Protectionist Policies : A case study of Indian Wine Industry, Why the EU and US must reform their subsidies

"The Indian middle class is hungry for exciting food and drink experiences" - at least according to Mariann Fischer Boel, the EU Commissioner for Agriculture. The free trade agreement between the EU and India was supposed to help quench this appetite. The EU wants to export wine, whisky, olive oil and 40 types of fish, among other things, to India when the customs barriers fall. Yet to whom such treaties are really helpful, India with growth rate of more than 9%, a huge consumer market but still high tariffs and legislative barriers, is one of the EU's top objects of desire as far as market access is concerned. The advocates of hyper-globalization often tout totally free markets as the only way forward, but the secret history of capitalism, as Professor Chang calls it, is that there are plenty of examples of countries that only advanced when they adopted protective measures that gave domestic firms room to grow. This lesson lives today in the economic miracles of Japan and Korea. This doesnt mean that protectionism is always good, only that is-Is not always bad. I think this view is true in general, but is it also true about wine? Or is there such a thing as wine exceptionalism? Let us now dig it further. Last year an article in Financial times reports on a dispute between the European Union and India that is apparently headed to the World Trade Organization. The issue is Indian wine tariffs. India has tariffs on imported wine and high taxes on domestic products, which is perhaps not unexpected, given Indias low per capita income. You might expect a country like India to impose high excise taxes on luxury goods as a way of funding needed government programs. I imagine that wine is a luxury for most Indian households, so a high tariff would be a way of taxing the affluent to benefit the poor. Wine consumption is very low in India about 16 million liters per year, which is practically less than a spoon per capita, given Indias huge population. But the Indian market is growing and is expected to double in the next three-four years, so there is something at stake here. More to the point, however, the Indian taxes are not for revenue only some are intended to protect the nascent Indian wine industry. WTO rules allow countries to have tariffs, but require that they satisfy a national treatment rule. This means that, once foreign products have entered the country and paid the duty, they must be taxed and regulated just like domestic goods. This is where India has run afoul of the WTO. According to the Financial Times article, three Indian states, Goa, Maharashtra and Tamil Nadu, which represent important potential import wine markets, impose additional discriminatory domestic taxes on foreign wines, while exempting domestic wines to try to encourage the growth of the industry.

India imposes customs duties of up to 150 per cent on bottled wines and spirits at the border. These are supposed to be equivalent to the excise duties paid by domestic producers.

But the EU says Maharashtra is imposing a special fee on imported wines and exempting local producers of wines and spirits from excise duty. Goa and Tamil Nadu are charging extra import fees while Tamil Nadu continues to operate restrictions on the sale of imports. If the accusations are true, this is contrary to WTO rules, and hence bad trade policy. But is it good economic development policy? That is, is it a good ideal way to build the Indian wine sector? Or is wine different? Yes this is a good idea. Yes this is Vino Exceptionalism and not protectionism. Mentioned above was one side of the story. The story you have been reading over and again, and believed that it is true, because after all it is told to us by our own wine writers, our very own small but selfish importers. Perhaps in the absence of any informed defense initiative, the charge of India adopting protectionist Policies seemed justified. In the remaining article I would like to contribute through some government papers so as to help my senior trade members to dig it further and prepare an offensive to defend the charge of US and WTO against our Federal government in the wake of charges leveled against India adopting protectionists policies. One of the greatest international economic debates of all time has been the issue of free trade versus protectionism. Now let us first understand what is protectionism? The meaning and measure of protectionism are different to different countries. Perhaps the game plan of protectionism is different to rich and the poor. And that is where the might of US and EU play differently then our India. As is evident we play with old stick that is simply put high tariff rate to protect domestic industry. Curiously EU and US play it opposite. Reduce the domestic tariff and enter in free trade agreements and by doing so ask the poor countries to reduce their tariffs to have a level playing field, so that poor third world counties can have access to European lucrative markets. Nice Trap? The game of protectionism has begun. Now comes in picture non-tariff trade barriers. Simply the quality parameters, or in case of wine permitted oenological practices, use of banned additives, labelling requirements and so on. The barriers dont stop here. Wines from third world countries continue to face tremendous competition from highly subsidized European wines, even though the WTOs Agreement of Agriculture intends to significantly reduce these kinds of subsidies. Although the EU unilaterally classifies these subsidies under the Green Box (i.e., not trade distorting) these subsidies are direct producer supports that allow European producers to be more competitive by absorbing taxes and import duties and subsequently lowering the price of their end product.

