Crippling trade tariffs imposed by China on Australian wine could lead to a worldwide chain reaction.

 

Australia's trade war with China will have a huge impact on the wine world in 2021, because suddenly Australia has a LOT of expensive wine to sell, and no obvious place to sell it.

 

Last week, China announced tariffs on Australian wine of 107 percent to 212 percent. Australia's trade minister called it "a devastating blow" to the country's wine industry, and said that it may make some wineries' business "unviable". It's shocking how dependent Australia's $3 billion wine industry, especially at the high end, had become on China.

 

 

First, Australia has been sending 40 percent of its exports, and 25 percent of all wine it produces, to China.

 

"They're not going to be able to turn off that spigot and turn it on somewhere else," said wine economist Mike Veseth.

 

And second, China is paying much more for Australian wine, per bottle, than any other major importer but Singapore.

 

Did you think the Chinese were buying only bottom-shelf Australian wine? Think again. By crunching Wine Australia's export report figures for 2019, I came up with the average value (wholesale selling price) per bottle of Australian wine sent to each country. These figures include bulk wine which isn't sold in bottles, so these are 750-ml bottle equivalents. Here are those average-bottle wholesale prices for eight of Australia's nine largest importers*.

 

 

Germany: $1.14/bottle

UK: $1.18

Netherlands: $1.89

Japan: $2.28

US: $2.28

New Zealand: $2.30

Canada: $2.46

China: $6.86

(*Singapore is Australia's fifth largest importer by value but isn't listed by volume. d on the volume imported by countries that are listed, Singaporean importers are paying more than $8.75/bottle, but I don't have the exact number. Singapore is likely unique on the list because it probably isn't buying bulk wine at all.)

 

Wine is not the only, or the most important, product hit by new Chinese tariffs. Beef, timber, barley and coal are also facing tariffs, and at least 20 ships full of coal have been anchored off the Chinese coast, unable to unload their cargo.

 

The knock-on effect

For wine, the repercussions to the Chinese tariffs will be global. European wineries will likely rush to fill the high-end void in the Chinese market. US wineries might want in on that action if a new administration decides to ease its own trade war with China. Argentina and Chile will have to protect their market share everywhere from Brazil to Denmark. The battle for store placements will be fierce, and Australian wineries now have pallets to sell.

 

"They're trying to open wider markets like Japan and South Korea," Veseth told Wine-Searcher. "They recognize that they aren't going to be able to move it all into a big market. They have to look at smaller markets."

 

China's aggressive posturing continues a trend of countries using wine tariffs as a political tool. Russia started it in 2006 with import bans on wines from Georgia and Moldova. Wine is an important part of the economy in those former Soviet countries, and the increase in tensions helped lead to the South Ossetia War between Russia and Georgia.

 

In 2019, Donald Trump brought the concept into the West by slapping tariffs of 25 percent on certain French, German and Spanish wines. 

 

Veseth, an economics professor in the state of Washington, said that for most countries including Australia, wine isn't as big a part of their economies as other items that could be tariffed.

 

"But it's a highly visible, symbolic, meaningful thing to do," said Veseth, who blogs as The Wine Economist. "I'm hopeful that we can back things down. It's not good for wine."

 

Veseth has been watching the China-Australia wine relationship for years.

 

"About 10 years ago Australia began to target China," Veseth told Wine-Searcher. "They realized that the way they had marketed their wines, they were competing with Chile. They were competing for lower-cost wines, bulk wines. Some of the groups decided to reposition Brand Australia in the Chinese market so they can earn a premium price. They've been very successful."

 

Veseth said the Australian wine industry had flown in dozens of Chinese sommeliers and wine buyers to familiarize thems with the country and its wines.

 

"When I said to my Australian friends that US wineries haven't had success in China, my Australian friends say, you haven't made a big investment in China in a very long time," Veseth said. "Now of course it backfires."

 

It's interesting that one thing China ed to were reports that Treasury Wine Estates was requiring Chinese wholesalers to buy huge amounts of cheap wines in order to get allocations of Penfolds Grange. This kind of deal is standard practice in many Western countries. But in this case, China alleges that it led to Treasury wines being dumped on the market below cost – and that may be true, if wholesalers only care about the Grange. China also has a significant wine industry, about the same size as Australia's, but it has been shrinking.

 

"Chilean bulk imports fill up a lot of lower tier of the market," Veseth said. "This could be part of trying to make Chinese wine more competitive in the middle and upper tiers."

 

However, as in other wine tariff situations, the wine industry had nothing to do with causing the tension. Two weeks ago, the Chinese embassy in Canberra delivered a list of 14 grievances to Australian media. Wine was not mentioned. The grievances included banning Chinese companies from the 5G network in Australia; calling for an international investigation into the origin of Covid-19; interfering in China's treatment of Hong Kong, Taiwan and Xinjiang; searching Chinese journalists' homes; accusing China of cyber attacks; racist attacks on Chinese and Asian people; and "an unfriendly or antagonistic report on China by media". It seems that China wants to control the Australian media the way it controls its own, and it's hard to see how Australia could give in to that demand.

 

"Wine is involved in this, but Australia has become so dependent on China, especially exports of natural resources to China," Veseth said. "At different times, Australia has tried to say, you're too dependent on me. But this is China saying, this dependency works the other way."