A couple of news stories in the past month focused my attention on the potential impact of unleashing pent-up global demand for fine wine that is now impeded by high import taxes. Specifically, Hong Kong decided to cut its wine import duties in half and South Korea concluded free trade agreement negotiations with the U.S. which look likely to result in a complete elimination of its high wine import duties (see Korea Trade Agreement Moves Forward: Wine Industry to be a Major Beneficiary). As pricing is about supply and demand, sudden reductions in taxes could cause demand to rise in a world of relatively fixed supply of fine wine.
See the chart below for a quick overview of major Asian countries' wine import duties in comparison to the U.S. The basis of import duties and taxes varies by country, ranging from the value of the wine to volume and alcohol levels. The data below is based on a single case of wine valued at $1,200. While Hong Kong's and South Korea's dramatic future tariff reductions are impressive, their economies are relatively modest. The bubble size in the chart represents the relative GDP among the countries shown, and therefore the potential purchasing power which could be released to impact wine prices. The two countries combined represent less than 5% of the U.S.'s GDP so the planned wine import cuts are not going to redefine price levels on their own.
"What if" scenarios for China and Japan
- China - What's more interesting perhaps is China's high duty combined with its purchasing power (about 60% of U.S. GDP and growing faster). What if China were to cut its 49% duty to zero? Given the growing number of millionaires in China (now in the 300,000-400,000 range), you can bet a such a change would impact fine wine prices (see my other recent post, China's long-term impact on fine wine prices, and Selling wine to the affluent Chinese).
- Japan - Japan's fine wine market is already very strong and while a reduction of 15% is much less than 49%, one can imagine a more immediate impact given the far more established channels of selling fine wine into Japan.
Bottom line: The stage seems set for long term price rises for fine wine. Wine collectors need to keep in mind that the world of fine wine is a very global business in which trends or market discontinuities elsewhere will impact their wallets and/or investment approaches.
