Geographic Indications and International Trade (GIANT)

The Wine Pact:

'New World' Wines Change the Industry

TED Case Studies
Number 675, 2002
by Alison A. Spitzer

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

I. Identification

1. The Issue

In December of 2002, Uruguay, Argentina, Chile, the United States, Canada, South America, Australia and New Zealand formed a pact that will forever change the world of wine. The pact is known as the Mutual Acceptance Agreement (MAA). Participating countries agreed to understand and respect their differences in growing methods as well as views on wine production. This “New World” agreement has left the “Old World” growers such as France, Germany, Italy, Spain, Portugal and Austria to acclimate to a new and rapidly transforming wine culture and market. However many older issues, such as geographical indication, water pollution and a constantly changing agricultural industry, still remain at the forefront of discussions. This case study delves into the history, traditions, issues and dilemmas of the constantly changing wine industry, with specific probing of the contemporary wine market.

Click Here to view the Mutual Acceptance Agreement.

2. Description

Historical Background
Scientists have documented that the possible origin of wine cultivation was between the Black Sea and the Caspian Sea during the years of 4,000 B.C. and 6,000 B.C. Here in this mountainous region, the Mesopotamian's stumbled upon the creation of wine by drinking fermented wild grape juice (Unwin, 1991. p. 7). After this discovery, the deliberate cultivation and storage of grapes in hand-made pottery was introduced to the world. The Babylonians, the Assyrians and the Sumerians as well as the Greeks, the Egyptians and the Romans followed the traditions of the Mesopotamian's and incorporated both vines and wines into their cultural symbols and celebrations. Wine has been considered both good and evil, healthy and unhealthy, not to mention elitist and classless. Viticulture encompasses a vast array of topics and issues, and remains a distinctive industry in modern history .

Throughout the world, viticulture and wine have played fundamental roles on the economic, political, social and ideological stages. Wine's important social position is due in part to its active religious role. According to Christian beliefs, wine is the blood of God and those who believe receive His blood at Mass, while Islam denounces the benefits of wine and prohibits its use altogether. In countries such as Egypt, due to practically uncultivable land, drinking wine is a luxury of the elite class, while beer is the poor man’s drink. However, in the Mediterranean region, vines flourish readily and the fermenting process is not a challenge. Therefore all tiers of society are able to enjoy wine. In essence, wine’s social fate within a culture depends solely on the environment and supply and demand economics.

Issues in Viticulture

Several dilemmas have plagued the world of viticulture since its integration into cultures around the world. Wine was one of the first items to be traded internationally and conflict was inevitable. One of several conflicting ideas in the early world of international trade was creating a basic form of measurement. For instance, in medieval times, a barrel held 45.5 liters in Florence, while an English barrel held 143.2 liters. A butt of sherry is universally 491 liters, yet in fifteenth century England, a butt of sherry as 572.8 liters and Italy considered 454 liters a butt (De Blij, 1983. p. 14). Compromises were eventually met, but this dilemma commenced a long history of competition and disagreements in the international arena. The growth and evolution of wine standards was the original cause for ideological conflict between countries. This issue is discussed further in the Culture section below.

The emergence of trans-national capital, in addition to the rise of the fashion industry and pop culture in the twentieth century has attracted much attention to the industry. Today the wine industry is attempting to keep the market equal and fair for all participating countries while economics and style control the tastes of the consumer and the destiny of winegrowers.

Old World versus New World

The major division in the industry today is between the “Old World” countries and the “New”. The Old World is Western European countries such as France, Italy and Germany, while the more recent entrances into the wine industry, such as the United States, Chile, New Zealand, Australia and Canada are considered the New World. For approximately 150 years, these New World countries have been learning the traditions of Western Europe and are attempting to master the skills in order to produce fine wines. In very recent history, the New World has equaled the quality of the Old World, yet this phenomenon has brought with it a new wine culture, as well as mass production with which smaller, more refined vineyards cannot compete. The United States is now the fourth largest power in the market. California alone generates more than 90% of the United States wine production and makes California, as its own entity, the fifth largest wine producer worldwide .

