The worldwide wine business is a good case study in free trade, given that there are many producers and few restrictions on commerce. In recent years, the cost of wine has reflected this generally free global market in two ways — one good and the other bad, as George M. Taber argues in this op-ed piece. Taber is the author of four books on wine. His latest is titled, A Toast to Bargain Wines: How innovators, iconoclasts, and winemaking revolutionaries are changing the way the world drinks.

The international wine market was a favorite subject for classical economists in the 18th and 19th centuries to help explain the benefits of free trade. Adam Smith advocated free trade in his opus, An Inquiry into the Nature and Causes of the Wealth of Nations. He wrote against the backdrop of mercantilism, which urged countries to export products to accumulate gold and import as little as possible so that they could husband their yellow metal.

Smith mused that he might be able to make wine in his native Scotland. “By means of glasses, hotbeds and hot walls, very good grapes can be raised in Scotland, and very good wine, too, can be made of them at about 30 times the expense for which at least equally good wine can be bought from foreign countries,” he wrote. The frugal Scotsman considered that crazy, adding: “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.” His strongest example was wine and cloth. The Portuguese could manufacture cloth, but were more efficient making wine, while the English could make wine, but were better at producing cloth. Smith argued that it would be better for both countries if they concentrated on their respective strengths and imported the other product.

Nearly a half-century later, the English political economist David Ricardo refined Smith’s theory by introducing the concept of comparative advantage. A country didn’t have to be absolutely better than the other. It was only necessary to be comparatively better in one area. The products Ricardo cited were, again, English cloth and Portuguese wine: “England exported cloth in exchange for wine, because, by so doing, her industry was rendered more productive to her; she had more cloth and wine than if she had manufactured both for herself; and Portugal imported cloth and exported wine, because the industry of Portugal could be more beneficially employed for both countries in producing wine.”

Wine remains today a good case study in free trade since there are many producers and only a few restrictions on commerce. Wine is a worldwide business reaching from Germany to South Africa and from Canada to New Zealand. It is now made in every state of the U.S., including Alaska and the Dakotas. Relatively young wine countries such as Mexico and Brazil have also joined traditional producers. Farmers in all countries are an independent lot who don’t take orders from anyone, and so there is large global overproduction. Supertankers of wine are now sailing the world to unload the product wherever they can get the best price.

Some governments or business groups have attempted to push prices higher by taking vineyards out of production, but with only modest results. The European Union has done that because local wine consumption has declined, while the consumption of beer and soft drinks has increased. Champagne producers in France in 2009 dramatically reduced output in an attempt to boost prices. Australian winemakers have plowed under some vineyards, but that has had little impact on the world market.

The cost of wine in recent years has reflected this generally free global market in two ways, one bad and one good. First, the bad.

Newly wealthy residents of the BRIC nations (Brazil, Russia, India and China) are turning to wine in a big way and have been dramatically pushing up the prices of the world’s most prestigious products. Prices for premium wines, especially from France, have gone through the ceiling, primarily due to demand from China. Château Lafite Rothschild, Bordeaux’s most famous label, is selling at astronomical prices. A decade ago, an American consumer would pay $100 or so per bottle. Today, in New York City, a bottle of Lafite goes for $1,600.

The reason for the sharp increase in prices is simple supply and demand. Mercedes-Benz can easily increase car production to meet unexpectedly strong demand. Winemakers, though, cannot ramp up the output of wines coming from a prime vineyard whose size has not changed in years. With more consumers vying for the same number of premium bottles, producers can increase the price. Château Lafite, the favorite label of the newly wealthy Chinese, simply sells out faster today than it did previously. In fact, a hot underground market has developed in China for empty Lafite bottles with well-preserved labels. Unscrupulous Chinese entrepreneurs fill the recycled bottles with lesser wines and then sell them at Lafite prices.

In mid-December at the duty-free shop in Paris’s Charles DeGaulle Airport, a shopper described only as “an Asian” paid 50,000 euros for just six bottles of French prestige labels. Part of the world wine market seems to be heading toward tulip-mania levels.

BRIC wine drinkers are buying primarily just a few wines — the First Growths of Bordeaux’s left bank, the most famous wines from the right bank such as Château Pétrus, leading Burgundies like Domaine de la Romanée-Conti, and the most costly Champagnes, including Louis Roederer Cristal and Dom Perignon. The higher the price for those wines, the better they seem to sell. Few wealthy consumers, though, are venturing much beyond prestige wines to buy the thousands of French products selling for $25 or less. So while a very small group of producers are prospering, the French wine business as a whole is in trouble.

