Economic Impacts on the U.S. International Wine Trade
What Lies Ahead?
Since the start of the new century, the U.S. economy has seen various rises and falls, some much larger than others, and most of which reflect on the global economy as well. With changing global economic conditions, one must wonder what effects will take place on international trade. Many of our favorite products are imported these days, such as sugar from Cuba or bananas from Costa Rica. One product with popularity in the U.S. and many European countries is wine. Wine trade has a number of issues affecting its future. These include trade policy changes, newer political leaders, currency exchange rates, and separation of the United Kingdom from the European Union, to name a few. With these in mind, we dive into predictions for the future of the wine economy.
In general, the global economy since 2000 saw promising rise until the global financial crisis in 2008-09. Trade thrived leading up to that point. In the years following the crisis, growth in annual trade has proven to be significantly smaller, even negative in some years. In terms of annual rate, international trade of sparkling and bulk wine has increased rates of value of 7% and 6%, respectively. Sales volume of each has also increased 6% and 3%, respectively. Bottled wine sales volume only has a 1% increase (Pomarici). These growth rates prove to be substantially lower than those prior to the recession. For the U.S. economy overall, current growth appears steady and unemployment rates have decreased. The future of the U.S. wine industry actually looks optimistic regardless of the statistics given above. By contrast, Mike Veseth, editor of the magazine The Wine Economist, says April sales figures indicate an early deceleration of growth in the wine market with many potential risks awaiting us.
One indication of trouble in the economy stems from the yield curve. This tracks the difference between short-term and long-term interest rates. Recently, the curve has flattened out, which implies economic slowdown. There was even an estimated 60% chance of a recession in the U.S. in the next twelve months since June of this year (Veseth). In addition, there lies the risk of too low global interest rates. With many countries dependent upon one another for trade and support, especially in the E.U., Veseth claims that policy makers worry that an economic downfall in one country could spread and seriously affect another country. In light of this, we turn our attention to the United Kingdom exit from the European Union, a.k.a. Brexit.
Britain always had their differences with the rest of the E.U.: geographically, economically, politically, etc. Their decision to separate has brought on negative effects, though, and as for wine, the future does not look so promising. British tax policy has negatively impacted the wine sales in the past. The current Prime Minister of the U.K., Theresa May, has plans that will only further the impact. As a side note, Scotland might again consider leaving the U.K. after their European departure. According to Veseth, leader Nicola Sturgeon shows upholding strong anti-alcohol positions. This could lead to a decrease in wine export from the U.S. to Scotland if stricter alcohol policies are enforced.
The U.K. is crucial for U.S. wine exports, because it currently sits as the second-largest consumer of U.S. bottled wine, number one consumer of bulk wine (Veseth). That being said, exchange rate has a lot to do with the volume of exports purchased. Quite frankly, the pound has not been doing so well. Recent drops in value have rendered British currency to hold less purchasing power. This means we will see less purchases of imported goods. That will be tough given that British supermarkets rely heavily on imports to fill their shelves. If wine wholesalers do not accept a drop in selling price in order to absorb some of the hit and incentivize wine purchases, Veseth says we could see the following: Wine prices increase; incomes decrease; potential for wine tax increase; potential for prohibition forces to strengthen, to name a few effects. This affects not only wine U.S. exports but all exports from any country to Britain. So, our evidence circles back to support the concern of spread of international decline.
All in all, future of the U.S. wine market all remains in speculation. The United States economy’s oncoming slowdown and potential recession could cause wine production to decrease drastically. This all disregarding what new trade policies await the country with from the President elect in come January. As of right now, though, the biggest potential threat with regard to international threats appears to be the fragile economic state of the still-recovering United Kingdom. For now, though, all we can do is sit, a full glass of red in hand, and wait.
Pomarici, Eugenio. Wine Economics and Policy: Recent Trends in the International Wine Market and Arising Research Questions. 5 Vol. , 06/01/2016. Web. 14 Oct. 2016.
Veseth, Mike. "What Next? Wine Industry Mid-Year Report & Preliminary Brexit Analysis." The Wine Economist. The Wine Economist, 12 July 2016. Web. 14 Oct. 2016.