Geographic Indications and International Trade (GIANT)

TED Case Studies Number 629 June 2001 by Josh James

Trade, Culture, & Environment

General Information Legal Cluster Geographic Cluster Trade Cluster Environment Cluster Other Clusters

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I. Identification

1. The Issue

Mexicans have long identified Tequila as more than just the national drink, but a unique symbol of their culture and environment. As the reach of global trade has extended and Tequila is now consumed around the world, Mexico has vigorously sought protection for its cherished spirit in international trade agreements. In bilateral and multilateral negotiations, including those leading to the North American Free Trade Agreement (NAFTA), Mexican trade officials have demanded Tequila be protected as a "geographically indicated product" under intellectual property rights law. They have argued that Tequila is a unique cultural product that can only be called by that name if fermented from the blue agave plant indigenous to a specific climactic region of Mexico. Even domestically it is illegal to distill Tequila outside the state of Jalisco and a few surrounding areas. Mexico has been largely successful in gaining these concessions. Tequila is protected under NAFTA, as are other geographically indicated spirits such as Canadian Whiskey and Tennessee Whiskey. But the debate has rekindled as Mexico has had to defend Tequila's exclusivity in bilateral negotiations with the European Union and most recently with China. In order to become eligible for admission to the World Trade Organization (WTO) China must sign bilateral trade agreements with all WTO member states. Mexico is the only remaining member with whom China has not signed such an agreement. Among the issues stalling negotiations is Mexico's insistence that China agree not to produce rival brands of Tequila, as it possesses the climactic conditions to do so.

2. Description

Tequila and Mexico share an inextricable history. Tequila is Mexico's undisputed national drink. But it is also a cultural symbol whose significance extends beyond the status of alcoholic beverage. Variants of the modern-day spirit have been produced in the arid highlands of central Mexico for at least nine hundred years, predating Hernando Cortez and the Spanish conquest by four centuries. The botanical source of the original drink was the maguey, a close relative of the cactus. Centered beneath the plant's ring of long, sharp leaves was a juicy pulp from which the Aztecs and related tribes extracted a type of honey-water that, when allowed to ferment naturally, produced a sweet and intoxicating libation called pulque. Consumed primarily during religious ceremonies, pulque appears to hold the title to first fermented drink in North America. Legends abound as to how it was discovered. Since archeologists claim the maguey has been cultivated in Mexico for nine thousand years to utilize its fibers, historians and folklorists alike believe the plant's spirituous potential was encountered much later by chance. In his well-researched novel, Mexico, James Michener offers a fictionalized version of how a native king fortuitously discovered pulque:

[King Nopiltzin] was elated because the honey water had once more transformed itself into the exciting beverage that he had tasted earlier. Closing the curtains that protected his apartment, he began to drink the liquor seriously, and before long the animated visions that had so pleased him at the first testing returned. Knowing that many problems beset the high priest, he summoned Ixbalanque, threw his arms about the old man, and cried in a half-tearful voice, "Ixbalanque, you are going to get your god!"

The priest struggled to free himself from the embrace and asked: "Will you remember tomorrow what you say today?"

Nopiltzin ignored this and said, "I have discovered a new god."

"Where?"

"In the heart of the maguey plant."

Indigenous to no other part of the world, the agave became the source for numerous libations. Over one hundred species of agave grow naturally in central Mexico, and each produces a slightly different drink. The two most famous renderings are Tequila and its less well-known cousin, Mezcal. Technically speaking, any liquor derived from agave is called a mezcal. But in current usage, Mezcal refers to the drink made in and around the state of Oaxaca from five varieties of agave. It shares similar traits to Tequila as a geographically indicated product whose protection has been sought by the Mexican government.

