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A leader in an emerging new international market:

The determinants of French wine exports, 1848-1938

María

-Isabel Ayuda

Universidad de Zaragoza

Hugo Ferrer

-Pérez

Universidad CEU-San Pablo

Vicente Pinilla

Universidad de Zaragoza and Instituto

Agroalimentario de Aragón (IA2)

Acknowledgments: This study has received financial support from Spain's Ministry of Science and

Innovation, projects ECO2015

-65582-P and ECO2016-74940-P, from the Government of Aragon, through the Groups S40_17R and S55_17R, and from the European Regional Development Fund. This study has

also been possible thanks to an academic stay in the Ecole de Hautes Etudes en Sciences Sociales (Paris) by

the third author. The authors wish to thank Gérard Beaur, Domingo Gallego, Graham Harding, Alfonso

Herranz, Miguel Martín-Retortillo, Giulia Meloni, Gilles Postel-Vinay, Marcela Sabaté, Javier Silvestre,

James Simpson and participants at the American Association of Wine Economists Conference held in

Bordeaux (2016

), the workshop 'Crises et Changements dans les Campagnes Européennes' of the Ecole d es H au t e s E t u d es en S ci e n ce s S o ci al es P ar i s 2 0 1 7 ), the Economic History Seminar of the University of

Zaragoza (2018) and the workshop 'Wine Globalization: Past and Prospective' held in Adelaide (2018) for

their help and advice. We also thank the editors and reviewers for their comments and suggestions.The usual disclaimers apply. Corresponding author: Vicente Pinilla (vpinilla@unizar.es)

Universidad de Zaragoza, Department of Economic Analysis, Faculty of Economics and Business Studies, Gran Vía 4,

50005 Zaragoza, Spain.

E-mail: mayuda@unizar.es ‡

Universidad CEU-San Pablo, Department of Applied Mathematics and Statistics, School of Economics and Business,

Julian Romea 23, 28003 Madrid, Spain. E-mail: hugo.ferrerperez@ceu.es Universidad de Zaragoza and Instituto Agroalimentario de Aragón

IA2- (Universidad de Zaragoza-CITA),

Department of Applied Economics, Faculty of Economics and Business Studies, Gran Vía 4, 50005 Zaragoza, Spain.

E-mail: vpinilla@unizar.es

Abstract: Our objective is to study in depth the performance of France in the new international wine market that began to take shape from the middle of the nineteenth century. We analyse the main

determinants of its exporting success for ordinary and high quality wine using a gravity model for both

types of wine. The article shows how France lost foreign markets in the ordinary wine segment, due to its

problems to maintain its exports owing to the decrease in production caused by the phylloxera plague and

the growing competition from more producers who were more efficient in these types of wines. However,

in the high quality wine market, the French exporters enjoyed considerable success, increasing their exports

thanks to their efforts to offer a product that was highly valued abroad and the use of modern marketing and

sales techniques. The exports benefited from the fall in transport costs and French colonial expansion.

However, the exports of both products suffered the strong impact of a series of major events, such as the

First World War, the Russian Revolution, the Prohibition in the United States and the Great Depression.

Our case study of wine shows that the collapse of the first globalisation was not the same for all products.

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I. Introduction

The first globalisation was marked by the international integration of the goods markets and a rise in trade. The latter was due to outward shifts in both the import demand and export supply curves, mostly produced by industrialisation, the liberalisation of trade, mainly through the signing of bilateral trade agreements, and the reduction in sea and land transport costs as well as other trade costs. 1

When new international markets

emerge and trade increases it is interesting to study how the countries involved compete to obtain advantageous positions. Obviously, the initial conditions are not the same for all parties. The most dynamic players in international trade during the period preceding the first globalisation enjoyed certain advantages and benefited from the strong growth that they had been experiencing since the mid nineteenth century. Nevertheless, the first wave of globalisation gave rise to many opportunities. We know that Great Britain became the absolute leader in the trade of textiles thanks to its technological advantage, although its previous favourable position in this market also contributed to securing its leadership. On the other hand, in the case of many agricultural products, the biggest winners were those countries or territories which, until the nineteenth century, were not particularly prominent in the trade of these products or did not participate at all , such as the new settler countries. 2 Therefore, it is crucial to analyse the intense competition that broke out in the new international markets and to explain the causes that determined the success or failure of the different participants in these emerging markets. Agricultural products represented a highly important part of international trade in the first globalisation. In fact, they accounted for approximately 40% of total trade until the First World War. 3 It is therefore essential to study these products in order to understand the dynamics of economic integration during this period. The international wine market has been analysed from several different perspectives. 4 However, to the best of our knowledge, there are no studies that 1 See Jacks, '19th century commodity market'; Jacks, Meissner and Novy, 'Trade booms'; Mohammed and Williamson, 'Freight Rates'; Findlay and O'Rourke, Power and Plenty; Harley, 'Late nineteenth century transportation'; Pinilla and Ayuda, 'Taki ng Advantage'. 2 Pinilla and Rayes, 'How Argentina'; Anderson, 'Agricultural Development in Australia' 3 Federico and Tena-Junguito, 'World Trade'; Lewis, 'Rate of Growth'; Aparicio et al., 'Europe'. 4

