At times, international trade–even among friendly countries–can quickly devolve into a game of tit for tat. If someone doesn’t play fairly, everyone else is going to make a stink about it, and they might even just take their ball and go home. Canada and Mexico have been calling the U.S. out for playing unfairly for awhile, and just recently, the World Trade Organization (WTO) told Canada and Mexico just how big of a stink they can make, and there’s good reason to believe the U.S. wine industry will be in the center of this stink.
In the December 7th announcement, the WTO, which acts as an international governance body for trade relations, noted that its internal arbitration panel determined that Canada and Mexico can impose over $1 billion in tariffs on exports from the U.S. in retaliation to a U.S. law that they see as intolerably unfair.
If these tariffs do come into effect, which could happen by as soon as Christmas, they could dramatically raise the price of many U.S. goods in Canada and Mexico. That is because tariffs are, in essence, taxes levied on products when they’re imported into a country. (Since the end of World War II, there have been efforts to reduce and even eliminate tariffs–between close trading partners like the U.S., Canada, and Mexico, tariffs are currently almost negligible.)
As with most taxes, their cost is reflected in the ultimate price of the product. So pretty soon, consumers in Canada and Mexico could see the price of U.S. wine spike, making them less likely to purchase U.S. wine instead of, say, French or Italian wine, which won’t have the additional cost of these new tariffs on them. This spike could have dire effects on the market share of U.S. wine sales in these countries.
In Canada, this could be especially pernicious, since the U.S. exports around $500 million worth of wine annually, and only recently became the biggest source of foreign wine sold in Canada, just outpacing France and Italy. Even a temporary price increase from these tariffs could harm the perception of U.S. wine in Canada, causing a spiral effect resulting in the loss of U.S. wine’s market share.
The announcement from the WTO’s arbitration panel is the latest in a years-long dispute resolution process that began in 2008. That year, certain U.S. laws, known as Country of Origin Labelling (COOL) rules, came into effect. These COOL rules required retailers to indicate to customers where various agricultural products originated.
The ostensible reason for these rules was for safety purposes, so customers could be aware that the goods they were buying might come from countries with more lax safety standards. But Canada and Mexico claimed that these rules would unfairly harm their ability to sell beef and pork products in the U.S., because U.S. consumers would see the label, “Produced in Canada (or Mexico),” and decide not to buy the product for, what is, under WTO rules, no good reason.
Starting in 2008, and lasting for several years’ worth of adjudication, Canada and Mexico argued in the WTO that the U.S. COOL rules improperly harmed their exports of beef and pork products. This claim was held up by the WTO, first in its Dispute Settlement Body (DSB, a court-like institution within the WTO, which rules on trade disputes, whether countries are in violation of the WTO’s rules and principles), and then through an appeal process.
The latest ruling from the arbitration panel was the culmination of this process. In essence, it was the sentencing phase, where, after finding in the DSB that the COOL laws were in violation of WTO rules, the WTO then announced how large of a violation it was, and thus how big Canada and Mexico’s response could be. Since the U.S. failed to repeal the COOL laws, the WTO gave Canada and Mexico permission to implement tariffs, which would offset whatever harm the COOL laws had on their sales in the U.S. Notably, these tariffs do not need to affect the same Canadian and Mexican products that the COOL laws are harming (i.e., beef and pork products), but can be levied against a wide variety of other goods–in particular, wine.
The main purpose of these tariffs is to goad the U.S. into repealing its wrongful laws, or, failing that, even things out for Canada and Mexico, at least on a macroeconomic scale. The House of Representatives voted earlier this year to repeal the COOL laws, but the Senate has not yet passed a similar measure. The Senate is currently considering two proposals, one which would fully repeal the COOL laws while the other would make COOL a voluntary program, but Canada has signaled that only a full repeal will assuage it. Until and unless the U.S. fully repeals the COOL laws, Canada and Mexico will put their tariffs in place.
Neither Canada nor Mexico has yet come out with a specific list of products that the tariffs will apply to, or at what level those tariffs will apply, but, again, there is good reason to believe that wine will be high up on the list. As a high-profile commodity, worth hundreds of millions of dollars in annual trade, wine would make a good target for Canadian ire. And U.S. lawmakers, in particular, Senator Dianne Feinstein (D-CA), have taken notice and indicated a willingness to repeal the COOL laws.
There is a fair chance that the omnibus budget bill currently working through Congress will include the repeal of these COOL laws, but this chance is far from certain. Our partners, Wine Institute and WineAmerica, have come out forcefully against the COOL laws, and actively encourage lawmakers to do the right thing and return parity to trade with our neighbors to the north and south. We at ShipCompliant will stay up to date on things as they develop, and will be sure to let you know what we find.