Bitter Taste of Free Trade : U.S. Vintners Say NAFTA’s Phaseout of Mexico’s Tariff Shields Competitors

When Mexicans pour the fruit of the vine, it’s far more likely to be brandy than wine in the glass. The average Mexican drinks less than a pint of wine in a year. That is 1/15 the U.S. average, or, as one Mexican wine producer put it, a national wine market about the size of that in San Diego.

Still, California winemakers saw promise when discussions began on the proposed North American Free Trade Agreement, which would remove barriers to trade among Mexico, the United States and Canada. U.S. vintners reasoned that the agreement would lower tariffs and thus allow them to sell quality wine at attractive prices to an emerging Mexican middle class that is primed for a change in taste.

But the details of the agreement, awaiting legislative approval in the three countries, show that California winegrowers, who account for 90% of U.S. wine exports, may not get a chance to demonstrate that offering a variety of reasonably priced wines would build a bigger market here.

Moreover, the provisions on wine suggest strongly that in crafting the agreement, the concept of free trade in some cases was subverted in the interest of big businesses aligned with the negotiating governments.

From the viewpoint of U.S. vintners, the success of the agreement is the reduction of import taxes in Canada--the most important foreign buyer of U.S. wines at about $35 million in annual sales.

Mexico, however, insisted on reducing its 20% tax on U.S. wines by just 2% a year, phasing out the tariff over a decade.

U.S. wine traders suspect that the high tariffs on their products were designed to protect not Mexico’s tiny domestic industry, but the big Spanish vintners, such as Pedro Dome, which dominate Mexican wine and brandy production, as well as importing.

In what some U.S. winemakers see as a Latin conspiracy, the agreement also does not provide comparable treatment for U.S. imports compared to imports from Chile. Chilean wine producers got much lower tariffs in the trade agreement that Chile and Mexico signed two years ago. The tax on Chilean wine was cut to 10% and will be eliminated by 1996, ensuring that Chilean wines will have a price advantage for years.

The NAFTA provisions have left U.S. winemakers fuming.

“It was bad enough to get a 10-year phase-in, but when you compare it to the deal the Chileans got, it was a slap in the face,” said Jim Clawson, international trade consultant to the San Francisco-based Wine Institute, the oldest and largest industry trade group.

Instead of encouraging cross-border trade, the proposed agreement “has discouraged U.S. wineries from entering the Mexican market, especially since Chilean wines will be coming into Mexico with a lower tariff,” said Christine De Loach, a co-owner of De Loach Vineyards in Sonoma County’s Russian River Valley, which began exporting to Mexico a year ago.

Industry representatives who advised the Mexican negotiators on NAFTA said they were not involved in the talks with Chile and could not explain why that country got a better deal. Mexico’s Commerce Ministry did not respond to repeated requests for interviews on the subject. Clawson attributed the difference in treatment to pressure on the Mexican government from Dome. Although Dome imports products from Europe that are subject to a 20% tariff, the bulk of its business is wine and brandy produced in Mexico that is not subject to an import tax. Dome has been an important player in agricultural reform programs, cooperating in the kind of technical and financial assistance to grape growers that government officials advocate. The company is estimated to buy about 85% of the grapes sold in Mexico.

Besides brandy, Dome produces most of Mexico’s economy wines. Clawson believes that Dome was afraid of competition from big U.S. companies such as the E & J Gallo Winery of Modesto, the largest in the world. Unlike the small Chilean wineries, Gallo has the marketing clout to compete with Dome.

Dome officials refused to comment.

Representatives of Mexican-owned wineries said they believe that easier access for imported wines would be good for the industry overall.

Rather than keeping U.S. wines out of Mexico, their main interest, they said, is gaining access to the U.S. market.

“If we think only about the Mexican market, we might as well close up shop,” said Camillo P. Magoni, winemaker at the two largest wineries here in Valle de Guadalupe, Mexico’s wine country 100 miles south of California. .

“California wineries have never paid attention to Mexico before,” said Tomas Fernandez, director of Monte Xanic, a 4-year-old winery here. “They were unhappy with the free trade agreement because their own market is bad. Still, Mexico is a market the size of San Diego. How important a market can that be for them?”

Wine sales within the United States have declined with the slowing of the domestic economy in recent years, and the U.S. industry has been looking for export opportunities.

Some Mexican winemakers said the real problem for the wine industry, both domestic and foreign, is the taste of the Mexican public.

Mexicans drink four bottles of brandy for every bottle of wine, according to the National Vintners’ Assn., which represents producers of both products. “Mexico is about the only country in the world where people mix brandy with soda, as if it were whiskey,” said Rafael Almada, managing director of the vintners’ organization. “Brandy highballs are the drink of the working class. Wine is a niche market.”

In Mexico, only the wealthy and the intellectuals drink wine, and the market is stagnant, Almada said. He said his organization believes that any expansion of imports would come at the expense of the domestic industry.

Almada pointed to the devastating impact on Mexican wineries when tariffs and regulations on wine imports began to be eased in 1986.

German jug wines poured into the country. Spanish and Chilean labels account for about half the shelf space devoted to wines in liquor stores in middle-class and upper-class neighborhoods.

Almada estimated that half of Mexico’s wineries have collapsed over the last 14 years. Other industry leaders put the figure even higher. The fatalities included Urbinon, Valle de Guadalupe’s oldest winery.

Under those conditions, said Almada, who advised the government in the trade negotiations, “I had to do what I could to protect my industry.”

Valle de Guadalupe winemakers, who have broken off from Almada’s organization to form a trade group that excludes brandy producers, said protection is not what they need, however.

“When people go to the supermarket and find 50 wines to choose from, they are going to start trying wines,” said vintner Fernandez. “That will be good for everybody except the brandy producers.”

U.S.-MEXICO WINE TRADE

U.S. wine sales to Mexico have grown steadily, but remain a fraction of the $146 million a year in U.S. wine exports worldwide. Mexican vintners are struggling to reverse a trend of shrinking exports to the United States. (in thousands of dollars.) Source: The Wine Institute.