Australian Wine Exports and the AUSFTA

Abstarct

Using data from the Australian Wine and Brandy Corporation, this paper explores the potential effect of the Australia–United States Free Trade Agreement (AUSFTA) on Australian wine exports to the United States. Specifically, it examines the relationship between the Australian–US real exchange rate, and wine sales of nine different categories of Australian wine exports between 1990 and 2004. The analysis indicates that sales of mid-valued red wine, white wine and sparkling wines are more sensitive to changes in price than other types of wine. This suggests that AUSFTA is likely to generate a larger proportional impact on sales of these wines than other varieties.

Notes

1. Countries were divided into quartiles for both of the analyses. Presence in Quartile 4 is referred to as high, Quartile 3 as moderately high, Quartile 2 as moderately low, and Quartile 1 as low.

2. The $10 category does appear above the $1.25 category briefly in 2003; however, it is unsustained and returns to the lowest category in 2004.

3. ‘Real’ prices may have increased (as the Australian dollar appreciated), which would normally cause a fall in demand. But if there has be a simultaneous increase in demand for these wines due to, for example, an extensive marketing campaign, then the observed change in demand would be positive, creating the ‘illusion’ of a positive PED.

4. If PED equals 10%, and if there was a fall in price of five cents for an $8.75 bottle of wine, you would experience a 0.6% fall in price. Since PED is equal to a percentage change in quantity that results from a 1% change in price, it is possible to multiply the estimated PED by the percentage change price that results from tariff reduction, to get a predicted percentage change in quantity. Noting that AUSFTA means a fall in price of 5.17 per bottle, we used the PED estimate in conjunction with 2004 quantity values to predict what could happen to exports for each wine/price point.