See, for example, Pinilla and Ayuda, 'International Wine Market'; idem, 'Political Economy'; Pinilla and

Serrano, 'Agricultural and Food Trade'; Simpson,

Creating Wine, 'Selling to reluctant drinkers'; Anderson and Pinilla, Wine Globalization. 3 specifically analyse the role of France, the most relevant country in terms of the trade of wine, within the international market from a quantitative point of view based on an econometric ana lysis of the determinants of the evolution of its exports. Within this context, the objective of this article is to study in depth the performance of France in this market, analysing the principal determinants of its exporting success. This country was the most important in the wine market , as, since its expansion, it maintained a leadership position which it subsequently consolidated and still holds today. To do this, using French foreign trade statistics, we will quantify and analyse the evolution of its exports. We will also use a gravity model approach to attempt to establish the key variables that explain this evolution. Our time frame begins at the onset of the first globalisation, in 1848, the first year for which data disaggregated in terms of quality and export destinations are available and ends in 1938, just before the Second World War.

Our results reveal

that during the first decades of the first globalisation, French exports grew rapidly but the phylloxera plague forced the French wine export sector to refocus on high-quality wines. In fact, there were two segmented markets governed by different forces: the high quality and the ordinary wine markets. The exports of low quality wine were affected by the fluctuations in French production, mainly during the phylloxera plague, which enabled other countries to seize a part of this market segment. Furthermore, the reduction in trade costs benefited French exports which faced a major obstacle to their continued growth in the low quality segment: wine had not become a product of mass consumption outside of the traditional consumer nations other than by its emigrants in the new world or its expatriates in the colonies.

However, foreign demand

boosted the growth of quality wine exports.

Finally, a series of external shocks led to a

fall and significant fluctuations in exports of both types of wine during the interwar period . These included the First World War, the establishment of the new Soviet State, the Prohibition in the United States or the Depression of the 1930s.

After this introduction,

Section 2 explains how the international wine market was integrated in the first wave of globalisation. The article continues with a section that explains the evolution of French wine exports. Section 4 analyses the diverging trends of French exports of quality wines and ordinary wines. Subsequently, we will explain the econometric model considered and the characteristics and sources of the data set used. 4 Next, we will present the results obtained before drawing the main conclusions in the final section.

II. The integration of the wine market

Wine is far from being a homogeneous product. Its heterogeneity is precisely one of its principal features. There are many different types of wine depending not only on colour or alcoholic strength but also on the enormous variety of vines that exist. 5

As well

as being an industrial process, the results obtained are also very diverse. In the first globalisation, like today, this heterogeneity of the product was highly important. 6

Low quality wine was

fully integrated into the daily diet of the population of the countries on the northern coasts of the Mediterranean, particularly in the west and of their emigrants who had settled in other continents. In countries such as France, Italy, Spain or Portugal it was by far the most consumed alcoholic beverage. 7

In non-producing western

countries, wine was not consumed regularly by wide segments of the population until much after the Second World War. Therefore, increases in income did not translate into increases in consumption, contrary to what occurred with other Mediterranean horticultural products. 8 Therefore, the expansion of wine exports was restricted by the limited progress in the globalisation of its consumption.

An essential factor is the cultural

traditions of different countries with respect to the consumption of other alcoholic drinks and their logical preference for them when the trade of wine was still insignificant. This cultural tradition can be explained by the specialisation of each country in beverages that could be produced at a lower cost. Furthermore, according to contemporary authors, the price of ordinary wine was much higher in non -producing countries than beverages with which it competed, such as beer or spirits, which may also have limited it s expansion. 9 Alcoholic drinks, such as beer or spirits, benefited from reduced production costs thanks to technological innovations derived from the Industrial Revolution. Other factors, such as fraudulent products or the failure to create buyer-driven commodity chains also influenced demand 10 5

Anderson, Wich winegrape.

