The Fall and Rise of the British Wine Market

People are always surprised when I tell them that Great Britain is the most important import wine market in the world. How is this possible? Britain is so much smaller than the U.S. and the British are known to prefer beer and spirits to wine. How can they be an important wine market?

One part of the answer is that most countries that consume a lot of wine actually produce a lot, too, and so are not necessarily large net importers. This is obviously true of France, Italy and Spain and it's even true of the United States. Countries that consume in large quantities but aren't also major producers are rare. Britain's wine production until recently has been tiny, so most wine is imported wine and that makes their market very important. British wine production is creeping up now, however, driven by global climate change. Rising temperatures are making it possible to produce good and even exceptional wines in Britain. It is said that some British sparkling wines already rival the best of Champagne.

A second piece of the puzzle was revealed to me recently in an excellent book by George Mason economics professor John V.C. Nye called War, Wine, and Taxes: The Political Economy of Anglo-French Trade, 1689-1900 (Princeton University Press, 2007). Professor Nye deals with many interesting topics in this book; I'm going to focus on the wine story here and not try to cover everything.

Britain was not always a beer and spirits culture. Wine was cheap and plentiful in Britain in the middle ages and Britain did in fact have its own vast vineyards for 300 years starting in 1152 because Bordeaux was British territory! The loss of those vineyards and then war with France caused Britain to turn away from French wines to those from Spain and Portugal and then, finally, from wine generally.

Faced with the need to generate war revenue, Britain imposed tariffs on wine imports. Significally, these were not excise tariffs (10% or 20% of value), but specific tariffs (x number of pence per bottle or gallon). Excise tariffs would have had an equal proportionate impact on wines of all prices, but specific tariffs introduced a bias against cheap wine. Suppose that the tariff is $10 per bottle, for example. The effect on a $100 bottle of imported wine is relatively small -- the price rises by 10% and demand probably declines somewhat. The impact on a $5 bottle of wine is enormous, however. Its relative price rises prohibitively. Who will pay $15 for a $5 bottle of wine? Its market evaporates.

(Note: Transportation costs , which are more or less the same regardless of price, have something of this same effect. This helps explain why that cheap but lovely bottle of local wine you enjoyed in Provence never shows up on your grocers' shelves here in the U.S.. By the time the transportation costs are paid it would no longer be cheap and you might not find it quite so lovely.)

The British drinks market was thus split in two. Elites continued to drink and collect fine red Bordeaux wines that they called "claret." The masses switched from wine to now relatively less expensive beer. And Britain acquired its reputation as a beer drinking nation.

Professor Nye argues that British brewers were able to take advantage of technological innovations that allowed for large economies of scale in beer production. Once they had a near monopoly on the British drinks market, they could build huge factories to satisfy the captive demand at low production costs.

An interesting "invisible handshake" arrangement evolved, according to Nye, between the brewers and the revenue-hungry British state. The brewers permitted themselves to by taxed at fairly high rates in return for tariff protection from wine imports, which gave them a large captive market. The economies of scale in brewing were so significant as to make it profitable both for the brewers and for the taxman -- so long as cheap wine was kept away.

Britain's entry in to the Common Market combined with Margaret Thatcher's later market reforms broke up this nice arrangement and established an environment where British wine demand could return. Britain was required to "harmonize" its wine tariffs with European partners, which removed the bias against popularly priced wines. And the market reforms allowed wine to be sold more widely and competitively, especially through supermarket chains. With wine available and at good prices, Britain's thirst for the vine returned.

Thus did Britain, once the most important export wine market in the world, become so again because of the cost of war, the nature of specific tariffs, the economics of brewing, Britain's entry into the Common Market and Mrs. Thatcher's market reforms.