How the TPP opens new markets for Ontario wine

By Sarah Reid - Published on January 20, 2016
The winery at Palatine Hills
Palatine Hills Estate Winery's owner says increased access to the global market will help wineries.

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This article is the first in a partnership between TVO and the Munk School of Global Affairs at the University of Toronto that will feature the work of the school's global journalism fellows.

When Canada and the U.S. agreed to a landmark free trade deal nearly 30 years ago, John Neufeld worried that his 73-hectare vineyard was doomed. At the time, the farm supplied grapes to nearby wineries, which had little faith that their products could compete against better-known — and superior — California wines.

“The information we had at that time was that California, with the reduction [in tariffs], would just come in and take over the Ontario marketplace,” Neufeld recalls. He was so worried that he ripped out all of his vines in the late 1980s. For several years, the farm grew only peaches and other tree fruits.

He was so wrong. Not only does he grow grapes again, but his vineyard, now named Palatine Hills Estates Winery, won many awards for his own vintages.

As he expands his sales to Asia, Neufeld’s experience reflects the transformation of an entire industry — from producing mediocre wine and lobbying for government protection, to embracing free trade and aggressively expanding its horizons.

Two more substantial trade deals await ratification by Parliament — the Canada-Europe trade agreement, known as CETA, and the Trans-Pacific Partnership, involving 12 Pacific Rim countries. Even as the dairy and automotive sectors warn against the impending devastation caused by these deals, Neufeld’s story shows how trade liberalization can turn even the most mollycoddled businesses into winners.

Prior to the 1987 Canada-U.S. free trade agreement, Ontario’s wine industry enjoyed heavy protection. There were customs tariffs, hefty markups and handling fees on imported wines. The LCBO added a 65 per cent markup to foreign wines in the year before the deal was signed, according to a report by the Carleton University Centre for Trade Policy and Law.

Michael Hart, a trade expert who was part of the Canada-U.S. trade negotiations, says the Americans were unyielding in their demand for access to the Canadian wine market: “The United States made it crystal clear that some of the things that we wanted were just not going to happen unless there was a deal on alcoholic beverages.”

To soften the blow, federal and provincial governments paid Canadian grape growers almost $50 million to remove over 3,400 hectares of labrusca vines, which weren’t well suited to making quality wine, according to the Carleton University report. More than 300 growers, including Neufeld, left the industry.

But before long, Neufeld realized that, far from dying, the wine industry could flourish. Free trade forced him and other winegrowers to improve the quality of their products.

“We had to do research and development. We had to develop a high-end appellation and quality control system for our products,” says Dan Paszkowski, president and chief executive officer of the Canadian Vintners Association. “That took time and money and many, many years before we really captured that export potential.”

In 1989, a group of Ontario wineries founded the Vintners Quality Alliance to regulate the industry and ensure quality and rules of origin.

The industry grew at an average of 11 per cent per year between 1995 and 2004, a 2012 BMO report estimated. Neufeld re-planted his entire farm with vinifera grape vines, and began processing the grapes too. He bottled his first wine in 1998, and launched Palatine Hills Estates Winery in 2003.

Palatine Hills’ icewine won the 2003 Wine of the Year at the Ontario Wine Awards. The winery was named Canadian Icewine Producer of the Year in 2006. Most significantly, Palatine won gold and “best red wine” for its 2007 Proprietors Reserve Merlot at the 2012 Cuvée Awards (a top honour in the Ontario wine industry).

The value of shipments from Canadian wineries soared to $900 million in 2010 from under $300 million in 1992, according to BMO. The number of grape-based wineries in Canada has almost doubled over the past 10 years.

Palatine Hills expanded into Asia with four stores in Taiwan and plans for more on the way. Far from feeling threatened, Neufeld is upbeat about the Trans-Pacific Partnership.

“We’re supportive of [the TPP and the Canada-EU free trade deal]. They provide us access to an additional 1.3 billion consumers around the world,” Paszkowski says. “The TPP puts us on equal footing with Chile and Australia, which have trade agreements with Japan, and makes our products more competitive with those countries. That’s critical.”

Japan imposes a 15 per cent tariff on foreign wines, or up to 182 yen (about $2.25) per litre. Canada does not have a free trade deal with Japan, so Canadian wines could be as much as 15 per cent more expensive than comparable Australian or Chilean wines in Japan. This puts Canadians winemakers at a disadvantage.

Once the deal is implemented, Japanese tariffs on wines will be lifted for participating countries within seven years. Duties on wines will also be lifted in Vietnam, Malaysia, Australia and New Zealand under the TPP.

The trade deal also promises to improve regulatory cooperation on wine among TPP countries. Labelling requirements, for example, will be harmonized, reducing costs for winemakers.

Neufeld has his eye on foreign markets because the LCBO allows Palatine Hills to sell wine only through its outlets and a single store at the winery.

“The LCBO has expanded their Ontario wine shelf, but not to the extent that the Ontario industry has expanded,” he says. “So those of us in the industry that are producing fairly large volumes of wine are looking elsewhere, meaning China, Taiwan, the Philippines, and Japan.”

[Our presence in Asia is] not huge at this point in time, but we are growing it, and we are investing,” he says. “I have four stores in Taiwan that sell our wine and yet I can’t open those same four stores here in Ontario.”

Neufeld says he no longer fears foreign competition: “The long-term success of the industry is based on access to market and opportunities to market.”

Sarah Reid is a journalism fellow at the Munk School of Global Affairs at the University of Toronto. Photo courtesy Palatine Hills Estates.

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