6

Gouy, 'L'exportation des vins' indicated that, on average, the difference in price between bottled wine

and wine sold in casks was enormous. In France bottled wine cost around 10 -15 francs per bottle and bulk wine 30 centimes per litre. In the case of higher quality wines, the ratio was 1:1,000. 7 Anderson, Nelgen and Pinilla, Global Wine Markets. 8 See Pinilla and Ayuda, 'Market Dynamism'; idem, 'Taking advantage'. 9 Anderson, Meloni and Swinnen,, "Global Alcohol Markets"; Gouy, 'L'exportation des vins français'. 10

Simpson, Creating wine.

5 On the contrary, the consumption of high quality wine was restricted to high- income groups, particularly in European or western countries. Hence, it can be considered as a luxury beverage 'chiefly connected with the ritual of entertainment' or 'limited to special occasions'. 11 The two markets emerged, integrated and grew in parallel throughout the first globalisation, although the widespread tariff liberalisation taking place during this period had a sma ller scope in the case of wine. The tariffs applied to wine imports of a wide range of countries were very high, for both ordinary and high quality wine, and followed an upward trend from 1875 until the Second World War. 12

The high excise and import

taxes on wine mostly sought to protect local producers of beer or spirits. 13 Within this context, France's prominent position in the new international market was facilitated due to three reasons: first, before 1850, France was the world's leading wine producer; second, the country had an outstanding tradition of producing superior quality wines, which were appreciated in the European courts and among the aristocracy and bourgeoisie, which was also the case for the incipient champ agne production, the clarets of the Bordeaux region and the reds of Burgundy; finally, France also had a history of exporting and was, by far, the leading country in terms of its foreign sales.

III. The evolution of French wine exports, 1848

-1938 If we examine the evolution of total wine exports in terms of real value, deflating the series in current values by the French wholesale price index, we can observe a rapid and fairly sustained growth of exports until a maximum level in around 1896 (Figure 1). 14 These high values remained stable until the collapse caused by the First World War.

The subsequent recovery was very modest.

If we consider export quantities, the initial upturn was undermined by the oidium plague between 1851 and 1856 although after 1864 exports recovered their previous level (Figure 1). 15 Exports peaked at the beginning of the 1870s but nose-dived when 11 Imperial Economic Committee, Wine, p. 10 and U.S. Tariff Commission, Grapes, Raisins and Wines, p. 286
12 See table 1 in Ayuda, Ferrer and Pinilla, 'How to become a leader' 13 Holmes and Anderson, 'Convergence in National Alcohol Consumption Patterns'. 14 Using deflated current values implies the acceptance of the official valuations used by the French

external trade statistics. The annual adjustments to the price variations were not automatic so these data

should be treated with caution in the short term, but they illustrate the trend well in the long term. See

Tallavignes, 'L'exportation des vins français', pp. 514-6. 15

The plague was successfully controlled from 1852 by applying sulphur sulphate. Lachiver, Vins, vignes,

pp. 405 -410. 6 France was hit by the phylloxera plague until production levels returned to normal levels in the 1890s, enabling a certain degree of recovery and growth in exports. The First World War and the turbulent period that followed caused exports to fluctuate considerably during these years with a clear downward trend. In order to gain a better understan ding of this evolution we must distinguish between the different types of wine.

Insert Figure 1

We can group the wine exported from France into two main types (although the distinctions between them are sometimes blurred): bottled high quality wine and ordinary wine sold in casks. We can observe that both wines grew considerably after 1848, although the sales of the former quadrupled after starting from a significantly lower level while the sales of ordinary wine doubled (Figure 2). The main destinations for ordinary wine were Europe and Latin America and quality wines were sold in both of these markets and also in North America. This enormous increase in exports stopped abruptly in around 1875 in the case of ordinary wine and dropped in the following twenty years to levels similar to those observed before their huge growth in 1850. The losses were enormous in all markets, but much greater in those furthest away from France, such as

America or Africa

(Table 1). They only increased in Oceania and Asia, where French colonial penetration took place during these years. The huge fall in production due to the phylloxera obliged France to engage in mass imports from other countries, principally

Spain, to supply even its domestic market.