The origin of the name Tequila is more shrouded in mystery. Many aficionados claim it derives from the indigenous Nahautl language and means "the rock that cuts." Tequila's namesake is a town in the state of Jalisco around which all production of the liquor is centered. The name of the town predates the name of the spirit; the latter was only distinguished from other mezcals in the nineteenth century. Nearly all of Tequila's 35,000 inhabitants work in the distilleries, on the agave plantations, or in the expanding number of tourist shops supporting the industry. The town's dependence on this production and trade stretches back to the Spanish conquest.

Tequila became distinguished from other mezcals by fermenting and distilling the juices of only one premium species, the tequilana weber azul, or blue agave. The industry blossomed over the course of the nineteenth century as production techniques improved, railroad transportation was introduced, and nationalism fomented across the land. Because Tequila and Jalisco stood at the geographic crossroads of these historic trends they reaped the benefits more than other agave liquor producers. Two of the earliest distillers of Tequila were Sauza and Cuervo; today these companies remain the two most successful producers as determined by market share. Their brands are recognized the world over. Countless other distillers have flourished and failed since the halcyon days of Tequila production in the mid to late 1800s.

Once an indigenous drink thought to be a gift of the gods, Tequila distinguished itself permanently from other mezcals and spread its reputation beyond the borders of Jalisco to the entire nation during the Mexican Revolution. According to Ian Chadwick, "Tequila gained national importance during the Revolution in the early part of this century, when it became a symbol of national pride and the passion for French products was replaced by patriotic fervor for Mexican goods. Tequila quickly became associated with the hard-riding rebels and gun-slinging heroes of the period from 1910-1920." Source 2

Tequila has remained a source of national pride. Its production, regulated both by the industry and the national government, is held to the strictest standards of quality and labeling requirements. The process culminating in the bottle of Tequila found on any supermarket shelf has been a decade in the making. The blue agave requires eight to fourteen years to grow its spiked leaves outward sufficiently to tap the rarefied moisture of the arid highlands and produce a succulent center from which the honey-water can be extracted. No irrigation methods are used; growth depends on waters supplied during the rainy season from June to September. The center of the agave is called the piña, Spanish for pineapple, whose appearance it closely resembles. The longer the piña matures, the better the quality of the drink.

At harvest the leaves are cut away and the piña is extracted. Typically, one piña will yield five liters of Tequila. The piñas are baked in ovens for thirty-six hours (or in modern autoclaves for twelve), transforming their complex carbohydrates into fermentable sugars. They are taken from the ovens to be mashed into pulp and juice. Modern mechanized techniques have fortunately taken over for more traditional mashing methods involving the feet of sweaty laborers. The pulp is separated out; its fibrous qualities are often utilized in rug making or furniture stuffing. The juice of the piña is mixed in large vats with water and yeast to begin fermentation. If done naturally this process takes approximately twelve days. Modern facilities often employ chemicals to reduce the time to two or three days. Tequila is typically distilled twice, increasing the alcohol content from the 5-7% present after fermentation to 30-40%. Premium Tequilas are often distilled three times, increasing the yield further.

The use of chemicals in the distillation process is sanctioned by the Tequila Regulatory Council (Consejo Regulado de Tequila), which tightly supervises production. The council's primary concern is overseeing the quality and integrity of the ingredients used, much as the Rheinheitsgebot, or German Beer Purity Law has regulated that industry since the Middle Ages. (see GERMBEER case study) By law, Tequila can only be labeled and sold by that name if over half of the fermented sugars derive from blue agave. The remainder of the mixture may include cane or brown sugar to dilute the final product. These are labeled mixto, or mixed, and constitute the less-than premium Tequilas. The Council allows these to be exported in barrels and bottled abroad. Premium Tequilas are those whose fermented sugars derive from 100% blue agave. They are labeled with such distinction and must be bottled within Mexico.

