Sonoma County wineries keep close eye on trade negotiations

International trade is again at the forefront of Washington policymaking as it is one of the few issues that the Obama administration and the incoming GOP-controlled Congress are believed to be able to agree upon in the next two years.

The issue has enormous implications locally, especially for the North Coast’s multibillion-dollar wine industry. A bottle of port wine at the Pedroncelli Winery in Geyserville provides a perfect example of the repercussions that these high-stakes diplomatic negotiations can have, especially as American and European negotiators try to increase market access and beat back attempts at each other’s protectionism.

The family-owned Pedroncelli Winery has produced its port since 1990, now up to 800 cases. It uses four separate grape varietals - tinta madeira, tinta cao, touriga nacional, and souzao - from its own vineyards. Those types of grapes have been traditionally grown in Portugal for the dessert wine, as opposed to a more common fruit like zinfandel that is used by other vintners. That provides Pedroncelli port a greater cachet in the marketplace. A 2008 Four Grapes Port retails for $19 on its website.

“We had the opportunity to plant many things on our property … but we found that they (port varietals) grow beautifully on our property,” said Julie Pedroncelli St. John, vice president of marketing for Pedroncelli Winery. “It gives us a diversity in our wine selections.”

But the winery could be forced to strike “port” from its name if the Europeans get their way. In May, the European wine industry indicated that it wanted to add new restrictions to the landmark 2006 wine agreement between the United States and European Union, which allowed American vintners to continue using 16 semi-generic wine names - such as port, chablis and champagne - but only on their existing brands. It banned the use of those names on wine labels introduced after March 2006.

“In this framework, the EU wine sector should not settle for a conservative and defensive approach, but quite the opposite, adopt an offensive position in order to maintain - if not increase - its market shares and commercial outlets. We should look forward, not backwards,” Jean-Marie Barillère, president of the European Wine Companies Committee, said in a statement.

That tone got noticed in the U.S. industry, which wants to retain American vintners’ rights to continue using wine terms that some have placed on their labels for more than a century.

“It’s a nonstarter for us,” said Tom LaFaille, vice president and international trade counsel for the Wine Institute, the California industry’s main lobbying group. “There are U.S. wineries that go as far back as the 1800s that have been using these names. There have been millions of dollars (spent) in promoting the brands. … In some respects, the American wineries are doing much more than European producers to introduce these products to American consumers.”

An international debate

The debate is playing out as the Obama administration is in talks with 11 other countries in the Asia-Pacific region on the Trans-Pacific Partnership to lower trade barriers and establish new frameworks for labor, environmental and intellectual property agreements.” It’s also working on a related pact with the European Union called the Transatlantic Trade and Investment Partnership, though those negotiations are expected to be more contentious and on a slower pace.

The negotiations are incredibly complex. One former U.S. trade representative likened it to “three-dimensional chess.” Countries vie to ensure their favored industries are not shortchanged in the process. They range the gamut from automakers to dairy farms to ranchers to banks to technology companies.

At the same time, they also want their citizens to take advantage of lower-cost exports. They are carried out under secrecy, and under suspicion of labor and environmental groups that argue the lack of transparency aids the powerful over the people.

The wine industry is part of this process. On a global scale, Europe is the clear leader as it produces 60 percent of the world’s wine. Overall, 7.1 billion gallons were produced in 2012, according to the Congressional Research Service (CRS).

The United States is the second-largest region with about 10 percent of global production, with California making about 85 percent of the American output.

The fight over the American wine market is integral to the wrangling. The U.S. is the largest importer of wines in the world, accounting for 25 percent of global imports at $5.2 billion, according to CRS.

Last year, the EU shipped ?$3.6 billion in wine to the United States, CRS found, while American wine exports to Europe were only $600 million, leading to a massive trade deficit. That occurred despite a lower per-capita consumption in the United States.

Against this backdrop, lobbying is taking place. For example, the Comite Interprofessionnel du Vin de Champagne, a trade group representing French champagne producers, has hired Akin Gump Strauss Hauer & Feld to lobby for rules to protect the use of the term “champagne.” The high-powered law firm has been paid $100,000 this year to lobby Congress and the administration, according to the Center for Responsive Politics.

The European campaign

But it’s an uphill fight, especially with people like Gary Heck at the forefront. Heck, owner of F. Korbel & Bros. Inc. in Guerneville, is dismissive of the European campaign, noting his company has produced “California champagne” since 1882, has identified California as the source of its sparkling wines since 1915 and on its labels since 1937. In 1997, champagne was added to the semi-generics listing of the IRS tax code, he noted.

