THE FEDS WANT TO MAKE THE WINE MARKET MORE COMPETITIVE

-- USE THE COMMERCE CLAUSE AGGRESSIVELY TO ABOLISH STATE MONOPOLIES

by Andrew Chalk

[Submitted as part of the public comment process 8/15/2021]

On July 9th the Biden administration released an Executive Order instructing the Treasury and the two branches of US antitrust enforcement, the Justice Dept. and the Federal Trade Commission (FTC) to to submit a report within 120 days “assessing the current market structure and conditions of competition [for beer, wine, and spirits], including an assessment of any threats to competition and barriers to new entrants.” Furthermore, “The report is to include discussion of unlawful trade practices; patterns of consolidation in production, distribution, or retail markets; and ‘any unnecessary trade practice regulations of matters such as bottle sizes, permitting, or labeling that may unnecessarily inhibit competition.’”

THE EXTENT OF ALCOHOL SUPPLY CHAIN REGULATION IN AMERICA IS UNPRECEDENTED

I hope the administration is serious and I hope that these terms of reference do not exclude legislation to address uncompetitive market structures. The reason is that wine, and beer and spirits, are almost unique in the degree to which it is regulated. The origins of much of the harmful legislation is the way that prohibition was unravelled when the 18th amendment (Volstead Act) was repealed in 1933. Nobody had ever repealed prohibition before and that created a void into which the idea of the three-tier system (3TS) came into being. The 3TS saw the wine market as divided into three groups in each US state: producers, distributors, and consumers. The idea behind the 3TS was that producers could only sell to distributors, and consumers could only buy from distributors. It interposed distributors into every transaction involving wine whether it made economic sense or not. It also prevented many transactions from taking place. For example, if a consumer wanted a certain wine and it was not in the distributor’s ‘book’, that transaction did not take place. In short, it gave distributors legislatively protected monopolies.

How was such a pro-monopoly system legislatively approved? Because it was sold to state politicians as giving them an easy way to collect the lucrative tax revenues that were predicted from wine. Rather than having to collect taxes from millions of consumers or thousands of wineries, the states could collect from a handful of distributors.

The 3TS is so inefficient that many cracks in it have emerged that allow a limited Right to Ship Direct. For example, wineries can ship directly to consumers to some extent. The problem is that these steps are partial.

TREAT ALCOHOLIC BEVERAGES LIKE OTHER FOODSTUFFS

What is needed in the Internet era where ordering online is the norm, is that alcoholic beverages should be brought into the same pro-trade framework as other foodstuffs. Specifically, the administration should aggressively employ the Commerce Clause of the U.S. Constitution (Article 1, Section 8, Clause 3) to allow interstate trade in alcoholic beverages. This would not automatically free up intrastate trade, but it would be a significant force to do so. For example, faced with out-of-state suppliers, states would be incentivized to allow in-state suppliers to compete for the same business.

There are collateral benefits as well.

Easier industry access. It is a small step to see how the interstate Right To Ship Direct would open doors to minority producers and their customers who would no longer be forced to get on distributors books and pay the cost wedge of compulsory use of a distributor.

Of course, some states have already implemented the Right to Ship Direct in some form but many of them have limits. A clean interstate right would incentivize them to free up their in-state limits. I hope the administration uses this review to bring alcoholic beverage law up to date.