Since 1994 Argentinean government implemented the diversification policy to reduce wine supply in the domestic market and stabilize prices through reducing the share of grapes allocated for wine production in favour of must production. The policy has set a minimum percentage of grapes for concentrated grape must (CGM) production for every wine maker. The research aims to investigate the effects of the policy on the sector applying spatial equilibrium analysis, based on the model of Interregional Trade of Wine products in Argentina. The qualitative analysis of the sector under the current policy revealed, that the policy had a) no impact on the grape segment, b) a slight positive impact on grape must production due to 14% increased grapes reallocated from wine sector, and c) an expected but modest 20% decrease of wine production. The anticipated increase of wine and grapes prices was not observed. Moreover the policy affects largely the optimal recourse allocation process, because it encourages CGM production among others also in those regions, which have non favourable agro-climatic conditions for CGM production. The advantageous development of CGM segment benefiting from “infant industry argument” of the policy is although a positive outcome, on the long run it will cause stagnation and discourage investments for advanced technologies. The elimination of the diversification policy will ensure the competitive development of this emerging industry.