“I take them very seriously. They are trying to put a big threat on us,” Heck said. Korbel makes 1.3 million cases annually, with only about 5 percent for export. In those foreign countries, Korbel complies with their respective laws if it requires a “sparkling wine” label.

Korbel argues that it adheres to production measures that originated in the Champagne region of France, but they are not unique to that specific region.

Moreover, Heck contends that the “champagne” name has become so ubiquitous among American consumers that any change would ultimately end in confusion and not be well-received. “I don’t know any celebration where they say ‘let’s go toast sparking wine,’” Heck said.

Heck has served as a director for the Wine Institute, which is a key player in the debate. The institute’s directors also come from large wineries such as E&J Gallo Winery, Constellation Brands Inc. and Bronco Wine Co., and has some smaller wineries as its district directors. The institute and its employees gave $188,686 during the 2014 election cycle and has spent $260,000 on lobbying so far this year, according to the Center for Responsive Politics.

But not all domestic wineries share its view on the semi-generic issue and region labeling. Napa Valley Vintners holds a view more similar to the Europeans, especially as its membership is mostly family-owned and makes fewer than 10,000 cases annually. It believes that a wine label should reflect where the grapes actually come from, and that accordingly semi-generic names should be eventually phased out.

The group has taken its position after seeing its Napa label ripped off globally, from poorly constructed logos on a Chinese wine bottle to a Clos du Napa that was actually from the United Kingdom. In 2007, Napa Valley became the first foreign product to receive geographical protection status from the EU due to work from the trade group.

“Wine is the ultimate product of place,” said Rex Stults, industry relations director for Napa Valley Vintners. “Our government is really looking through the rear-view mirror and not through the windshield.”

The Napa vintners have helped form the American Origin Products Association to help lobby for their cause throughout all sorts of industries, such as the Maine Lobstermen’s Association, the Idaho Potato Commission and the Ginseng Board of Wisconsin. It’s playing for the long game, Stults said, especially as more wine regions in Oregon and Washington grow in popularity. “I’m optimistic more and more wine regions are paying attention to this,” Stults said.

The Obama administration is aware of the industry split, especially when U.S. Trade Representative Michael Froman met with winemakers in Napa last year with Rep. Mike Thompson, D-St. Helena.

Thompson contends that the administration should be able to move forward in protecting local wine names such as Napa, Sonoma, Mendocino and Lake counties, while also preserving gains made in the 2006 accord.

“I think there is a big difference in (wine) style and location,” Thompson said.

The Wine Institute is focusing on the Pacific trade negotiations - which does not include China, but does include Japan, Chile and Canada - to ensure that it includes text recognizing the 2006 agreement. The EU has struck trade deals with South Korea and Central American and Andean countries that LaFaille contends has put U.S. wineries at a disadvantage in use of geographic regions and descriptive terms, such as limiting the use of “chateau” when it’s not related to geography and grape varietals such as prosecco.

Wanting to play offense

Another goal is to lower trade barriers such as tariffs, especially for Japan - the third-largest market for American wine last year - Vietnam and Malaysia. “If we can get tariffs phased out ... that’s going to have the biggest impact on the future of California wine exports,” LaFaille said.

The U.S. industry ultimately wants to play offense with Europeans, singling out subsidies to European winemakers which are estimated at $1.5 billion by critics.

The EU is phasing out export subsidies, but the Wine Institute contends direct payments still exist to vintners and grape growers.

But subsidies can cut both ways. For instance, U.S. Sen. Tom Coburn, R-Okla., wrote to Agriculture Secretary Tom Vilsack last year bemoaning taxpayer subsidies for the U.S. wine industry, such as the more than $300,000 spent on the Mackinaw Trail Winery in Michigan through a specialty crop grant block program administered by the U.S. Department of Agriculture.

“So, despite the aforementioned dire predictions about how (budget) sequestration will impact USDA’s ability to fulfill its core missions, the department has been spending hundreds of thousands of dollars subsidizing wine, wine trails and wine festivals and other projects around the country,” Coburn wrote.

In Geyserville, Pedroncelli St. John said she will keep a watchful eye on the far-flung developments.

“The EU is very protectionist for their own wineries,” she said. “The U.S. should be just as protective for their own wineries.”

You can reach Staff Writer Bill Swindell at 521-5223 or bill.swindell@pressdemocrat.com. On Twitter @BillSwindell.