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The New NAFTA – USMCA: Challenges and Opportunities for Growth of the BC Wine Industry

The New NAFTA – USMCA: Challenges and Opportunities for Growth of the BC Wine Industry

(A commentary by Nikita Gush, Articled Student and Dennis Ryan, Partner and Head of the Natural Resources Group, Doak Shirreff Lawyers LLP, Kelowna, BC © 2019)

A new NAFTA?

On November 30, 2018, the US, Canada, and Mexico signed a new North American free trade agreement called the United States Mexico and Canada Agreement (USMCA).  This agreement claims to have modernized its 25-year-old predecessor, “NAFTA”, which, amongst other things, will affect Canada’s wine industry.

In British Columbia, the wine industry makes up an important portion of Canada’s agricultural sector. There are approximately 271 licensed grape wineries, which contribute about $2.8 billion to the BC economy each year.

Since the signing of the USMCA, concern has been raised by political commentators on whether the free trade negotiations led to a fair outcome for the Canadian agricultural sector, including BC wineries.

Is the USMCA already in effect?

Implementation of the USMCA is an ongoing process. Over the next several months, each of Canada, the United States, and Mexico must ratify the tri-lateral treaty and create domestic legislation to implement its terms with an objective that the agreement will take effect on or about January 1, 2020.

The ratification process will face challenges. The US Congress has yet to debate the USCMA, and now that the Democrats control the House, it will be interesting to see how the ratification process will proceed given that the Democratic Party has expressed objections to parts of the USMCA. Likewise, Federal elections in Canada will occur this coming fall and may result in a new government that takes objection to parts of the deal. In Mexico, newly elected President Andrés Manuel López Obrador, who was sworn into office on December 1, 2018, has also expressed reservations about the agreement.

Until the ratification process is completed in each of the three countries, NAFTA remains in place.

How is the USMCA going to affect BC wineries?

The provisions of the USMCA and NAFTA do not differ in relation to wine. NAFTA permitted Canada to maintain the measures it already had in place in BC and Ontario at the time of the NAFTA negotiations. These measures allowed private industry wine store outlets in BC to stock and sell only BC wine. These provisions are maintained in the USMCA, and are located in Annex 3-C or the so-called ‘Wine Annex’.

In 2014, the BC Government allowed these British Columbia Wine Institute (BCWI) BC VQA wine store licenses that were in existence during the NAFTA negotiations to apply in grocery stores (on-shelf), in addition to private wine and liquor store outlets (store-in-store). This led to approximately 21 grocery stores in BC selling exclusively BC wine. It was at this point that the US lodged a World Trade Organization (WTO) complaint against Canada for unfair trade practices, which was supported by 13 third-party countries, including Mexico. The complaint was based on the accusation that Canada was contradicting the General Agreement on Tariffs and Trade (GATT) rules on non-discrimination by allowing BC to sell exclusively BC wine on grocery store shelves. The GATT is a legal agreement that has been ratified by a number of countries around the world to promote international trade and reduce trade barriers.

The United States’ WTO complaint against Canada was a barrier to USMCA negotiations. As a Canadian concession to advance the negotiations, BC agreed to amend its legislation that restricts the sale of only BC wines on grocery store shelves by November 1, 2019. Canada and the US formally completed these negotiations in a series of two ‘side letters’. Therefore, the real change facing BC wineries is not a result of the USMCA, but rather from the side letters exchanged between the US and Canada during the USMCA negotiations. If ratification proceeds in the anticipated timeline, this will mean that commencing this autumn, we may see the US (and potentially other countries) entering into agreements with certain BC grocery stores to sell their imported wine on-shelf.

Although this may seem to be a somewhat disappointing development for BC wineries, it may not result in a large change to the status quo. Given that there are only 21 grocery stores currently selling BC-exclusive wine (with licenses that have been grandfathered in via the Wine Annex to the USMCA), permitting the US (and other countries) to access other BC grocery stores to sell their wines on-shelf will likely not make a huge impact to the BC wine producers.

Miles Prodan, CEO of the BC Wine Institute (BCWI), explains that: “The BCWI maintains that the USMCA Wine Annex continues to recognize the provenance of our grandfathered BC-only industry licenses and continues to work with the federal and provincial governments on a solution that preserves the integrity of these farm-to-market licenses while allowing imports similar access”.

Similarly, in a Vancouver Sun article by Kevin Griffin on October 1, 2018, BC Trade Minister Bruce Ralston notably recognized that people who love BC wine are going to keep choosing it. Ralston stated that “People are aware of the variety and quality of BC wine. BC wine has come of age, [and] it’s a product that people want to buy and will choose.” Invariably, as one channel of access to BC wine is becoming slightly more limited, BC wineries may want to seek out opportunities to provide expanded access to their wines.

Free trade opportunities

With the USMCA’s implementation slated for January 1, 2020, BC wineries will be motivated to expanding their presence not only in the US market but also in Mexico.  Mexico only imported 3,108 L of Canadian wine in 2017, which is very low in comparison to the USA, which imported 422,542 L of Canadian wine that same year. As well, it is important not to forget Canada’s largest wine importer—China—which imported 1.3 million L of Canadian wine in 2017.  We understand, however, that much of the wine China imports may be dessert wines.

A reflection on the advantages of free trade may also cause wineries to reconsider how they purchase their equipment, processing, labeling, packaging and shipping supplies. With the USMCA reduction in tariffs on cross-border trade, it may be more cost-effective to import some of the materials and supplies that wineries depend upon to produce their wine.  Globally, Canada represents a growing wine market, which is an excellent opportunity for other countries to sell BC wineries the products they need to make their wine.

The lawyers at Doak Shirreff’s Natural Resources Group can work with BC wineries at all stages of their formation, expansion, development, marketing, sales, and cross-border challenges to help them grow their business.

 

Contact our lawyers today to gain further clarity. We have your best interests in mind and would be happy to help.