France is particularly alarmed by the demand for New World wines. According to the Bordeaux Wine Bureau, or the CIVB, in the past 10 years, French wine consumption in the global market has decreased from 71% to 66% (The Wine Institute). Apparently, the impact has been most recognizable in the United Kingdom, where New World wine has become particularly strong, gaining 14% of the market in the past 10 years, totaling at 40% of the United Kingdom’s overall wine market. France is being forced to change its archaic and aristocratic ideals of the wine market due to the recent trend toward more creative and less acidic wines. Even their most loyal of neighbors, the Balkan states, have decreased their consumption of French wine, deciding instead to join the worldwide trend towards innovative New World productions.

TABLE ONE

WORLD WINE PRODUCTION BY COUNTRY (1)
In thousands of gallons (000)
Actual 1996-1999

Copyright: Wine Institute from Ivie International based on data from Office International de la Vigne et du Vin (O.I.V.)

The New World attitude towards Old World wine is much more positive than the reverse. Each year, the United States imports 124 million gallons of wine, 50% of which originates in France or Italy, while the US exports only 80 million gallons annually, of which, 1.5 gallons goes to France and Italy collectively (The Wine Institute).

The sentiments are not mutual between the two worlds; then again, neither are the rules- an issue which is highly controversial in the wine industry. Wine making techniques differ according to region, terrain and cultural traditions. France is infamous for manipulating these differences to imply that the rules governing the international wine industry are not just. At a recent meeting of the International Office of Vines (OIV), France argued to prove such a point. The terrain of the New World allows for production of wines that are fruity and high in sugar, while a key element, acidity, is not as readily produced. Therefore, according to the regulations of the OIV, the New World participates in "acidification", or the addition of grape acid to their wine. The French have expressed their grievances in accordance with this regulation and have proceeded to refer to New World wines as “manufactured wines”. What they neglect to mention is that in Old World grapes, there is an overabundance of acid, which at times would prove to be undrinkable in its normal state, therefore the OIV allows them to take part in a process known as “chaptilization”, in order to sweeten the wine (Juergens, 2002. p. 10).

In an effort to protect themselves from the domineering Old World vineyards, the U.S., Australia, New Zealand, Chile, Uruguay, Argentina, Canada and South America have developed a pact that communicates their acceptance of each others growing techniques and traditions, allowing them to increase confidence in the industry and play the game by their rules. Their ability to create this pact relies solely on the recently formed New World Wine Producers Forum, which replaces the more traditional OIV's role, although the OIV is still the governing body of Old World wine producers.

Their first step in this mission for control of the market was to withdraw from the International Office of Vines. New World Wines now have their own international alliance, which France refuses to recognize. In order for European Union to show their resilience, they have counterattacked the New World by finally signing a trade agreement with South Africa after seven years of deliberation. Now, South Africa will be exporting 42 million liters of duty free wine to the EU annually, which is over 75% of South Africa’s wine exports each year (The Wine Institute). The agreement should be beneficial for the South African economy as a whole, but the decision makers also emphasized the need to promote the wine making industry to the black population, acknowledging that the industry is predominantly white. This agreement could prove to be, on many levels, a significant boost to the South African state. For more information regarding European Union-South African Relations, please click on the "Grappa" link provided in the related case studies section below.

The EU and South Africa hope to incorporate housing possibilities for the underprivileged workers, for this has emerged as a considerable problem in California. Many Mexican immigrant workers are left without sufficient housing while undergoing demanding physical labor during their long days. Immigrants are forced to sleep in the streets and in vineyards with little empathy shown by the vineyard owners .


