The U.S. Government, through newly confirmed U.S. Trade Representative Robert Lighthizer, has started the process of re-negotiating NAFTA by delivering a notification letter to Congress. Talks could begin as early as August. The re-negotiation of NAFTA could have consequences for the BC wine industry because NAFTA has, up until now, included language that allowed BC (and other provinces) to provide preferential treatment for domestic wine to a certain extent. Specifically, an allowance was made for a limited number of \”preferential\” retail licenses selling only BC wine. This exemption became contentious in the past couple of years when the BC government converted freestanding VQA store licenses to supermarket licenses and also auctioned off additional \”BC wine only\” supermarket licenses. Those actions prompted a WTO challenge by a number of trade partners including the U.S., the E.U., Australia, New Zealand and Argentina. While wine issues are unlikely to be at the top of a list of NAFTA grievances, it would seem likely that those issues and complaints will now become part of these negotiations.
The BC wine industry will likely face numerous trade-related issues in the year ahead, both nationally and internationally. This post outlines some of those issues and argues that the industry may wish to become strategically involved earlier rather than later.
National – Inter-Provincial Shipping
While the federal government removed the absolute prohibition on the interprovincial shipment of alcohol directly to consumers in 2012, they made the exemption dependent upon provincial laws. Since that time, only one province, Manitoba, has completely opened its doors to the interprovincial trade in alcohol. Consumers in MB are free to purchase wine from the rest of Canada because the laws of that province specifically allow such purchases with no restrictions other than that the amounts must be for personal use. Two other provinces (BC and NS) have restricted exemptions that allow consumers to purchase 100% Canadian wine from another province if the wine is purchased direct from the winery. These provinces do not allow the purchase and subsequent shipment of non-Canadian wine from another province nor do they allow purchases/shipment of any type of wine from a retailer. SK has a confusing system that only permits the purchase of 100% BC wine from a BC winery, and only if a high amount of markup is paid.
The above results have provided limited benefits to consumers and to wineries who were initially enthusiastic about the changes to the federal law. Everywhere except for Manitoba, consumers are still prevented from purchasing/shipping from retailers in other provinces. They are not allowed to hunt for difficult-to-find imported wines in other provinces. They cannot comparison shop. The system for alcohol retailing remains based on protectionism, with each provincial liquor board continuing to block interprovincial trade on the basis that it would create a loss in liquor revenue for that province.
The provinces signed the Canadian Free Trade Agreement (PDF here) in April which purports to remove many barriers. However, the agreement does virtually nothing in respect of the interprovincial trade in alcohol. All existing practices are continued … with only a promise that the provinces will review the issues and report back in a year. The provinces have promised to do this many times before … with little progress.
The one bright light on the horizon is that the Supreme Court of Canada has now agreed to hear the appeal of the Comeau case. This is the New Brunswick case involving charges brought against an individual who drove to Quebec, purchased alcohol, brought it back to NB and was charged for doing so by the RCMP. A lower level New Brunswick court found that the relevant New Brunswick laws were unconstitutional on the basis that s.121 of the Constitution guarantees a \”free trade\” zone within Canada in respect of Canadian products. The NB Court of Appeal declined to hear an appeal of the decision but the nation\’s highest court has now agreed to do so. This effectively means that there will eventually be a national precedent from the SCC on this issue.
The SCC hearing of this issue provides the greatest opportunity in decades for changes to the protectionist systems outlined above. This case has the potential to create landmark changes which could provide great benefits to consumers and the industry. This could be Canada\’s \”Granholm\” (the case that opened U.S. borders) It is possible that our provincial borders may end up \”wide open\”. It is also possible that the SCC may uphold the existing restrictions…. or that the court may end up somewhere in between. Nevertheless, it is important that the industry should be aware that the stakes \”are high\” in this case … and that the industry should proactively start to consider the implications of this case and the possible effects on the wine business.
International – WTO Challenge
On the international front, there is also the possibility of ground-breaking change. As noted here earlier, a WTO challenge has been started in respect of the BC \”wine-in-grocery\” model which currently only permits the sale of 100% BC wine on regular grocery store shelves. The challenge is being supported by the United States, the EU, Australia, Argentina and New Zealand. A good description of the challenge and the issues is contained in this article by Karen Graham: Checking In on the WTO Trade Challenge. At the present time, it is not clear how this dispute will end but there certainly appears to be a danger that the issues will become part of a larger trade dispute and/or a re-negotiation of agreements such as NAFTA.
It is my view, as I have stated before, that the BC grocery model is not trade-compliant. I do not think that it makes sense for BC to be creating a closed grocery retail channel for its own wine while simultaneously trying to argue that other provinces should open their retail channels to our wine. In addition, it seems to me that there is a danger for the wine industry that this dispute will widen and end up including other policies such as direct delivery and preferential markups. Again, I believe that the industry should be aware that the stakes \”are high\” and that proactive early engagement and involvement would be wise.
Put Wine Consumers First
On both of the above issues, it is my view that there is a strong argument that the industry should be taking positions that put wine consumers first. Generally, I believe that most Canadian wine consumers have tired of restrictive liquor policies that make it inconvenient for them to buy wine (and other alcohol) and which prevent them from exercising the freedom of choice that they have with respect to other consumer products. The Washington state-based \”wine economist\”, Mike Veseth, puts it succinctly in his book \”Wine Wars\” (which I recommend) where he states (at p. 158):
One thing that I think I\’ve learned is that the opposite of competition — wine protectionism — makes wine very bad, and so trying to stop market forces is unexpectedly dangerous. I have seen this over and over again. We learned about New Zealand\’s experience … Abandoning protectionism and embracing the global market has been the key to their astounding growth. … A protected market encourages least common denominator wines.
As I noted above, Manitoba opened its borders to the alcohol trade when the federal law changed in 2012. Contrary to the predictions of the naysayers, there have been virtually no ill effects in Manitoba: provincial liquor revenue has kept pace with national norms and there has been no major disruption to their retail system. It\’s my view that the other provinces should consider adopting similar strategies with respect to these trade disputes. Let\’s put wine consumers\’ interests ahead of provincial protectionism … and \”free the grapes\” for all Canadian wine lovers.
The Supreme Court of Canada has announced that it will hear an appeal of the Comeau case. This is the New Brunswick trial level decision that found provincial restrictions on the inter-provincial transport of alcohol to be unconstitutional. The case was first appealed to the NB Court of Appeal which declined to hear the appeal. However, the case will now head directly to the country\’s highest court where a ruling would create a national precedent on the issues. The case has the potential to change the landscape for the interprovincial shipment of alcohol in Canada and could also affect other interprovincial trade issues such as agricultural marketing boards. Globe coverage of the decision is here: Supreme Court to Hear Polarizing Border-Beer Case.