Protectionism v Free Trade

Would a free-for-all on vine planting within the EU allow European producers more scope to compete, or simply make the economics of wine even less attractive?

Amongst all the macro issues likely to affect the UK wine sector over the next 10 years or so, one of the most important could be the new EU planting regime that comes into effect in January 2016. In summary, countries within the EU will be allowed to increase their area under vine by up to 1% per year until 2030 when the regime will be reviewed.( On a parochial note I should point out that nothing will change for regions such as the UK which have less than 50k hectares of vineyard planted and are not currently subject to any restrictions ).

This brings to an end nearly 40 years of constraints on planting, culminating in a serious grubbing-up initiative, which took 160k hectares out of production between 2009 and 2012. To put this figure in context: although it represented only 4% of area under vine in the EU, it was the equivalent of ripping out all the vineyards in Australia.

The planting restrictions were designed to deal with the issue of chronic oversupply, which has bedevilled our industry for so long, and has been a major factor in keeping prices and profits below a sustainable level.

Sympathy for the “free traders”

Hence the importance of this change, which comes after several years of bitter debate. At one point it looked as if all restrictions on planting might be removed. The arguments for this were actually very strong. Outside the EU there are of course no real constraints. Anyone can plant what they like, and one’s own skills in production and marketing will determine one’s level of success. Thus, it was argued, abolishing restrictions would allow the EU to compete fairly with the rest of the world, while dynamic and successful producers would not be constrained from realising their potential.

In principle I have sympathy for the “free traders”. Protectionism inevitably benefits the inefficient and complacent more than the rest, and in the wine industry there are arguably significant numbers of such producers. Restricting plantings helps producers to “pull up the drawbridge” and inevitably represents a barrier to progress and innovation.

The argument for protectionism

However I don’t think it’s as simple as that: this is after all the wine industry. In 2012 Decanter ran a piece concluding that the removal of planting restrictions would be catastrophic. In theory, classic regions like Burgundy and Bordeaux could double in size whilst Rioja and the Douro could increase in area by six times. The piece was clearly alarmist, but it is worth considering the effect of such a move not only on the super premium sector, which is arguably the only area of the wine business where returns are close to being acceptable, but also on the lower tiers in such regions.

Scarcity value is at the core of the business model of an uncomfortably large number of producers and, setting aside any schadenfreude at the discomfort of the more complacent, I would question whether the effects of a free for all would be beneficial.

Let’s take the example of Australia, which in the 1990s became a role model for how to make money from wine, at all price levels. It achieved this by linking production and marketing more effectively than had been done in the past. However, because there were no restrictions on planting, Australia moved from having a marginally scarce resource (arguably the perfect position) to a substantial surplus within a few years.

It soon became clear that this surplus wasn’t as positive as some had imagined. It was actually hugely damaging, and not just at the mainstream level. The premium tiers got caught up in the quicksand, and the image of Australian wine has really not yet recovered. In hindsight, some control of plantings in the 90s (in principle at least) would have averted this problem.

Another broader argument in favour of protectionism is this. The consumer, even the relatively knowledgeable wine consumer, is pretty confused about the benefits of trading up and so often doesn’t bother. This is, in part, down to the extraordinary diversity of the range available. It’s also a result of too many producers focusing their efforts on getting the wine “right” as opposed to thinking about how to market it. This in turn is partly down to the fact that a significant number of producers are not really in it for financial return, at least in the way that most producers in other food and drink sectors would understand the term.

The range of wines on offer to the consumer, viewed as a whole, has therefore relatively little rationale from a broad market perspective and European production is extraordinarily local. No bad thing in some ways, but hardly a sound base upon which to expand, particularly if the expansion is a free-for-all. One of the key motivations for the EU’s policy was to improve the economics of wine production. It’s difficult to see how a free-for-all would achieve anything but the opposite.

I’ve no doubt that there would be exciting discoveries of new terroirs, and more generally certain producers would clearly benefit. But broadly I envisage it would provide a great opportunity for retailers and consumers to trade down. It would also inevitably water down the franchise of those brands (individual and regional) that have so far kept themselves out of the quicksand. For regions, such as Germany, which are trying so hard to extricate themselves from the very same quicksand, it would surely represent a setback.

Finally many argue, powerfully, that what the wine industry requires is a good shake-out and substantial consolidation. Removing all planting restrictions might well lead to the exact opposite, at least in the medium term.

The next 15 years

My view, therefore, is that we should give a cautious welcome to the compromise. Allowing 1% extra plantings per year may not sound very much, but to put it in context it means that France could allow plantings of 8,000 hectares per year. In three years this would amount to an area the size of Burgundy and in four to another Champagne. Spain meanwhile could create the equivalent of Rioja in five years. Within the 15 years of the plan, well over 500k hectares could be added to the EU’s vineyard area, equivalent to that of Australia, Chile and South Africa combined.

I accept that the devil may be in the detail of the proposal, which I have yet to see. As I understand it, for example, no country or region is obliged to take up the additional allowance so in countries that wanted the restrictions maintained (ie all the major wine producers) we might not notice any chance at all. This would clearly be disappointing but it’s an unlikely scenario. Champagne, for example, already has plans to add another 10k hectares.

Whatever one’s view, however, this is potentially the dawn of a new era and in future the protectionists will be on the defensive, which is as it should be. Certainly I’m uncomfortable arguing on their side. And a lot can change in 15 years, as the last 15 have clearly proved.

Perhaps by 2030 the European wine sector will be less economically fragile; perhaps in the interim we will see significant consolidation. Certainly one can envisage producers of necessity becoming more market oriented. All of which will give ammunition to the free traders. By then too, if the forecasts are right, we shall be beginning to see the clear effects of climate change. At the moment we’re simply regulating to cope with changing economic realities. We may soon be faced with even more fundamental challenges, this time from nature itself.

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6 thoughts on “Protectionism v Free Trade

    • Thanks Bob. As you know our government is in favour of a free for all and I am sympathetic in principle. However the wine industry is just so ‘chaotic’ in terms of structure that I just don’t think that this is the right way forward at this time.

    • As I understand it each country has the option of increasing its total vineyard area by 1% per year. Producers\Regions may therefore apply for an allocation. However countries are not allowed to trade their 1%. The WSTA supplied me with a lot of information. If you are interested I’m happy to forward it.

  1. before making anything, it is wise to know who might buy it…the vast vineyards of Europe were planted to feed the needs of the industrial revolutions in different countries and the needs of the large standing amd conscript armies. with young consumers everywhere not rushing to embrace wine as their preferred alcoholic beverage, who will buy any additional production, let alone existing production? the absence of a market is surely the best argument for not planting more?

    • I agree completely Peter. However one of the issues with the wine industry is surely that there are lot of producers out there who are over optimistic or who believe that if they produce good wine it will find a market. This culture is perhaps fuelled by the extraordinary fragmentation of the producer base. This implies that, in theory at least, it is quite possible to grow at the expense of the competition even if the macro market scenario is not that positive.

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