Will China's Tariffs Hurt American Wine?

U.S. vintners are just beginning to build a foothold in a market where Australia and Chile hold a big advantage
Will China's Tariffs Hurt American Wine?
Chinese President Xi Jinping and U.S. President Donald Trump meet in Beijing. (FRED DUFOUR/AFP/Getty Images)
Mar 29, 2018

Updated April 2: The Chinese Ministry of Commerce announced April 2 that China would be going forward with their proposed tariffs on 128 U.S. products, including an additional 15 percent tariff on wine. "It is hoped that the United States will withdraw the measures that violate the rules of the [World Trade Organization] as soon as possible, so that the trade of related products between China and the United States will return to normal track," said a statement from the ministry.

Could American wine end up collateral damage in a trade war between two of the world's biggest wine-consuming nations? On April 2, the Chinese Ministry of Commerce announced it was imposing a 15 percent tariff on U.S. wine, among other products, in retaliation for U.S. President Donald Trump's plan to impose tariffs on $60 billion worth of Chinese goods coming into the U.S.

While it is unclear how long the tariffs will last, wine-industry leaders are asking how this may affect their bottom line. "We are very concerned that these tariffs will impose new barriers to the long-term development of the important Chinese market and will create a competitive disadvantage for American wine relative to other regions that enjoy more favorable tax treatment," said Ryan Pennington, director of communications at Ste. Michelle Wine Estates.

In March, President Trump announced a 15 percent tariff on Chinese steel and aluminum. His government is also preparing a list of Chinese products that could be targeted with additional tariffs after a U.S. inquiry found China guilty of intellectual property theft and unfair trade. That's prompted China to retaliate with tariff hikes of their own, including on U.S. wine, fruit, pork and more.

American wine is just beginning to build a presence in the People's Republic. The U.S. exported close to $80 million worth of wine to mainland China last year, the equivalent of over 14 million liters, and the country is the fifth-largest foreign market for U.S. wine, according to the Wine Institute, a trade group. Christoper Beros, the Institute's Asia director, estimates that approximately 200 California wineries are exporting to China, most of them large- to medium-size.

But while the volume of U.S. wine imports may seem high, it's just 2 percent of the Chinese wine market, dwarfed by imports from other countries such as France, Australia and Chile. French wines have long enjoyed an elite image with Chinese consumers. And Australia and Chile have negotiated free-trade agreements with China, which have put them at a significant advantage.

Current Chinese customs duties for U.S. wines are 14 percent—the new tariffs increase that to 29 percent. Wines from Australia and Chile are charged customs duties of 0 percent. According to Beros, these countries "have relied heavily on exports for many years for their entire industries [and] have been aggressively marketing in China." In 2017, Australian wine imports into mainland China jumped 53 percent, up to $741 million. And the trade group Wine Australia has invested tens of millions of dollars to further market their vintners to Chinese consumers.

The U.S. has not cultivated the Chinese market as aggressively as some of their competitors, suggests Alberto Fernandez, managing partner of Torres China, who claims American wineries have not put much focus on exports to the country. "All big commercial brands from the U.S. in China have not reached even 10,000 cases sold per year recently," he said. "That's the case of Robert Mondavi, Kendall-Jackson or Ste. Michelle Estates." With wines from Australia and Chile coming in duty-free, American wines lack value for money in consumers' eyes.

"The big challenge will be related to the perception by Chinese consumers that California wine is now too expensive," said Don St. Pierre Jr., who cofounded the Chinese import company ASC Wines and is now CEO of Vinfolio. Producers will have to increase their prices to cover the added costs. How will the consumer respond?

Ian Ford, who cofounded another Chinese import company, Summergate Fine Wines, anticipates another layer of difficulty. He believes a trade war would create a consumer backlash against U.S. wine. "With the tariff, the Chinese government is signaling to the Chinese population a desire to punish U.S. wine as a category," said Ford. "And the Chinese are likely to fall in step and enthusiastically embrace a de-facto boycott."

Some worry the effects will be felt here at home. "Retaliatory tariffs on our nation's wine industry will have a hugely negative impact on our economy and jobs in my district both today and for the future," Congressman Mike Thompson, who represents part of Napa, Sonoma, Mendocino and Lake counties, told Wine Spectator through a spokesperson.

Big companies such as Treasury Wine Estates are less pessimistic about the threat, because they can focus on selling Aussie wines in China and their American wines in other markets. "We're confident we can manage the impact of any geopolitical issues of this nature in the ordinary course of business," said Brent Dodd, corporate communications manager for TWE.

But as a result of lost market share, Michael Kaiser, vice president of Wine America, foresees a potential glut in the domestic wine market. "If a market closes for the product, it's got to go somewhere else," he said. "The obvious place that these wines will go is back here into the U.S. market, and that could affect other producers across the country who might then have to compete for shelf space."

How long the tariffs will last remains uncertain. Last week, Chinese leaders indicated a willingness to negotiate with U.S. trade representatives. For his part, Beros hopes that eventually even existing barriers could come down. "We would hope that over time we would have our own free-trade agreement with China," he said.

—With reporting by Suzanne Mustacich


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