Commentary: The U.S. should stop subsidizing bulk wine imports

By Stuart Spencer

It’s a difficult time for many California winegrape growers. During the past couple years, prices have plummeted, and wineries have allowed contracts with growers to expire. This year, many of the state’s uncontracted grapes were left to rot on the vines.

A downturn in wine consumption is partly to blame. But weak demand is not the only problem. During the past two decades, imported bulk wine has flooded the U.S. market and driven down demand for California-grown wines and grapes.

Here in Lodi, I can walk into my local grocery store and see bottles of imported wine sitting on shelves while unharvested grapes hang on vines less than a mile away.

In the store, the imports can be hard to identify. That’s because imported bulk wine is blended with homegrown wine, and as long as the imported wine makes up less than 25% of the blend, it can be labeled “American.” Consumers may inadvertently purchase these wines believing they are supporting California farmers.

The real tragedy is that the U.S. government incentivizes these imports. Since 2004, a program called “duty drawback” has subsidized bulk wine imports by refunding wineries for up to 99% of the duties and alcohol taxes paid on the imports. To qualify for the refunds, the wineries must export the same quantity of “interchangeable” bulk wine within five years.

The terms of the program give participating wineries tremendous latitude. “Interchangeable” wine is broadly defined as any wine that is the same color and within 50% of the price point. Furthermore, because wineries are given five years to find matching exports, any emerging shortages of California-grown grapes are quickly extinguished by bulk wine sourced from overseas.

The adoption of duty drawback led to an explosion of bulk imports from virtually zero in 2003 to nearly 400,000 tons in 2022. To put that in perspective, in 2022, California growers harvested 3.35 million tons of winegrapes, meaning the imports totaled close to 12% of the state’s production.

Meanwhile, during the past decade, data on California’s purchased grape crush, which does not include winery-owned acreage, shows that the rolling five-year average has declined by 535,000 tons, or about 15%.

This outsourcing of winegrapes is being aided by duty drawback.

The imported bulk wine ends up on American store shelves virtually tax-free, giving it a “substantial tax advantage over domestically produced wine,” according to U.S. Customs and Border Protection, the agency that manages the program. The tax break helps large importing wineries drive down prices, hurting small local wineries that do not have the economies of scale to conduct import-export business and must pay alcohol taxes on their domestically produced wine.

From 2006 to 2010, seven large wineries accounted for 80% of the bulk wine exported from California, according to the Gomberg Fredrikson Report. From 2018 to 2022, after a decade of duty drawback had reshaped the market, those seven wineries accounted for 95% of bulk wine exports, meaning the share of exports shipped by other wineries had shrunk from 20% to just 5%.

Duty drawback has done far more to stimulate imports than exports. In a 2018 review of the program, CBP found that the volume of bulk wine imported by the U.S. grew by 875% between 2004 and 2016. During the same period, exports increased by less than 6%.

The agency concluded that the “economic effects of the practice do not support the view that it is an effective or efficient export promotion measure.” The downstream damage to the domestic grape market far outweighs the benefits.

Later that year, CBP ended the program, but it was reimposed in 2021 after groups representing the beverage industry sued and a court ruled that CBP did not have the authority to halt the program on its own. Only Congress could do that.

Today, millions of gallons of bulk wine continue to pour in from overseas while California winegrapes go unharvested and rural farming communities struggle.

Duty drawback, as it is being implemented with wine, is an anti-local trade policy that has significantly damaged the California winegrape market. This destructive policy subsidizes the state’s largest wineries to replace California-grown grapes with cheap imports.

The program also allows importers to circumvent the environmental and social regulations required on California farms by importing wine from countries that do not have similarly stringent standards. And it increases carbon emissions by encouraging the shipment of tens of thousands of containers across the world in lieu of local grape purchases.

It’s time for Congress to fix this mess and support California farmers.

(Stuart Spencer is the executive director of the Lodi Winegrape Commission. He may be contacted at stuart@lodiwine.com.)