Saturday, January 7, 2012

Why are imported wines in Australia so expensive?

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

5% Duty
29% Wine Equalisation Tax
10% GST

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.


Paul Starr said...

I think you might want to revisit this after a bit of research. WET wasn't introduced as a protectionist measure (and isn't protectionist in any standard sense). You've missed mentioning that it is only some (small) Australian (let's ignore the NZ issue) wineries that are eligible for the WET rebate.

And WET's history has to do with the GST and the removal of previous wholesale sales tax/excise arrangements for alcohol. There was concern that, if previous alcohol taxes were removed in a standard way, and one lot of 10% GST added, wine would become comparatively cheaper than beer, which could contribute to increased consumption of higher-alcohol products.

The combination of WET + rebate arrangement (over alternative reforms such as a volumetric tax) was intended to balance concerns over tax changes leading to more boozy drinking with impacts on the Australian wine industry. Nothing to do with protection.

You might also have mentioned the size of the Australian market, such as for Chianti, compared to other export markets.

Red said...

Paul, thanks for the comments and information.

I can appreciate that the origins of the tax and the motives may not have been protectionist. The ultimate effect of the tax though is protectionist if it makes imported wine more expensive on a like for like basis.

I'm not sure why you say it is only some wineries that are eligible for the rebate. See below for the ATO's eligibility criteria

"To be eligible for the producer rebate, you must be the producer of that wine - that is, you must manufacture the wine from grapes, other fruit, vegetables or honey you produce or purchase, or provide the grapes, other fruit, vegetables or honey to a contract winemaker to be made into wine on your behalf."

The limit to the rebate is $500,000 (not a small amount of money), and in no way is limited to just small winemakers. Treasury Wine Estates, one of the largest producers in Australia, claims the rebate.

Moreover, the ATO's broad definition of producer means that wineries can structure things so as to claim multiple rebates. It's in no way limited to a small number of wineries, nor a small amount of money that is rebated, with the government paying out about $200 million a year.

Paul Starr said...

Too much shorthand in my previous post, I guess. What I was getting at was that it is only small producers (less than $1m wholesale) who end up eligible to have all their WET rebated. Yes, big players can claim some WET (and there are loopholes) but their scale of production is not the target of the WET rebate regime. The same argument applies to the high-volume NZ SB producers, who get not much more than a marginal benefit from the arrangement.

If you got rid of the WET rebate, I'd argue you'd see a lot less high-end, small-winery production in Australia. If you got rid of WET and the rebate, and don't have some control like a floor price or volumetric tax, you have a real risk of bulk wine prices crashing. That would have producer impacts, but also could see a worsening of impacts from excessive drinking, including in Indigenous communities, as wine (with a higher alcohol content) becomes significantly cheaper than beer (full-strength and light) as a delivery system for alcohol.

It's not an ideal scheme, but I'd continue to argue that it is the ongoing product of concerns about alcohol pricing in the Australian market and its consequences, rather than trade protectionism.

Duncan said...

I appreciate this succinct & clear outline of how our imported wines get to an inflated price. I just got back from an extended stay in the States & was mostly stunned at the price differences (between US - cheap as chips vs. Ozzie's gold standard pricing) for all imported wines. I had an inkling of why it might be such when I decided to move from NZ to Melbourne in 2009 & contacted Customs about bringing some of my wine cellar (US collected, mostly foreign stuff from 80's & 90's) over & they wrote me back to say that, for example, if I declared a value of $400 Aus, then I would pay $273 in tariffs & taxes! That is one mean Customs agency - NZ just waved me in with 200+ cases as they were convinced it was my personal effects/property.

And once a government gets a revenue stream, they are not going to let go unless a viable replacement stream is on offer. I am curious though if many other items in Australia fall prey to the same tax impacts? As you site the luxury car tax which makes many 'normal' cars in the US cost more than twice as much here, is it the same with other items like Levi jeans or books as they also seem ridiculously over priced.

Red said...

Appreciate all those points Paul, and I guess I've come at this issue from perhaps an atypical angle (and not delved into local issues as it is another topic altogether, and one that is regularly debated).
You visit a place like Piemonte and see fantastic Barolo for perhaps 35 Euro ($45), but by the time it gets here it is $100 or more, and while there are market and margin considerations, the largest part of this increase in price is tax (which includes duties along with the WET). That there is then no WET rebate anywhere along the chain for imported wine, creates an uneven playing field vs local wine. Interestingly, the fact that the WET rebate does include NZ producers, but not producers from other countries, only further serves to highlight this in my opinion.

On the local front, some sort of price floor/volumetric tax would appear to me to be a far better solution than the current set up (I've seen $1.60 bandied about as the possible tax on a litre of wine). It would seemingly -

- avoid too much cheap plonk
- give small, high end producers the chance to potentially increase their margins while reducing cost to end consumers
- reduce the cost/disadvantage of imported wines

Red said...

Thanks Duncan. Australian Customs are certainly a pain with bringing in wine, unless of course it's the generous 3 x 750ml bottles they let you bring in without charge!
Not sure about other areas, but certainly with books there is a ban in Australia with parallel imports which results in as you say, ridiculous prices on books as compared to other countries.

Teddy said...

Thanks for the piece, Red, though many of Paul's points are valid (credit to you both for the engaging and respectful discourse).

Nevertheless, it's interesting to see the effect of WET on import prices, potentially a protectionist outcome even if not the original intent.

Paul - if WET were to be abolished, I'd be reasonably confident in saying it would only be done if floor pricing and/or volumetric taxation (like with beer) were to be introduced.

A thought to entertain (though one I'm not yet committed to) is that abolishing WET (and replacing with a more rational tax structure) could lead some small producers to exit the market, while other high-end wineries may focus on innovative techniques, blends or focus on alternative varieties as a response to new prices and to ensure their place in the Australian wine market.

Also, there's a fair amount of research that suggests WET is actually a contributing factor to alcohol abuse - much of which has been done by the folks at Adelaide University's Wine Economics Centre. (However, their policy prescription also involves introducing volumetric taxation to correct this, rather than simply abolishing WET - simply abolishing WET would be worse without other policy prescriptions).

Oh, and Duncan - I'd say the reasons for not abolishing WET are more political than revenues-related; volumetric taxation would likely reap more revenue.

(I'm happy to dig up some of the recent papers I've been reading if you guys want :) )

Thanks for the discussion!

craig underhill said...

Excellent, thought provoking blog. I will declare an interest as an importer! WET does seem to be unfair but not just for imports but for domestic producers as well.

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