When Tequila was consumed predominantly in Mexico, regulating the liquor's production was relatively straightforward. But as barriers to international trade have fallen, Tequila has penetrated more and more markets, and worldwide demand for the Mexican spirit has skyrocketed. Consequently, liquor distillers outside Mexico have been lured by such demand to produce knock-off brands of Tequila. Motivated both by cultural pride and pressure from powerful interests in Jalisco, the Mexican government has sought to protect Tequila as a geographically indicated product that can only originate from Mexico. The legal basis for such protection falls under international intellectual property law. While such laws have traditionally referred to the protection of copyright on books, film, or music, intellectual property has been expanded in international law to include protection for products of "geographical indication," also called "denominations of origin." These might be considered national intellectual property. Mexico has sought such protection for Tequila and its cousin Mezcal in all international trade agreements beginning with the North American Free Trade Agreement (NAFTA) ratified in 1994.

Gaining concessions under NAFTA was not difficult since Mexico, Canada, and the U.S. all had products they wanted to protect. Under the section, "National Treatment and Market Access for Goods, Distinctive Products," Mexico gained the following provision: "Canada and the United States shall recognize Tequila and Mezcal as distinctive products of Mexico. Accordingly, Canada and the United States shall not permit the sale of any product as Tequila or Mezcal, unless it has been manufactured in Mexico in accordance with the laws and regulations of Mexico governing the manufacture of Tequila and Mezcal." Source 3 In return, Mexico granted the same concession to Canada for Canadian Whiskey and to the U.S. for Bourbon Whiskey and Tennessee Whiskey. This agreement was pivitol for the Mexican Tequila industry both for the international legal precedent it set and because the United States is by far the largest importer of Tequila.

This case study highlights how NAFTA was only the beginning; Mexican trade representatives have faced more difficult struggles to protect their nation's exclusive right to produce and trade Tequila. The two most significant disputes have flared between Mexico and the European Union, and more recently between Mexico and China. The legal and trade aspects of these cases are discussed below.

3. Related Cases

The following TED case studies analyze similar disputes focusing on the intellectual property rights of geographically indicated products. Of the ten cases, four relate to food and six to alcoholic drinks. Undoubtedly, further cases will appear as global trade intensifies, demand for distinctive cultural products increases, and well-entrenched interests fight to maintain the exclusive right to sell these creations to the world.

• BASMATI: India-US Basmati Rice Dispute
• BUDWEIS: Who Owns the Name Budweiser?
• CHOCOLAT: Chocolate Substitutes in the EU
• FETA: Intellectual Property Rights of Feta Cheese
• GERMBEER: German Beer Purity Law
• GRAPPA: Who Owns Grappa?
• KIMCHI: Japan-Korea Kimchi Dispute
• MEXBREW: Miller Loses Cinco de Mayo
• PISCO: Liquor Dispute Between Chile and Peru
• SCOTCH: The Culture of the World's Leading Spirit

II. Legal Clusters

5. Discourse and Status: Disagreement in Progress

Though NAFTA set a precedent, it was confined to North America and did nothing to prevent rival brands of Tequila from being produced and sold in other parts of the world. For that Mexico had to rely on its membership in the World Trade Organization (WTO). During the 1986-1994 Uruguay Round, the WTO responded to increased pressures to address intellectual property rights in international trade. The result, ratified by all member states, was the Agreement on Trade-Related Aspects of Intellectual Property Rights, abbreviated TRIPS. The thirty-three page document delineates provisions protecting copyrights, trademarks, patents, industrial designs, and the fledgling concept of geographical indications. According to Article 22 of TRIPS: "Geographical indications are, for the purposes of this Agreement, indications which identify a good as originating in the territory of a Member, or a region or locality in that territory, where a given quality, reputation or other characteristic of the good is essentially attributable to its geographic origin." Source 4

As with other internationally famous foods and beverages such as Champagne, Scotch, or Roquefort cheese, Tequila can clearly lay claim to TRIPS protection. The spirit is named for a specific town in Mexico. Its production has been strictly domestically regulated for over a century to assure it is only produced in one particular region and only if fermented from the blue agave. That species is indigenous to no place on earth but central Mexico, where it has been cultivated for 9000 years. The TRIPS provision emphasizing locality, quality, and reputation seems almost to have been written for such a case.