3. Related Cases:

Pisco "Pisco's future has been marred by agrarian reform, economic and political turmoil, new and more profitable crops, water pollution, and a trade dispute with Chile over its namesake." By Pamela Oakes

Bacardi "This case examines the ownership status and the rights of the owner of Havana Club rum, and the circumstances under which this theory is derived." By Jacqueline Lirtzman

Budweis "For the past hundred years, an international legal dispute continued between the American brewer Anheuser-Busch and the Czech beer producer Budejovicky Budvar over the right to use the trademark name Budweiser on their products." By Blanka Homolova

Grappa "That tradition matters in the global age has become obvious in the case of grappa, an alcoholic drink that has not only become popular lately, but that has also become the bone of contention between the European Union and South Africa". By Petra Ticha

Scotch "The underlying issue in this case study concerns the labeling processes for internationally marketed products named for the region, area, or nation where they are produced." By Elizabeth McRoberts

Zinfandel "While American winemakers were the first to call their particular type of wine Zinfandel, recent genetic tests, which have proven that Zinfandel and an Italian wine called Primitivo are genetically identical, led Italian winemakers to begin marketing and labeling Primitivo under the name Zinfandel, hoping to ride a wave of popularity." By Anita Tepsic

4. Author and Date:

Alison Spitzer, December 18, 2002

II. Legal Clusters

5. Discourse and Status:

There is disagreement and it is currently in progress

6. Forum and Scope: The Mutual Acceptance Agreement and Multilateral.

The newly formed Wine Pact between the Argentina, Australia, Canada, Chile, New Zealand, South Africa, Uruguay and the USA has given rise to many challenging disputes between these so called New World wine producers and the Old World, which consists of France, Germany, Italy, Spain, Portugal and Austria. Before the separation of the wine producers, there was one governing body, the OIV as mentioned earlier. Now, with the recent installment of the New World Wine Producers Forum (NWWPF), there are two standards by which the industry regulates global trade. In signing separate international agreements, the two worlds increase the rate of conflict within the international arena, not to mention the already ailing agricultural sector. With the signing of the Mutual Acceptance Agreement (MAA), the New World producers will formally agree to their legal standards of international trade, or, in other words, not those to which OIV members conform.

In this situation, there are four main issues in which the WTO must play the role of mediator, or arbiter, between the dueling worlds . First, there is the problem of subsidies. Australia is adamantly opposed to the constant subsidies provided to European growers by the European Union. These subsidies allow the growers to increase production by upgrading grape varieties and also improving irrigation systems. Australia is not awarded the same luxury, therefore in a fair international market, this is unacceptable practice.

Next, the United States, Australia and Canada dispute the inequality of tariffs between the two worlds. Due to the WTO Agriculture Agreement, all non-tariff wine producers were made to pay tariffs in order to increase the transparency of their interactions. "Tariffs on imported wine into the “Old World” countries have generally been double that of Australian, US and Canadian tariffs." (Corrs, 2002) Australian wine growers would like to see the European tariffs reduced to enhance Australian price competitiveness in the European markets. In order to increase the competition of New World wines in the European market, New World countries are requesting that the EU finds a different method to protect the Old World growers (Corrs, 2002).

An issue addressed widely in the media is protection of geographic indications. The clashing views of the New and Old Worlds have intensified their competitive dispositions. In the EU, many components constitute geographic indication. For instance, in France, the appellation d’origine côntrolées and maximum production limitation contribute to geographic indication. The natural reaction between the vine, the weather and the soil are paramount in analyzing a finished product. Traditionally, New World countries abide by much less intricate regulations and therefore have a different, less intimate relationship with geographic indication .

To finish, there is the matter of oenological practices. In the past, this issue allows for importation barriers on certain countries. For instance, since oenological practices are traditionally unique to the country of origin, France has had the ability to prohibit Australian wines for their oenological practices do not abide by the ones native to France. This has emerged as a problem for the WTO and for agricultural trade itself (Corrs, 2002).

These differences between two major international systems have proven challenging not only to the WTO in recent years, but to the international community as a whole. In example, if there is one definition of geographic indication adopted in the future, inevitably one or several countries will be significantly harmed. The WTO must continue its duties as impartially as possible in order to preserve the culture and the economic importance of the wine trade.

7. Decision Breadth:

The future decisions made by the WTO in this industry will have long reaching affects on every aspect of wine production, especially the eight members of the newly formed MAA treaty.

