Granholm & State Control: Antiquation of the Modern Wine Trade
Zippers, taxes, & Modern Prohibition
Zippers. Would you be surprised if the US & individual state governments placed a new ‘sin tax’ on zippers? Let’s say the tax imposed was $1.25/lineal foot of zipper…., why not?
Why does this question seem so outrageous? Because it is, and so far, we have not had a suggestion of the sort….at least…..yet. I mean, really!? Should every area of life be regulated by government under the single condition that it has a potential to be used irresponsibly, irreverently or illegally? Or maybe the only reason for taxation should be ‘whatever possesses the highest potential revenue for taxation’, that’s what we should tax.
Yeah, there’s a lot of zippers out there….in fact, does a human being alive in the U.S. not posses multiple zippers? Wow! That’s a lot of potential tax revenue…..isn’t it?
For sure, zippers would be shorter and button manufacturing would be a much larger trade (probably heavily unionized).
Ok, where’s the jump between zippers and the wine trade?
The US and State controls over the production, distribution and sales of alcohol are as antiquated as the thought of taxing a zipper because of the frequency of use and the tendency to use ‘what’s inside’ inappropriately (however that is defined).
Of course, irresponsible consumption of alcohol is not the question. Driving a vehicle under the influence of alcohol and the required regulation to make such behavior illegal is not a question. Producing products with ZERO regulation where the product consumed might be harmful to the consumer is not in question.
The same answer regarding the responsibility to manage what’s inside a ‘zipper’ is the same human responsibility to consume and control behavior consuming alcohol. Drink and drive: go to jail. Assault someone sexually: go to jail (of course, in CA, the law is now changing to suggest ‘rape’ isn’t a violent crime).
Oh, yes. There’s this little reference to ‘products and industries which have higher than normal tendencies for fraud’ as a criteria for greater regulation (such as the gambling industry).
Last but certainly not least, there’s this little things of taxes: $69,000,000,000 (that’s billion) per year of alcohol tax revenue (Federal, state and Local).
Granholm: Modern decisions to free the modern wine trader
Granholm v. Heald was a Supreme Court decision to override the state controls that were granted with the 21st amendment to the Constitution of the United States. Of course, the alcohol trade previously being made illegal by the 18th Amendment, was ‘freed’ and no longer were alcohol manufacturers held as slaves to the US government….at least in part.
So long as the U.S. and state governments could control (meaning control the means of taxation for the manufacturing of alcohol), then the manufacturing and distribution of alcohol could resume in the United States of America.
“Granholm” was specific to the ‘unfair’ trade controls by state wineries to have a monopoly on the sales of alcohol to consumers within their own state. That a ‘state’ citizen should have the right to purchase wine or other alcoholic products from any producer of wine or alcohol they wish as a ‘direct’ purchase (no different than that of a, yes, you guessed it, a zipper!).
The Granholm decision didn’t ‘fix’ the regulatory issues stifling the U.S. producer/supplier but was simply a stop-gap resolution to hold back even greater controls by government or monopolization of ‘certain’ producers.
The ‘freeing’ of the US wine trader has many tentacles of entanglement to unwind. From barriers of producers and sellers to freely sell their wares as easily as, yes…..say a ‘zipper’, to the trade barriers between U.S. and foreign producers and sellers, there is a crazy amount of regulation involved.
With many regulations seeming reasonable (such as the requirement of a ‘particular’ percentage of grape varietal being required for the resultant wine to be named that grape varietal [i.e.: Cabernet Sauvignon]), there are a myriad of regulations that only encourage greater monopoly by major U.S. & foreign entities.
“There’d never been a more advantageous time to be a criminal in America than during the 13 years of Prohibition. At a stroke, the American government closed down the fifth largest industry in the United States — alcohol production — and just handed it to criminals — a pretty remarkable thing to do.” ~ B. Bryson
Wine is legal….or is it?
The recent ‘trade war’ between the U.S. and China directly effected many California producers selling wine into the country of China. When asked what I thought about the challenge of U.S. trade policies that were being inflicted by our executive branch on some foreign wines, the response is simple:
“For the better part of my 40 vintage career, the ‘walls’ of taxes, tariffs, value added taxes, fees and the ‘accumulated costs of exporting U.S. wines to foreign nations’ has be completely upside down compared to the cost of foreign wine products importing into the United States. Before the ‘trade war’ of 2018–2019, it cost 47% to import a wine into the country of China from America. Ask me how much it costs for foreign wine products to import into the U.S. I don’t know how y’all define ‘free and fair’ trade policies, but it’s high time we evaluate the imbalance that is decimating the U.S. wine supplier trade (remembering that the only producers that can benefit from foreign trade barriers are the top 1%).
~ Nicholas Karavidas, Consulting Wine, Intl.
