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D. Murali

Two US States are saying no to uncorking the wine bottle on the Internet. In effect, they are saying no to fluid e-commerce. Not many would say cheers to this one.

E-COMMERCE makes the world one big mall to sell your wares. A grand thought that is, now under threat. Because States in the US are erecting walls that can hinder trade. On this, a recent issue of Mercatus Reports (www.mercatus.org) carries a paper titled, "Wine wars: Uncorking E-commerce?" by Asheesh Agarwal, Assistant Director of the Office of Policy Planning at the Federal Trade Commission, US, along with Jerry Ellig and Todd Zywicki.

At the core of the wine issue are laws that New York and Michigan have for prohibiting sale to the State's residents by wineries from outside the State. So, sons of the soil can only have wine of the soil. The justification that the States give is regulation of alcohol; but people are unhappy with the new barrier to fluid commerce.

There have been several instances of the Supreme Court tossing out state laws that were against interstate commerce - such as a 1935 New York price-control law "that discriminated against out-of-state milk producers," and a 1989 Connecticut statute "that required vendors to conform in-state beer prices to prices in other states."

To defend a discriminatory law in the US, the State has to show that it is "vital to achieving the regulatory objective", points out the paper. There has to be `substantial empirical and other evidence' to show that no other alternative is available except to discriminate. According to the authors of the paper, both New York and Michigan may not be able to win their case before the court.

E-commerce and minors

Protectionist lawmakers in the two US States feel that prohibition is necessary to protect the underage (or minors) from drinking. Though parents who saw on TV the recent coverage of the MMS scandal may only agree forthwith, the plea of protecting the young may be wishful thinking. Because, as a judge once observed, consumers can become just as "drunk on local wines" as those from outside the State. Agarwal and his co-authors point out, that in New York "190 in-state wineries can ship directly to consumers' homes." There are also `sting data' to show that "it is at least as easy for minors to buy alcohol in local retail stores as it is online."

Okay, interstate direct shipping won't do more harm than what the local shipping will. Are there any positives to say about out-of-state shipping? Yes; there's greater variety, and prices can be lower. The paper cites recent research by Alan E. Wiseman and Jerry Ellig on the erstwhile ban in Virginia on direct shipment. They used "a 67-bottle sample of popular wines" to find that cost savings depend on price, quantity ordered, and shipping method; and that online shopping could effect a saving of 3.6 per cent. "Most savings occurred on the more expensive bottles." A saving that cheers, we may add.

Physical presence

Agarwal and his team fear the e-commerce implications of the case involving the two States that the Supreme Court has to decide upon this year. What is bothersome is a provision in the New York law - that of `physical presence'. Accordingly, "out-of-state wineries may ship wine directly to consumers only if those wineries establish a `physical presence' in the State." The State's defence for insisting on such a presence is that it won't be able to exercise appropriate oversight otherwise. Now, the paper argues that such a requirement is against constitutional principles. If their apex court were to uphold physical presence requirements, the authors fear that the sweep may well go "beyond the alcohol context" and be "especially pernicious" to mail order and Internet commerce. The country would not be one big mall to sell your wares, then, because e-commerce thrives on the idea of connectivity that promises to deliver wherever you are without having to set up shop everywhere.

"Physical presence requirements could force online companies such as Amazon.com or catalogue retailers such as L.L. Bean to establish offices in all 50 States," postulate the authors. Such a move towards `economic balkanisation' can invite, as observed in a 1951 case, "multiplication of preferential trade areas."

Protectionist policies and laws are not new. Outsourcing has had its more than fair share of such. If the ongoing whining over wine is any indication, we may see a hangover setting on other industries too, with governments taking the plea of consumer protection to shoo off outsiders and put a firm stopper on e-commerce.

ITworks@TheHindu.co.in

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