Yet one problem inherent in TRIPS is that, while issuing detailed guidelines for what constitutes a geographical indication, the agreement has yet to establish a registry of specific products protected. Tequila is therefore not specifically recognized. If a trade dispute erupted because companies in other nations were producing knock-off brands of Tequila, the WTO would first encourage Mexico to deal with the issue in bilateral trade negotiations with the country. If these failed, Mexico could take the case to the WTO Dispute Settlement Body and would have to make the argument that Tequila is a geographically indicated product protected by Articles 22-24 of the TRIPS agreement. Given the precedent set by NAFTA, and the way in which Tequila seems a perfect fit to satisfy standards of "locality, quality, and reputation," Mexico would likely win any case it brought to the Dispute Settlement Body.

Mexico has faced two major disputes in this realm, first with the European Union. In May, 1997 Mexico and the E.U. signed a bilateral trade agreement in which Europe recognized Tequila and Mezcal as "denominations of origin." In return, Mexico granted exclusive recognition to 175 European spirits, including Champagne, Cognac, Grappa and Scotch. While NAFTA was crucial for Mexican Tequila interests because the U.S. is its largest importer, this agreement was similarly pivitol as the E.U. countries combined represent the second largest export market for the liquor. Further, at the time of the signing the Tequila Regulatory Council (CRT) estimated that some 3.5 million liters of "pseudo-tequilas" were sold annually in Europe. Source 5 This did not end the dispute, however. Over a year and a half later, in January 1999, the CRT estimated that at least thirty brands of pseudo-tequila were still sold throughout Europe. The catchy names for these knock-offs included "Blue Tarantula" in Italy, "Hot Tequila" in Finland, and "Silver Gunmen" in Belgium. Source 6 Since that time Mexico has continued negotiating with the E.U. to improve enforcement of the 1997 agreement. Little has been written on the subject since then and it appears Mexico will not resort to taking the E.U. to the WTO Dispute Settlement Body. After all, Europe does not deny Mexico's claim to denomination of origin for Tequila; it simply has been lax in enforcing it.

Mexico's other dispute, very much in progress, is with China. The two countries are in ongoing negotiations to sign a bilateral trade agreement. To gain consideration for WTO membership, China must first sign separate trade agreements with each member nation. Mexico is the last member with whom China has no such deal. Negotiations began in earnest last fall but remain unresolved. Part of the delay can be attributed to the logistics of the Mexican presidential transition of December 1, 2000. Yet in principal, the outgoing Ernesto Zedillo and the incoming Vicente Fox both have strong neoliberal tendencies that favor free trade. From the opposite side of the table, if Chinese rhetoric is to be believed, government officials strongly favor their country's entry into the WTO and would seem unlikely to let a dispute with one member stifle those chances. As the Free Republic reported: "Chinese President Jiang Zemin is so anxious about gaining Mexico's approval for WTO membership that he dispatched a high-ranking delegation to President Vicente Fox's inauguration . . . stressing the need for bilateral cooperation between the countries." Source 7

Yet the dispute rages on. Among the issues stalling talks is China's hesitance to accept Tequila as a geographically indicated product. Mexican trade diplomats have echoed the concerns of Jalisco distillers who "have been worried that China could produce its own brand of tequila, since it has a climate that could support the agave cactus." Source 8 How China would obtain and cultivate blue agave is a mystery. It could attempt to smuggle agave plants or their seeds from central Mexico and transplant them into an arid highland climate in China. Or, less drastic but equally contentious to Mexicans, Chinese companies could produce rival brands whose taste mimics true Tequila but does not use the sugars of the agave. This is what the European imitators did; they distilled liquors using sugars from similar plants. The result at least partially resembled Tequila, and they illegally labeled it as such.