8. Legal Standing:

Treaty

III. Geographic Clusters

9. Geographic Locations

a. Geographic Domain: Multinational

b. Geographic Site: South Africa, Western Europe, Australia, North and South America

c. Geographic Impact: Many

10. Sub-National Factors: No

11. Type of Habitat: Many

IV. Trade Clusters

12. Type of Measure: Import Standard

The trade data involved with this particular case study is complex and organizationally challenging. Realizing the wide range of data that could be considered for inclusion, elimination of certain aspects of statistical information was required. The Wine Pact encompasses eight countries, ranging from Canada to South Africa. In these countries, there are both wine importing and exporting companies unique to that country. Realizing the time available and the scope of this study, I focused on the data available through the U.S. Chamber of Commerce, the Wine Institute based in San Francisco and the International Business Directory. . The emphasis in this research is mainly focused on U.S. wine trade statistics since 1995 in regards to amount of product that has been imported and exported.

Trade measures involved in this case are found readily throughout the statistical information. When measuring the amount of liquid, wine measures are in liters, hectoliters and gallons of wine per year, and possibly per capita. Also, monetary measures of wine trade are most often deciphered in terms of US dollars. Land quantity may also be useful when researching wine trade information- the main measurement in this context is acreage. Lastly, all of these measurements are generally recorded in years.

As one can note after analyzing the data provided below, the increasing relevance of New World wines in the past decade cannot be ignored. Although France still maintains a comfortable lead in national production (refer to Table One), the amount of trade that transpires between France and other states on the international stage has plummeted, leaving more room for the emergence of New World wines in international trade. In Table Three, France is not individually listed as an importer of American wine and has remained unenthusiastic about U.S. imports. However, there has been a rise both in other Old World importation of U.S. wine and the rise of U.S. wine exports in general (Table Two). Canada shows a drastic increase in U.S. imports, perhaps due to their increasingly close trade relations. Since 1995, the U.S. has raised its imports of Australian wines by over 300%. There have been similar trends with Chile, Argentina and New Zealand.

13. Direct v. Indirect Impacts: Direct

The amount of trade foreshadows total production, therefore there is a very real and present impact that trade has upon the wine industry. For example, in California, the surplus of wine production has forced many farmers to abandon their farms or sell them to real estate agents to become condominiums. This overproduction has also caused a drastic increase in unconventional grape variation sales and raisin output (Scoblionkov, 2002).

14. Relation of Trade Measure to Environmental Impact

a. Directly Related to Product: Yes, Wine

b. Indirectly Related to Product: No

c. Not Related to Product: No

d. Related to Process: Yes, International Policy

15. Trade Product Identification: Wine

16. Economic Data

In South Africa, the Second National Wine Industry Environment Conference and Exhibition was held in North Terrace, Adelaide in November, 2002. Among the issues being discussed are “Managing Winery Wastewater”, “Eco-Efficiency- Do More With Less”, “Environmental Data Analysis” and “Reducing Greenhouse Gas Emissions and Operational Costs.” In Spain, Environmental Performance Indicators are beginning to be used to track the environmental implications of Spanish vineyards . This method is being implemented in hopes of increasing environmental awareness among Spanish growers to potentially create an environmental friendly growing situation.

21. Name, Type, and Diversity of Species

1. Grapes: Actual vine species are numerous, thus for the purpose and scope of this paper, they will be grouped in the same category.

2. Glassy-winged sharpshooter and other water obstructers.

3. Pests that are potentially fatal to vines in other ways.

22. Resource Impact and Effect:

There is a low environmental impact, yet the loss or depletion of water could lead to a catastrophic impact on the wine industry, therefore its impact and effect is high, as well as the possible impact and effect of insects that carry fatal diseases.

23. Urgency and Lifetime:

Low. If one of the environmental problems were to occur, the urgency of the matter would be high, but the recovery of the vines would not take a significant amount of time.

24. Substitutes:

There is no substitute for water or the grapevine. However there are substitutes for grape wine, similar products such as rice wine or other distilled fruit drinks.

VI. Other Factors

25. Culture:

Yes. Although economics are vital to every industry, the wine industry sets itself apart by emphasizing the importance of the role of wine in societies, as well as its symbolic significance, to be of the utmost importance. The complexity of wine growing, the wide range of grapes and its vast, long history make it an interesting topic. Political, economic, environmental and cultural implications of the current divide between the new world and the old make it a fascinating case study.