According to 2006 International Trade barriers report, European wine producers received 1.4 billion (USD 1.8 billion) in subsides from the European Commission in 2006. These subsidies come out of the EUs revised Common Agriculture Policy (CAP), which are distributed throughout the wine market as follows: 42 percent (512 million) represents the direct or indirect costs of the various

forms of distillation; 37 percent (450 million) represents expenditure on the restructuring program; 13 percent (156 million) represents aid for musts; and

The remainder is divided between the private storage of wines and musts, refunds and the definitive grubbing up of vineyards. * Within the distillation process wine is processed into alcohol, which is intended partly for the potable alcohol market, with the remainder intended for the fuel market. The aim of distillation is to withdraw production surpluses from the market at a guarantee minimum price. With new world wines (i.e., wines from Australia, Chile, New Zealand etc) gaining increased market share over past years, the EU has faced a decline in sales, both within Europe and in export markets. In response, EU wine producers have been pressuring the EU Commission and individual Member governments for additional subsides to support their industry. This level of subsidization encourages overproduction because wine grape growers are guaranteed a buyer. If sold, the grapes are fermented into wine; if the grapes are not sold for wine, they are sold to the government to be distilled into ethanol, a process referred to as crisis distillation. If the vineyards are not yielding profit, the growers gets grubbing up subsidy. If they want to replant vine they again get subsidy. If they are able to export they are encouraged by export refunds. For promotional activities within domestic and international markets they are supported by various marketing mechanisms and so on. A little-noted consequence of the crisis distillation of wines subsidy is that it encourages the overproduction of spirits in the EU, with some of this surplus being dumped on the world market. Led by France, Spain and Italy, the EU is the largest producer and exporter of spirits in the world, accounting for more than 90 percent of the $1.5 billion world market. Oxfarm international which is an organization working to find lasting solutions to poverty and injustice reports in its briefing papers that the competitive producers of spirits in developing countries are shut out of the lucrative world market for spirits by these European distillation subsidies. A study commissioned by the EU itself found that because of EU subsidies, wine producers from third counties, who could also potentially deliver wine for distillation of potable, alcohol, are hindered from entering this market. The study explained that the EU aid reduces the EU distillers cost for raw materials, which leads to lower prices of potable alcohol.

The elimination of EC distillation subsidies would cause world prices for spirits to rise and EU production to fall. If prices rose by 10 percent, producers of spirits would earn $150m in additional annual revenues. If EU exports decreased by 25 percent, producers in other countries would enjoy additional market opportunities worth as much as $350m. To put this figure into perspective, the Global Fund to fight AIDS, Tuberculosis and Malaria spends $450m a year on fighting malaria, the worlds number one killer disease. Armenia, Chile, Malaysia, Mexico, South Africa and India are all competitive producers of wine and spirits and are harmed by EU distillation subsidies. Such subsidies hurt these countries by suppressing the world price of spirits and by impeding their exports of spirits to world markets, in breach of WTO Agreement on Subsidies and Countervailing Measures.

My readers can really have a clean pictures of EUs support to its wine industry if they go through council regulation (EC) No 479/2008 in which official journal of EU introduces provisions of EUs support programs to its wine industry. The council regulation providers supports to member states by grants for promotion on

third country markets, restructuring and conversion of vineyards, harvest insurance, crisis distillation, By- product distillation, and so on. Having given a fair idea about the EUs support measures, I have to ask you Is it not protectionism? The rich countries can offered to grant subsidies, reduce tariffs only to gain access to potential markets. Their products are cheap because their cost is subsidized. India on the other hand cannot afford to grant these subsidies to its industry and thus impose tariffs to protect its domestic industry. If EU wants a level playing field they should also notice that Indian wine industry is not supported by any foul subsidy measures as their member countries. One advice to Madam Fischer Boel is if EU is planning to take India to WTO dispute settlement body, (DSB) then she be advised many plaintiffs from butter to orange juice, Tobacco to Tomatoes and Corn to rice are waiting for her, since developing countries whose farm sector are being damaged by these illegal subsidies are found all over the globe. On the other hand all of us would like to tell our newly formed wine importers association to stop crying for govt. Policies and work together to press the hospitality industry to pass on the benefits of customs duty relief to customers and reduce their over 300 percent mark ups to reasonable level, But they will not do so as nobody wants to hurt their own patrons.