For a couple of years now the Australian dollar has more or less been at parity with the USD. As it relates to the Euro, it means we can buy products from Europe with the same level of purchasing power as the American consumer. As I’m writing this article $1 AUD buys 0.80 Euro, and $1USD buys 0.79 Euro. That makes it very easy to compare the costs of imported European wine in both Australia and the US, and as such I am consistently amazed and disheartened to see what a difference there is in what an American pays for a Barolo, Bordeaux, or Burgundy as compared to what we pay. Below are some examples with more or less average prices in each country -
I’ve tried to pick a reasonably random selection of European wines. Different countries, regions, and producers. I’m sure there can be argument over whether the price I have for each wine is truly the average in each country but they would be arguments about $5 here, maybe $10 there. What the above charts shows is a consistently more expensive price for the Australian consumer. What explains this difference? In a word, tax. On an imported wine in Australia there are the following taxes
29% Wine Equalisation Tax
Apparently occasionally there is another 5% from customs for “transport and insurance”. I can’t profess to know too much about US taxes, and there may be some non-tax related factors at play, but it is quite obvious when looking at the chart that taxes are the main difference in the cost of European wines in Australia as compared to the US.
At 29%, the main issue is the Wine Equalisation Tax (WET). It’s a controversial tax even in terms of its effect on local wine, but when it comes to imports it is ultimately a protectionist tax that makes imports more expensive relative to local wine. Local wines are subject to the 29% WET tax, but local producers are also entitled to a rebate of 29% on the wholesale value of their wine sales. An imported wine just has the 29% tax applied, with no rebate. The ultimate effect is that local wines are cheaper than imports on a like for like basis. (As an aside, at a local level, this is also an example of wonderful bureaucratic waste and tax inefficiency. We’ll tax your product at 29%, have that money cycled through a bureaucracy with all the embedded costs that come with that, and then we’ll basically give you that money back to you as a rebate.)
As with any protectionism it’s ultimately counterproductive and wasteful in the long term. Australia has become a prosperous nation over the past 3 decades in large part because of our reduction in tarrifs. Australia has among the lowest level of tarrifs and protectionism of any OECD country. Unfortunately some patches still exist. One ridiculous example is the luxury car tax, which sees a 33% impost on top of any imported car worth about $55,000 or more. Another is the WET.
People will talk about supporting local industry, but the wine industry shouldn’t be protected. It should survive and thrive on its own merits.
The quality and character of a segment of Australian wine at present is fantastic. However, there is still plenty of uninspiring gear out there. Greater competition from imports would in fact only be a good thing for even further improving the quality of wine we produce. Imagine a world without this irrational WET tax. The imported wines we drink would be significantly cheaper. Burgundy, Bordeaux, and Barolo all significantly cheaper. If I’m an Australian winemaker producing a Cabernet, Pinot, or Nebbiolo, in order to compete with these imports, I’m going to have to ensure I have a compelling story, compelling wine, or ideally both. Uninspiring wine is more likely to be squeezed out.
I appreciate that there are real people at the end of this equation. Wonderful, passionate wine people, who make great wine, and who are struggling in this time of oversupply and a strong Australian dollar. The rebate might be the only thing currently keeping them afloat. However, coming back to my earlier point about the reduction in protectionism in Australia over the past few decades, individuals would have suffered with each industry where tariff cuts have occured. And yet the long-term result has been a massive positive for this country. I see it as being no different in the long term for Australian wine. Moreover, in 2012, there is a quality, uniqueness, and confidence with Australian wine that should not require government subsidy or protection.
And on the other side of that coin, many importers are doing a wonderful job in bringing in some fantastic and unique wines. Wines that provides both a reference point and a point of difference. At the end of the day, all anyone should ever ask for is a level playing field, and as such we should be paying a lot less for imported wine.
* Postscript: To perhaps clarify my position further as to what the alternative might be to WET, I believe that if there has to be a tax of this sort then some kind of volumetric tax would be a far better set up for both local producers and imports. I've touched on this in the comments section, but it is worth another entire piece in itself.