16

From the end of the nineteenth century,

ordinary wine exports began to grow again but the levels reached were far lower than those previously achieved.

Insert Figure 2

However, quality wine exports continued to grow until they peaked at the beginning of the 1890s, even equalling the value of ordinary wine exports. The quality wine exports to northern European countries grew, especially to the United Kingdom which absorbed two-thirds of all the bottles exported to Europe (Table 2). Finally, the colonial market maintained a significant level of growth. In any event, we can observe 16

The trade war with Italy after the approval of its new tariff in 1887 limited the imports from this country

enormously. 7 that until 1914, French quality wine exports remained at high levels, although they grew very slowly from the end of the nineteenth century.

Insert Table 1 and Table 2

The First World War marked the beginning of a very turbulent period and put an end to the years of growth and high sales which plummeted to levels even lower than the minimum levels of the phylloxera period. The end of the war gave rise to an ephemeral recovery to levels similar to those before the war, 17 although the beginning of the crisis in

1929 dealt a harsh blow to exports and generated a marked annual instability. The lowest

export levels of the post-war period were recorded in 1932 and the recovery in subsequent years was modest. The causes of evolution of the exports of both types of wine can be classified into three types: supply-driven, demand-driven and forces related to the globalisation process, particularly the reduction in transport costs and the liberalisation of trade. Furthermore, a serie s of political and economic shocks also played a key part.

Beginning with the

supply-driven causes, an essential factor was the arrival of the phylloxera plague to the European vineyards. France was one of the first countries hit by the plague which led to a considerable decline in production, particularly in the 1880s. The decrease in production therefore, forced a drop in exports. However, when we compare the evolution of the exports of the two types of wine, we can observe that they followed opposite trends. While ordinary wine exports plummeted due to the brutal fall in production, quality wine exports continued to grow.

Furthermore, other countries took

advantage of France's export weakness in two ways.

First, the main European

competitors, such as Spain or Italy, attempted to seize foreign markets from France, such as Latin America or some European countries. In low quality wines, France's principal rival was Spain whose exports increased formidably. The competitiveness of these Spanish exports was mostly based on their low prices. 18

On the other hand, the emerging

17

The Treaty of Versailles shows how important it was for the French government to secure markets for its

wines. Article 269 established provisions for wine that enabled the imports of French wine by Germany

with a tariff which was more favourable than the one applied on 31 July 1914. Article 274 obliged

Germany, in return, to respect the laws, regulations and judicial decisions regarding the designation of

origins, particularly for wines and to ban imports and exports that did not comply with these regulations.

18

See, for example, Douarché and Penic, L'exportation des vins; Gervais, 'La crise phylloxérique'; Pinilla

and Ayuda, 'Political Economy';. 8 production of the new world countries, which was reaching significant volumes, sought to conquer the domestic markets with the aid of strong tariff protection. 19 However, in the case of quality wines, the null effect of the fall in production on their exports can be explained by two reasons. First, the phylloxera plague arrived much later to the Champagne region, whose sparkling wines accounted fo r a considerable part of exports. Second, the quality wine exports adopted different strategies so as not to lose the foreign markets, such as using the accumulated stocks of aged wine or directly mixing the wines with those imported from other countries in order to maintain export levels. The advances in the fight against phylloxera through the replantation of a substantial part of the vineyards enabled production to recover, and from 1900 output was reaching levels similar to those of the pre-phylloxera era. From this year, and with the exception of the years of the First World War, production grew slightly and therefore remained at high levels. 20 Within this context, ordinary wine exports recovered considerably, although they did not return to the levels o f the pre-phylloxera era. Also from the supply side, the improvement in production processes and the marketing of quality wine were crucial for the evolution of exports. Due to the vital importance of these changes, the whole of the following section of this article is dedicated to them. From the demand side, the economic expansion of the second half of the nineteenth century in countries immersed in their industrialisation process had a different effect on both types of French wine exports.

An important factor is that wine did not end up

becoming a mass-consumed product in Europe outside of the traditional consuming countries, although it did become part of the alcoholic drinks consumed by the emerging middle class and the high -income social segments. The data referring to wine consumption by country illustrates what happened. While in the main producing countries such as France, Italy or Spain, wine consumption between 1860 and 1938 ranged between 75 and 150 litres per person/year, in the western industrialised cou ntries,quotesdbs_dbs25.pdfusesText_31

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