There are times a tradesman might question whether or not it matters that something is legal or illegal concerning their trade. The ability or inability to freely trade within the systems of that trade are the point to reconcile: Can I as a producer freely and fairly trade the wine I craft into any consumer who desires to purchase my product, either foreign or domestic?
What is free and fair?
It might be an immature or overly juvenile thought to suggest that ‘trading’ in business should have equal regulations concerning the movement of particular products from one geographic area to another.
What does this mean?
If government and the regulation of particular products is to serve and protect the consumer then do the current set of U.S. and state regulations serve, protect, and provide opportunity to the American consumer? If they do not, then should they be restructured to do so?
Rhetoric! Man, don’t you hate it sometimes! What is ‘free and fair’? Is it Something that orange haired politicians use as election jargon?
Or how about a set of policies to support and nurture the businesses and consumers (ALIKE) within the jurisdiction of local and national boundaries?
Ok, maybe it’s oversimplified to state that if it costs 20% of the invoiced export to enter into a particular country that ‘fair’ might be that it would cost that country 20% to enter ‘like kind’ consumer or industry goods into the United States (in total accumulated importing costs of taxes, tariffs, duties, fees, value added taxes, etc.).
Shouldn’t trade policies balance and consider the producer and tradespeople within the jurisdiction of the trade before considering the producers from outside the jurisdiction?
Hmmm….if the answer is ‘yes’, then Granholm becomes a bit more challenging. Yup, that’s why it was a 5–4 Supreme Court Decision. Maybe, brilliant minds could concur that there might be localized protections to insure local economies of business development and local employment without ‘locking out’ the consumer of a local state to make decisions to purchase products they prefer outside of their locale? Sound reasonable?
You see, whether we’re talking about local trade or international trade, if a policy weakens the local producer or supplier while strengthening either another related local industry or a foreign industry, then ultimately the local trade will founder.
The foundations of trade policies necessarily focus on whether or not the local supplier trade is strong. Without this, it is impossible for the producer/supplier trade sector to remain a strong international trade partner.
“A weak or decimated supplier industry can never become a strong foreign trade partner.”
Who wins when a state or foreign government limits trade?
Good question. Not so easy to answer. Of course, the wine trade is no stranger to trade barriers within its own country.
Try shipping wine from California to a consumer in Utah and you’ll soon discover the challenges to trade.
Try shipping wine from California to India and soon you will discover how big of a trade wall there is for wine entering that country (upwards of 300%).
You see, whether foreign or domestic, U.S. trade policies for wine producers seem almost, well, criminal. OUCH! How can we say this? Because the system of laws encourages greater freedom of trade from outside of the United States than inside.
So why is it that I can sell and ship a pencil or trash bag or flower arrangement, etc. from California to Vermont but I can’t do the same with the bottle of wine I produce?
The license to direct ship wine from California into Vermont is roughly $1,000/year. That means that if I make $5 on selling a bottle of wine I would need to build a business of selling at least 200 bottles directly to consumers in that state just to pay the direct shipping license. This license does not allow me to sell wine to other retailers as that would be a wholesalers license. If I don’t want to go through the difficulties to license a wholesale company in Vermont to wholesale my own product to retailers, then I have to have another license to sell to wholesalers directly in that state.
How much does a license to do the same for a pencil manufacturer or a garbage bag manufacturer, etc. into Vermont. Nothing. You simply make your pencil and ship it to a buyer, whether directly to a consumer or a retailer who wishes to buy your pencil.
Sound complicated? Well, welcome to the United States of oppressive alcohol related regulation.
How Trade Policies have created U.S. infighting
A not so civil war…..just beginning
Over the last 20+ years, trade policies encouraging imports of wine into the U.S. and discouraging exporting of wine products to foreign countries are topics rarely discussed. Why?
Another great question. For whatever reason(s), what has resulted is what some call ‘the decimation of the U.S. producer shelf space by either direct or indirect subsidized foreign products’. OUCH….again!
The consumer is the absolute winner in the scenario of providing very reasonable priced wines on the U.S. shelf from foreign producers giving the U.S. consumer a vast variety of wine choices.
During this 20+ years, the import dollar share of wine purchased from U.S. retailers has grown from less than 10% to over 35% with over $1 of every $3 spent on wine in the U.S. is spent on an imported product. Much of the wine being imported into the U.S. has been either directly or indirectly subsidized by the foreign governments importing wine (i.e.: Australia does not directly subsidize its wine products to the U.S. but with water subsidies by the Australian government [to water the vineyards], the U.S. market would not have been so lucrative for Aussie producers [such as Yellow Tail]).
Not that California wine growers are looking for this kind of support, but it they did have these ‘indirect’ subsidies (not small contributions) there might not be a need to discuss this here on “Purple Happy”!
During this last 20+ years, U.S. retailer and Importer business have built into quite a strong voice in this one category: The importation, distribution, and sales of imported wine products.