Wine has played a role in numerous cultures around the globe. In the Christian religion, wine is symbolically used as the Blood of Christ. Many religions view wine and other alcoholic beverages as the vehicle of evil, or the devil.

Although wine is used greatly in an expansive number of religions, it is also a part of cultural heritage in countries such as mexico or spain. There is also a goddess of wine in greek mythology. As a factor, culture plays a role in the preservation of wine. Cultural tradition is kept alive by the continued importance of wine, and vice versa.

26. Trans-Boundary Issues: No

27. Rights: Yes. The rights of migrant workers are a problem in the wine industry. Unfair pay, long hours and inability to find housing, especially in California are contributing factors to the industry's problems today.

28. Relevant Literature and Links:

Australian Wine Online Strategy 2025. Environmental Strategy. www.winetitles.com.au/awol/overview. Retrieved from the World Wide Web on October 5, 2002.

Briggs, Asa. 1985. Wine for Sale: Victoria Wine and the Liquor Trade. B.T. Batsford LTD: London.

De Blij, Harm Jan. 1983. Wine: A Geographic Appreciation. Rowman and Allanheld: Totowa, NJ.

Environmental News Network. "Napa Valley Picks Up Pieces in Wake of Quake." www.enn.com/news/wire-stories/2000/09/09042000. Retrieved from the World Wide Web on October 5, 2002

Environmental News Network. "Warning Labels for French Wine?" www.enn.com/multimedia/1999/09/091699/091599glrc_5702.asp. Retrieved from the World Wide Web on October 5, 2002..

Environmental News Network. Benston, Liz. "Insect Threat Declared an Agricultural Emergency in California." www.enn.com/news/wire-stories/2000/06/06242000. Retrieved form the World Wide Web on October 5, 2002.

Environmental News Network. Aubert, Jean-Marc."Flooding, storms leave at least 2 dead in southern France." www.enn.com/news/wire-stories/2002/09. Retrieved from the World Wide Web on October 5, 2002.

Grant, Marcus, ed. 1998. Alcohol and emerging markets: patterns, problems and responses. Edward Brothers: Ann Arbor

The International Institute for Industrial Environmental Economics. Conde, Maria Bergua. “Environmental Performance Indicators for the Wine Industry: Spain as a Case Study”. www.lu.se/IIEE/publications/theses-99/marina.html. Retrieved from the World Wide Web on October 5, 2002.

Juergens, John. July 12, 2002. "World wine statistics: U.S. Fourth in Production, Third in Consumption". Oxford Town Wines. Retrieved on September 7, 2002. www.wineloverspage.com/oxford/stats.phtml

Scoblionkov, Deborah. "A Worldwide Tide of Surplus Wine Could Bring Price Breaks." Philadelphia Inquirer. August 28, 2002.

The Second National Wine Industry Environment Conference and Exhibition. www.nationalwineenvironment.org.sa. Retrieved from the World Wide Web on October 5, 2002.

Unwin, Tim. 1991. Wine and the Vine : A Historical Geography of Viticulture and the Wine Trade. Routledge: London

Ulin, Robert C. 1996. Vintages and Traditions: An Ethnohistory of Southwest French Wine Cooperatives. Smithsonian Institution Press: Washington.

The Wine Institute. "Sustainable Wine Growing Practices". www.wineinstitute.org/communications/Sustainablepractices. Retrieved from the World Wide Web on October 5, 2002..

Wine Knowledge News. February 7, 2002. "French Wine Sales Under Pressure". Berry Bros and Rudd. Retrieved on September 7, 2002. www.bbr.com/gb/db/news-item/305?id=chxlbd1p4l100j&first_news

The WTO and the Clash of the New World / Old World Wine Producers. Corrs Chambers Westgarth. Retrieved from the World Wide Web on November 5, 2002. http://www.corrs.com.au/WebStreamer?page_id=2202

Graphics:

All graphics retrieved from Clip Art