While several articles compiled by Expeditors, an online database covering trade issues Source 9, suggest Tequila is the driving force behind the stalemate, Free Republic cites additional points of contention between China and Mexico, summarized as "toys, textiles, and tequila." By this argument, Mexico is not only worried that China could flood foreign markets with knock-off brands of Tequila, but also with low-cost toys and textiles. These labor-intensive industries are vital to the Mexican economy, particularly in the export market to the United States. NAFTA would preclude the U.S. from importing Chinese liquors labeled Tequila, but intellectual property provisions hold no reign over toys and textiles, which China can produce and sell at lower costs than Mexico. Chinese admission to the WTO could produce a critical competitive disadvantage for Mexico in these industries, though Mexican trade official Raul Urteaga insists the heart of the dispute is the intellectual property protection of its national drink. Source 10

6. Forum and Scope: WTO and Bilateral

7. Decision Breadth: Mexico, European Union, China

8. Legal Standing: Treaty

III. Geographic Clusters

9. Geographic Locations

a. Geographic Domain: North America

b. Geographic Site: Southern North America

c. Geographic Impact: Mexico

10. Sub-National Factors: Yes

11. Type of Habitat: Dry

IV. Trade Clusters

12. Type of Measure: Intellectual Property

13. Direct v. Indirect Impacts: Direct

14. Relation of Trade Measure to Environmental Impact

a. Directly Related to Product: Yes: Tequila

b. Indirectly Related to Product: No

c. Not Related to Product: No

d. Related to Process: Yes: Culture

15. Trade Product Identification: Tequila

16. Economic Data

International demand for Tequila has skyrocketed over the last few years and distillers have been hard pressed to meet it. The following table highlights this exponential increase, displaying revenues from Tequila production in U.S. dollars from exports and total sales (domestic and export combined).

 

	Exports	Total
1998	N/A	$296 million
1999	$181.54 million	$370.48 million
2000	$449 million	$926 million

obtained from: http://www.tequilaaficionado.com/article.php?sid=83.

Specific data on exports is either scarce, contradictory, or measured in incomparable units. Following is an industry summary of average exports by continent, with some detail on individual countries when available.

obtained from: http://www.mapilli.com/import.htm.

V. Environment Clusters

20. Environmental Problem Type: General Habitat Loss

The proliferation of a global market for Tequila has triggered environmental consequences as well. European distillers and Chinese trade representatives have sought to deny Mexico the geographical indication because demand for the liquor is rising fast while the supply of blue agave is declining precipitously. The agave shortage began in 1997 when a series of bacteria and fungi infected and destroyed as much as a quarter of the crop. In each year since, similar numbers of plants have been effected, and the industry is scrambling to find a solution. Source 13

The Tequila industry's desperation to find enough agave to meet demand has produced two results with potential implications for the habitat. The first has been an internecine agave war between the two major areas of production, Jalisco and Oaxaca. Each side has accused the other of attempting to purchase its supply of agave on the black market or, more blatent still, stealing it directly from the fields. In 1999, Oaxacan farmers marched in the capital to protest these acts. As the agave shortage has escalated, such confrentations have continued. Source 14

On the part of the Tequila producers this is not only theft but fraud, as the Oaxacan agave is used in place of blue agave but the product is still labeled Tequila. Several Jalisco distillers have been shut down by the government for failing to meet quality standards, i.e, using a minimum of 51% blue agave in the process. The second result of this habitat loss has been the industry's alliance with the scientific community to produce genetically modified strains of tequilana weber azul that could resist the diseases currently destroying it. Source 15 One article has detailed the promising work of industry commissioned scientists to clone the blue agave in an attempt to resolve the shortage. Source 16

But the question must then be posed: if Tequila can be produced from a plant that was genetically engineered or cloned in a laboratory, does it forfit its legitimacy as a geographically indicated product?

