On July 27, the Minister of Small Business, Export Promotion and International Trade, Mary Ng, issued a sobering blow to Canadian wineries and their patrons. After a World Trade Organization (WTO) challenge against Canada from Australia claiming “discriminatory measures,” Ms. Mary Ng announced that the two countries had come to a (partial) agreement that will see Canada repeal its excise tax exemption on domestic wines effective June 30, 2022. The announcement could spell the end of the domestic advantage for Canadian wine producers over their foreign competitors, and – unfortunately, for some reading this – a potential increase in the cost of domestic wines.
Background:
The Australian challenge came on January 12, 2018 in a request for consultations with Canada concerning measures maintained by its government and the provinces of British Columbia, Ontario, Quebec, and Nova Scotia governing the sale of wine (DS537: Canada—Measures Governing the Sale of Wine). Of particular issue in the request were a set of policies and practices the Australian government deemed to be inconsistent with the General Agreement on Tariffs and Trade (GATT), and that ultimately disadvantaged Australian wine exporters in Canada.
Eager requests to join consultations from Argentina, Chile, the European Union, New Zealand and the United States were also accepted by Canada. While the Panel and Appellate Body proceedings that followed offer a display of the intricacies of bureaucratic procedure and negotiations, what remains important for this discussion is the outcome: a (partial) agreement between Canada and Australia calling for the former country’s government to repeal the federal excise duty exemption on wine as set out in subsection 135(2) of the Excise Act, 2001 by June 2022.
Outcome(s):
Legal jargon aside, the (partial) agreement will effectively see Canada remove a tax exemption on Canadian wines that is noted as one of – if not the – reason the domestic industry has thrived in recent years. Up until now, the exemption, which shields 100-percent-Canadian-made bottles of wine from the federal excise duty, has stood as a notable advantage for domestic wineries vis-à-vis their foreign competitors, and has helped significantly with the expansion of the industry. A statement issued this month by Wine Growers Canada (WGC) claims that, between 2006 and 2018, the excise exemption supported “investment in more than 400 new wineries and 300 winery modernizations.”
But the inevitable misfortune facing Canadian wineries as a result of the (partial) agreement – a return to the industry of old where foreign and domestic bottles are taxed the same – may have just spilled over onto their loyal customer base. With reports estimating that Canadian producers will be subject to pay an additional tax in the range of 50 cents per bottle (depending on alcoholic content), it is likely that domestic wineries will be quick to offload some of that burden.
Given the limited possibilities facing Canadian producers, it is quite possible that ardent support-local-buy-local wine drinkers will have to shoulder an increase in the cost of their favourite bottle. In an industry where the ability to freely sample from a wide variety of bottles is integral to the culture of consumption, the concern surrounding an increase in the cost of domestic wines cannot be overstated.
On the other hand, it is also quite possible that a per-bottle-increase in the price of domestic wine will have little to no effect on consumer behaviour. Canadians already spend more than wine drinkers in many other countries due in part to the government’s “sin taxes” (a tax issued to curb the consumption of alcohol, tobacco, and cannabis) and various provincially-imposed taxes and markups on alcohol. Despite this, the World Health Organization reported in 2017 that Canadians still drink more alcohol per capita than the worldwide average.
Domestic producers and their sympathizers will nevertheless be quick point out that Canadian wineries have been dealt a losing hand. As one commentator points out, our national wine producers are being faced with only two real options. The first, as discussed above, to pass along the cost to consumers (an almost sure bet to undermine competitiveness). Or, alternatively, Canadian producers could absorb the cost (a strategy that will surely impact their bottom line). In short: a lose-lose scenario, both for producers of Canadian wine and – in the event that domestic bottles become more expensive – the consumers.
The Minister of Small Business, Export Promotion and International Trade will have us believe that the (partial) agreement is about more than a potential increase on production/consumption costs. In her recent statement, Ms. Mary Ng asserted that “Canada’s objective throughout this process has been to ensure a competitive Canadian wine industry.” Moreover, that the (partial) agreement displays “Canada’s strong commitment to the rules-based international trading system,” which she describes as being “incredibly important” for Canadian businesses during these especially trying times.
This trademark reassurance – a tone that has come to characterize the Trudeau government’s reign – and Ms. Mary Ng’s idea of what is “incredibly important” do not seem to be sitting well with the WGC. Citing the excise tax burden as a palpable threat to the profitability and ultimate survival of wineries across the country, the WGC has called for the government to prove its loyalty to the industry with the establishment of an “excise exemption replacement program.” The statement from Global Affairs Canada announcing the (partial) agreement assured Canadians that the government is “committed to supporting [the wine] sector, creating good jobs for Canadians and promoting the sale of high-quality products.” While the national industry association claims that the Finance Minister, Bill Morneau, is prepared to offer support in managing the impacts of the trade agreement and removing uncertainties, there is no way of knowing if any suitable (trade-legal) programs are actually in the pipeline.
Speaking in the House of Commons in April, the MP for Niagara Falls (one of Ontario’s premier grape-growing and winemaking regions), Tony Baldinelli, warned the federal government of the potential impact the (partial) agreement could have on the Canadian industry: “[Australia’s] challenge was a major threat to our domestic wine industry before COVID-19. It is an even bigger threat now as the impacts against our wine industry could be compounded if a ruling is made this summer in Australia’s favour. If that happens, our Canadian wine industry will be devastated. More than 700 wineries and 9,000 Canadian jobs are at stake.”
With the move set to come in the next two years, plenty of uncertainties still surround the partial settlement of the trade dispute between Australia and Canada. It is nonetheless expected that wine producers will continue to ramp up lobbying with the hope of inspiring a new program that is both compliant with trade agreements and that supports the domestic wine industry. As it attempts to balance the interests of the different stakeholders involved, it will be critical for the Canadian government not to let tensions ferment with either its foreign trade partners, domestic businesses, or Canadian patrons.
There will be plenty of w(h)ining, of course, but such is life – both in the vineyard and the political arena.