Free trade can be a wonderful thing. Two parties, engaging in free trade with one another, both wind up richer.
The idea behind free trade is that tariffs/duties are reduced to zero. Countries import and export without restriction.
Free trade works because of something known as comparative advantage. A country enjoys a comparative advantage in something if it can produce it at a lower opportunity cost over another country. Look at Japan. This is a country which has built up its economy by mimicking and improving on the innovations of others. Japan, if it so chose, could produce high quality textiles as well as cars and other high tech. But its opportunity cost in producing cheaper textiles is high; for every resource the country devotes to textiles, it will have less to produce cars and other higher value tech equipment. So Japan chooses to channel most of its resources into the higher value stuff and import the cheaper textiles from lower wage countries like India and Bangladesh.
The removal of trade barriers leads to lower prices for consumers. A consumer in Japan gets his textiles cheaper if they’re brought in from India duty-free rather than produced in high-wage Japan. In the short run, certain local Japanese textiles producers go under and the Japanese government collects less taxable revenue; but over time, as resources are allocated to more cost effective comparative advantage industries, the loss is more than offset. Exports increase. Increased competition from foreign producers, now allowed to sell their products in Japan duty free, brings about increased efficiencies in the Japanese producers still surviving.
So how does beer fit into free trade?
For most of the world, it doesn’t. Particularly the less developed world.
Alcohol is one of those easy things for a government to tax. Notice that when you enter a new country, you’re only allowed to bring in a limited quantity of alcohol duty free, usually just 1 liter. Anything above that amount incurs duty.
An importer of beer faces the same taxes shipping containers of beer in bulk as you’d be levied if you brought in over your duty-free allotment. It’s just that some countries put up more obstacles to bringing in foreign-made beer than others.
Glance over a basic commodity code chart for the import duties for lager beer and you’ll see a HUGE discrepancy in numbers. Duties for a lager range from 0% (USA, Liechtenstein) to 9.6% (European Union) to 10% (Taiwan) to 30% (India) to 55% (Iran) and beyond. Then, there are other charges. Excise taxes, interior taxes, countervailing duties, landing charges, and whatever else a country can dream up.
As an example how lopsided tariffs can be, let’s pretend that a U.S. beer manufacturer is exporting a single 330 ml bottle of beer, valued at $1, to Thailand. To keep things simple, we’ll say the shipping costs are 10 cents (which they might be per bottle if the bottles were shipped in bulk) and the insurance costs are another 10 cents. By the time that $1 bottle of beer reaches Thailand and is slapped with import duties of 60% and excise fees of another 60%, plus a per liter alcohol tax of almost $3, VAT of 7%, and interior taxes of 7%, it costs $4.55 even before it’s been marked up for retail sale.
Now, let’s flip it. A Thailand beer manufacturer ships a $1 bottle to the U.S. Adding on the 10 cents for insurance and 10 cents for shipping, that Thai beer ends up costing only $1.25, since the USA only charges a minimal excise fee of 58 cents per liter of alcohol.
A Thai beer competes in the United States being only marginally more expensive than a similarly valued product made Stateside while an American beer in Thailand is more than four times more expensive than a locally produced beer.
Fair? As we’ll soon see, the biggest loser in this example is Thailand, not the USA.
Countries putting up such barriers to foreign competition usually impose other barriers to fend off local competition, too. To get a major brewery license required for commercial brewing in Thailand, one needs enough backing to pay taxes on ten million liters of beer per annum, effectively killing off any viable craft brewing industry. Chiangmai German Microbrewery, considered the first craft brewery in Thailand, must actually “export” its brews to Laos for bottling and then re-import them into Thailand in order to escape the prohibitive tax regimen.
Japan once had similarly punitive regulations. Japan deregulated in 1994 and lowered duties to European Union levels. Today, Japan has close to three hundred microbreweries, with a half dozen of them regularly exporting worldwide. Opening up the market expanded it. Korea is another example of a nation with draconian competition laws that are slowly being relaxed.
Thailand is part of a regional trading block, ASEAN, made up of ten Southeast Asian nations. ASEAN has aims to be a Southeast Asian European Union, and yet in one ASEAN nation, with few exceptions, you are hard put to find a beer from another.
Protection from foreign beer producers and regulations to inhibit internal competition only serves, in the long run, to hurt the countries supporting that unfair playing field. A Thai beer imported into the USA enters with price advantages an American beer imported into Thailand doesn’t have. However, that Thai beer is brewed in a nation that, because of restricted competition, brings along with it lower efficiencies and quality. The Thai beer industry as a complete entity actually winds up smaller and with lesser value than had the nation subjected itself to free trade and let its local breweries sink or swim against them.
A country’s local industry is like a muscle. For a muscle to grow, it must continually be challenged. If a muscle is rarely used or stressed, it atrophies. Countries with beer regulations that run away from rather than towards free trade inhibit their ability to manufacture products than can adequately compete on the world stage.