21. Name, Type, and Diversity of Species

Name: agave tequilana weber azul (blue agave)

Type: succulent, "having fleshy stems or leaves that conserve moisture" (related to cactus)

Diversity: 136 species in central Mexico

22. Resource Impact and Effect: Medium and Product

23. Urgency and Lifetime: Medium and 10 years

24. Substitutes: Substitutes

VI. Other Factors

25. Culture: Yes

Though most people consider Tequila just another means to get drunk, to Mexicans it is also a source of cultural pride and national heritage. With expanding global markets, the rest of the world is gaining an appreciation for the 900 year old beverage from the arid highlands of central Mexico. It is no longer considered an unrefined drink; its premium brands compete in taste and quality with any of the world's great spirits. This is good news for Tequila business interests, provided they can retain their exclusive right to produce the world's supply. But in fighting for such protection in international trade disputes, they may also face environmental and cultural consequences. Will the agave habitat either become endangered or subject to genetic modification? And as the price for Tequila soars with demand, producing a more lucrative market for premium Tequilas, will the average Mexican still be able to afford his cherishered national drink?

26. Trans-Boundary Issues: No

27. Rights: No

28. Relevant Literature

Footnotes

1. In Search of the Blue Agave, Ian Chadwick webmaster (2001). http://www.ianchadwick.com/tequila/pulque.html.

2. In Search of the Blue Agave, Ian Chadwick webmaster (2001). http://www.ianchadwick.com/tequila/history.html.

3. Department of Foreign Affairs and International Trade. North American Free Trade Agreement, Part Two: Trade in Goods, Chapter Three: National Treatment and Market Access for Goods. http://www.dfait-maeci.gc.ca/trade/nafta-alena/chap3ab-e.asp.

4. World Trade Organization (1995). Agreement on Trade-Related Aspects of Intellectual Property Rights. Articles 22-24 address geographically indicated products. http://www.wto.org/english/docs_e/legal_e/27-trips.pdf.

5. Mexican Embassy to the UK (1998). "Legal Aspects of Tequila." http://www.demon.co.uk/mexuk/update/june98/legalteq.html.

6. Armando Talamantes. "El tequila falso sigue circulando por Europa." ("False tequila continues to circulate in Europe."). Publi.com (16 January 1999). http://publi.com/news/1999/0116/e08.htm.

7. Dean Calbreath. "Mexico is China's final WTO membership." FreeRepublic.com (7 December 2000). http://www.freerepublic.com/forum/a3a2fb6732bf1.htm.

8. Ibid.

9. Expeditors.com, an online database of articles on international trade issues (2001). See year 2000 articles #163, #204, and #211 on China-Mexico trade negotiations. http://domino.expeditors.com/apps/newsflash/nesflash.nsf.

10. Dean Calbreath. "Mexico is China's final WTO membership." FreeRepublic.com (7 December 2000). http://www.freerepublic.com/forum/a3a2fb6732bf1.htm.

11. Sandy M. Fernandez. "Tequila's Happy Hour." Time Magazine online (13 March 2000). http://www.time.com/time/magazine/article/0,9171,40336,00.html.

12. Bob Lape. "VA-Room at the Top: Drinking Toward the Millennium. Power Page (2001). http://www.powerpg.com/articles/001.html.

13. In Search of the Blue Agave, Ian Chadwick webmaster (2001). http://www.ianchadwick.com/tequila/news.html.

14. Ibid.

15. Ibid.

16. Andrea Morris. "Tequila Production Hand-in-Hand with Science." Tequila a fondo (2001). http://www.100tequila.com.mx/3eafondo.htm.

 

Bibliography & Links

Ian Chadwick's "In Search of the Blue Agave" website served as an immense source of background material. Ian also granted permission to use most of the images seen above. http://www.ianchadwick.com/tequila.

Mapilli Importers. http://www.mapilli.com/import.htm

Michener, James A. (1992). Mexico. New York: Random House. p-147.

Tequila a fondo. http://www.100tequila.com.mx/3eafondo.htm.

TequilaAficionado. http://www.tequilaaficionado.com.

Viva Tequila. http://www.itequila.org.