Giving Prestige Wines as Gifts

Typical of the new Chinese wine consumer is Yang Bin, chairman of Beijing DSH Auto, a General Motors dealership in the Chinese capital. He told me his favorite wines are Château Pétrus, Château Cheval Blanc and Château Ausone, which all sell for very high prices. He said his daily wine is Château l’Évangile, which goes for about $200 a bottle. He owns a wine collection of some 6,000 bottles.

In November 2011, Jim Clerkin, the CEO of Moët Hennessy USA, the big French Champagne producer, said that his prices would be going up after the first of the year, largely because of booming sales in the Asia Pacific region and Russia. He added that for the first time in a half-century, Moët’s sales are growing strongly despite a weak U.S. economy.

One of France’s most famous winemakers explained to me recently that the international wine market is going through a phenomenon that he has now experienced three times when newly rich countries begin drinking wine. In the 1950s and 1960s, it was the Americans; in the 1970s and 1980s, it was the Japanese; and now it is the Chinese. In the first phase, consumers buy prestige wines to give as gifts rather than enjoy as personal consumption. The most important feature of such wines is their reputation. People giving gifts never want to look cheap or unsophisticated. To them, price is irrelevant, while reputation is everything. This French producer said he could sell his entire annual production in China at much higher prices than he can get anywhere else, but after doing that for a few years, he would have lost his traditional markets. So he’s spreading out his production to old and new consumers.

At the same time that the cost of prestige wines is exploding, however, the good side of the free market in wine is that there are now more and better products available at attractive prices than ever before. The two hottest wines in the American market over the past few years have been Australia’s Yellow Tail — the official spelling is [yellow tail], brackets included — and California’s Charles Shaw, aka Two Buck Chuck. The former sells for about $7, and the latter for $1.99 in California and $2.99 in most other states. Nearly 700 million bottles of Charles Shaw have been sold since the brand hit stores in 2002. In addition, hundreds of other bargain wines sell for less than $10 a bottle. For example, Wegman’s, a grocery chain in the Northeast, now carries a line of $6 wines from around the world.

And while the prices for the top Champagnes such as Roederer Cristal are starting to top $200 a bottle, inexpensive sparkling wines are selling very well. These are made using the same techniques as the real stuff but with grapes grown in Germany, Spain, Italy, California and Washington state. They generally sell for less than $15 a bottle and are often very good.

The quality of such wines has improved dramatically in recent years, thanks mainly to the use of technology first developed in other areas. The Israelis made the deserts bloom with the help of drip irrigation, and Californians are using that same technique to produce more and better wines in such hot regions as the San Joaquin Valley. Night harvesting and refrigerated trucks that bring grapes to the winery under ideal conditions have also improved wine quality, not only in California, but also in Chile, Argentina and Australia.

The greatest story never told in the wine business is the improvement of those bargain products. The American wine media focus mainly on premium wines that few people can now afford, and offer scant coverage of less expensive products. As a result, publications have generally missed the improved quality of less expensive bottles.

Bargain brands do surprisingly well in blind wine competitions. At the 2007 California State Fair wine competition, a 2005 Two Buck Chuck Chardonnay won best of class against wines costing as much as $55. Last year, Charles Shaw Pinot Grigio won the same award at the Pacific Rim Wine Competition, and other inexpensive wines such as Beringer, Cupcake and [yellow tail] also score well in contests.

I hate to think that I probably will never enjoy the experience of tasting France’s greatest wines because the prices have gone to such levels that I, and many other consumers, can no longer afford them. But then I’m sure I will also never drive a Ferrari. A $1,600 bottle of Château Lafite works out to about $267 a glass. Is any wine in the world worth that price? I’m reminded of a comment made by the winemaker of Screaming Eagle, a California cult wine, after a six-liter bottle of it sold at auction for $500,000, which works out to $10,417 per four-ounce glass. “It’s wild,” she said. “You drink it, and it’s gone. My brain doesn’t get it.”

Adam Smith and David Ricardo, however, would get it. They would have understood what happens when supply is limited and some consumers will pay any price to buy a scarce product. At the same time, though, the classical economists would also be happy that the price and quality of the wines that most people drink on a regular basis have never been better. The market is working. For many of us, it is the golden age of wine.