trade policy
• wine

JEL CLASSIFICATION:

• Q13
• Q17

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Trade data are widely available for three broad wine product categories: wine that is less than 14% alcohol and in packages less than 1.5 l (often referred to as bottled wine), wine that is less than 14% alcohol and in packages greater than 1.5 l (often referred to as bulk wine) and sparkling wine. Anderson and Nelgen (2011) provide more detailed data that describe markets for four wine products: nonpremium (bulk wine), commercial premium (low value bottled product), super premium (high value bottled product), and sparkling. We use data from Anderson and Nelgen (2011) to parameterize our model and consider four markets for wine in our policy simulations.

² There are various ways to model tariff cuts and the level of the reduction (for example, see http://www.wto.org/english/tratop_e/agric_e/agnegs_swissformula_e.htm). We consider a 50% cut to all tariffs in our analysis as a way to consider the likely implications over a longer time horizon.

³ Restrictions on the interstate sales of wine are not expected to have the same level of impact on the demand for wine; however, these restrictions are considerably more stringent in the eastern U.S., and in some capacity, they further increase prices for selected wine products in the Eastern U.S.

⁴ The 17 states with laws that ban or restrict wine sales in grocery stores include Alaska, Arkansas, Colorado, Connecticut, Delaware, Kansas, Kentucky, Massachusetts, Minnesota, Mississippi, New Jersey, New York, Pennsylvania, Rhode Island, Tennessee, Utah and Wyoming (Wine Institute 2009).

⁵ We acknowledge that wine is produced in many, if not all, states, and that there is a nontrivial amount of wine produced in New York State. National statistics often show that more grapes are produced annually in New York State compared to Oregon; however, much of the grapes produced in New York State are used in the production of concentrated grape juice. Overall, the vast majority of wine produced in the United States is from the three western states (California, Oregon and Washington), and furthermore, there is widespread retail availability of wine in these three western states. For reasons related to wine production and similarities in wine consumption laws, and for simplicity, we separate these states into two aggregate regions in our model.

Additional information

Funding

This work was supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture [Hatch Project # 1008694];