Academic journal article American University International Law Review

Regulatory Policy and Innovation in the Wine Industry: A Comparative Analysis of Old and New World Wine Regulations

Academic journal article American University International Law Review

Regulatory Policy and Innovation in the Wine Industry: A Comparative Analysis of Old and New World Wine Regulations

Article excerpt

Economists and politicians alike tie free trade concepts to the principles of Adam Smith. Yet they often forget that his economic model was rooted in the international trade of wine.1

I.introduction

Fermenting grapes into wine is an industry dating to ancient times. It is also an industry that has faced government regulation as far back as at least the Roman Empire. And though the process of viticulture has evolved to some degree, winemaking has largely remained centered in Old World countries in Europe, where winemaking originated. The 20th century gave birth to experimental wine production outside of Europe in the United States, Chile, and Australia, among others. Today, demand for New World wines is outpacing demand for Old World wines, leading producers to ask, what changed?

The growth of the New World wine sector has, in part, to do with opportunities created by the regulatory environment. Strict production and quality control standards allow Old World wine to maintain its quality and high price on world markets; however, regulations may also hold back Old World producers from innovative practices that drive market growth. Growth in sales and consumption of Old World wines has been flat for years. New World wine producers, armed with more flexibility in their regulatory environments, have had great success in attracting global customers looking for high-quality yet affordable and interesting wine options by using innovative production and marketing tactics not available to Old World producers. Growth in sales and consumption of New World wines has been surging.

The history of wine production in the Old World is one of competition, cycles of overproduction and shortage, and radical variations in quality. These factors imposed costs on producers that made sustainable growth difficult.2 Governments entered the fray in earnest in the 18th century to lay down regulations that would reduce transaction costs by establishing clear rules for the production of wine.3 These institutional rules underlie the development of a wine region yielding some of the highest quality wines in the world. However, these rules have also held back this region from innovation and adaptability to changing demands in international wine markets.

In this article, I explore whether strict regulatory policies in the production and sale of wine limit the responsiveness of the wine sector to changing market demand. To answer this question, I will perform a legal and public policy analysis of wine regulations, comparing Old World and New World rules and assessing their effects on the responsiveness of producers in each region. Using France as a representative of Old World producers, and Chile and the United States as representatives of New World producers, my study will survey the regulatory environments of each country in historical context. Then, using consumer survey data, I will assess the key determinants for wine selection in the largest market for consumption of wine-the United States. With that information, I will identify the key regulatory policies that may inhibit responsiveness to market demand.

II.BACKGROUND

The heart of my thesis is that government regulations meant to protect wine quality may limit opportunities to adapt to changing consumer preferences in the wine export market. More precisely, the stricter the regulation, the less opportunity firms have to respond to changes in consumer demand through innovative techniques in the production and marketing of their products. To test this thesis, I have selected three markets with vastly distinct regulatory environments- France, being a traditionally rigid regulatory environment; Chile, being a laissez faire regulatory environment; and the United States, falling in between the two. The first part of this analysis involves an explanation of the regulatory environments in the wine sector in each of those countries. This analysis will show the dramatic differences in wine laws and their raison d'etre. …

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