In fact, this voice has some of the strongest literary voices in the U.S. wine media singing the song of ‘free and open trade’ regarding the recent tariffs placed on French Wine, even organizing a very strong and effective regulatory voice, the “National Association of Wine Retailers”.
It should go without saying that a collective voice for the wine retailers of America is going to produce positive fruit for the both the retailers and consumers. There is no doubt that with such a large membership (I believe over 8,000 members (almost overnight since the threat of foreign tariffs on wine became reality under the Trump administration).
Regarding the impact of imported wine on U.S. grower and wine suppliers, the reality has hit hard over the last several years (if not decade).
One such example is that over the last year, California wine growers have been asked to clear out over 30,000 acres of wine grapes as the supply of California grapes is higher than the demand of California wine.
U.S. Wine “Oversupply”…..maybe not
In the same year that California wine grape growers were asked to pull out 30,000 acres of vineyards (and another the following year), the imported wine costs dropped 27%.
Many believe that this has created (and will continue to create) not only a flood of imported wines, cheaper than U.S. growers and suppliers can produce, but also a wider door for imported products to place a foothold on domestic retailer shelves, further exacerbating the weakness of the U.S. grower and winery supplier.
“If the population of America is growing and the per-capita consumption of wine continues to increase (albeit slowing with millennial age group low consumption), then how do the shipments of California and U.S. wine suppliers decrease?”
- In the last 30 years, wine consumption in the U.S. has increased every year with the exception of maybe 3 years. Wine consumption in the U.S. is higher today than ever before in history.
- Vineyard plantings in the U.S. have leveled off and large percentages of aging vineyards have leveled off or dropped in their productivity resulting in a lower supply to demand ratio.
- The population of the U.S. continues to grow at a pace of adding 1.6 million more people per year.
- Since 1990, the U.S. per-capita consumption of wine (per adult ‘of-age’ consumer) has grown by almost 1 gallon per person.
How does this translate into California growers having to pull out grape because of an ‘oversupply’?
Simple. Increase of inexpensive imports + High trade barrier expenses of U.S. wine into foreign countries.
The problem (or at least a significant hurdle to overcome):
“An Internal conflict has been created between retailers who have built extensive businesses from imported wines over the last 20+ years and the U.S. vineyard/winery suppliers who have increasing costs to produce while foreign competitors have been able to garner support for in various ways, including direct or indirect subsidies.
Does the U.S. vineyard & wine supplier have to suffer for the U.S. consumer to win?
Balance. Now there’s a new word.
It is estimated that the growth of imported wine dollar share of sales in the U.S. has grown from 7% to nearly 37% in the last 25 years.
It is also estimated that if the U.S. vineyard/wine industry could regain only 5% of the import dollar value it has lost to imports, it would have to begin planting vineyards again to keep up with population growth and per-capita consumption increases (assuming they both remain a constant).
One of the great lessons that the U.S. wine trade may need to learn (before this ships rights itself) is that they may need to lose more vineyards and wineries before it realizes that a shortage of wine grapes will ultimately cost the consumer much more for the resultant wine from California. Of course, imports may always be there to fill in the blank but the consumer of California wine certainly will not the winner with rising labor, land, and materials costs for the California and U.S. growers.
I would hate to think that the National Association of Wine Retailers wouldn’t be concerned for this particular potential imbalance, nor would they desire the decimation of the existing California or U.S. wine supplier trade. Much has to come into balance in communications, inclusion of supplier side representatives on the board to insure a trade balance, and reasonable efforts to right the import/export trades to allow the suppliers to get back on their feet.
It should be stated that issues such as this do not hinder the top 1% of the wine supplier market (i.e.: the “Big Boys”) but that 1% only represents less than 100 wineries of the 9,000+ in the U.S. What’s more is that 80% of the U.S. wine shelf is controlled (80% of U.S. retailer wine sales) by less than 10 of those U.S. Wineries!
Folks, that leaves 8,990 wineries battling over the last 20% of the U.S. retailer wine shelf.
So, does the consumer have to suffer for the U.S. domestic vineyard/winery supplier wine trade to regain it’s composure?
No. It simply needs to ‘consider’ that there is more than one side to the U.S. wine trade.
Hopefully, a little sandbox lesson will open the eyes of those who wish to keep them closed.
Nicholas Karavidas is owner and winemaker of Élever Vineyards & OneMaker Wines, Principal Consultant for Consulting Wine, Intl. and the Designer of Wine & Food Pairing tool “Flavor Shapes”. 2020 marks 40 vintages of wine production as a winemaker with the majority of his time designing and managing winery designs as well as vineyard and wine family business strategies. If you can’t find Nick analyzing wine, you will certainly find him analyzing his market, reading more on technical topics of wine & wine marketing, the impact of international trade on his craft and last but certainly not least, how to be a better father and husband to his wife Heather, his 6 children and 8 grandchildren.
