China on Monday followed through on threats to raise tariffs on U.S. wines and a range of other American products, retaliating against the rate increases the Trump administration levied on steel and aluminum from China in March.
The new retaliatory tariffs raise the rates on U.S. wines entering China by 15 percent, adding to pre-existing tariffs and taking the total levies paid on a bottle of American wine from 48.2 percent to 67.7 percent.
“Wine is a luxury item, if you will, that the U.S. has become a real exporter of and mainland China is the fifth-largest export market for U.S. wines,” said Michael Kaiser, vice president of WineAmerica, a national trade association and public advocacy group representing wineries in all 50 states.
“The fact that it’s become such a high-end good in China right now I think is one of the main reasons for (the tariffs),” Kaiser said.
China’s growing taste for U.S. wines accounted for more than $80 million of American wine passing into the country last year, with the vast majority coming from California producers. A report last month from Wine Institute, the trade group for more than 1,000 California wineries, noted that consumption of imported wine in mainland China had increased 2.5 times in the past five years.
“We expect this trend to continue for the foreseeable future,” Christopher Beros, Wine Institute trade director for China and Pacific Rim, said then.
Yet in a statement issued Monday as the tariffs took effect, Robert Koch, president and CEO of Wine Institute, said, “This new increased tariff will have a chilling effect on U.S. wine exports to one of the world’s most important markets.”
With the pre-existing tariffs, American winemakers are already at a disadvantage when competing with other countries importing wine to China, Koch said, “and this will only exacerbate that problem.”
Echoing that sentiment, the Napa Valley Vintners trade group said Tuesday, “This puts our producers at a further disadvantage for selling our wines in the China market and makes it even more difficult for consumers in that country to have access to our high-quality wines.”
In particular, the newly added 15 percent tariff widens the gap between American wines and those from competitors in countries like Chile, New Zealand and Georgia, which enter China tariff-free. Wines from Australia will also be tariff-free in China by 2019.
Apart from the increase in price possibly deterring potential wine buyers in China, another cause for concern may be a lasting effect on Chinese perceptions of American wines, said Patsy McGaughy of the Napa Valley Vintners.
“If consumers in China develop a more nationalistic perspective, that has a potential lingering effect,” McGaughy said. “We don’t know what that might mean.”
While the full impact and duration of the new tariffs remains unclear as the trade war between the world’s two largest economies continues to take shape, wineries here are taking a measured approach to the latest strike.
“When you do international sales, you have a very long-term view on things,” said Vivien Gay, international sales manager for Silver Oak Cellars.
“Because there’s always going to be some sort of political event happening, be it Brexit, be it oil plunging in Canada,” she said. “So you have to have a long-term view and you have to sort of go, ‘OK, well, this is another little challenge and we’ll get through this.’”
The winery has been working in the Chinese market for nearly 20 years, Gay said, and has built significant brand awareness.
While the new tariffs pose a higher price tag, Gay said, “That increase isn’t going to be so detrimental as if we were a less expensive wine, because we are regarded as a brand. So people will still want to buy Silver Oak.”
Scott Meadows is general manager at Silenus, a “small winery in Napa that, of course, employs proud Americans.”
The winery sells 80 percent of its wine to export, Meadows said. “And of that 80 percent we probably sell 80 percent of that to China. So for us, it’s a huge problem.”
The winery, which has been working in the Chinese market for eight years, currently has several ongoing contracts with distributors that were supposed to be fulfilled at the end of last month, but have been put on hold because of the price increase, Meadows said.
When asked what the winery planned to do in light of the new tariffs, Meadows said, “I’m still trying to figure that out. My desire is that this would end soon, but unfortunately I feel a bit more pragmatic than that, that it’s not going to.”
“What’s going to end up happening is it’s going to be us that are the ones that are going to have to give,” he said. “I would say that’s probably true of anyone in Napa or anyone in the wine industry. If you want to sell your wine over there, they have plenty of options from other countries.”
“So the pressure’s going to come down on us and as employers, if the pressure comes down on you to cut prices, which cuts your profits, you’ve got to cut somewhere up along the way. And so ultimately it hurts all your workers who are here in the U.S. working.”
But, Meadows added, he remains optimistic on the long-term potential for a strong fine wine market in China, despite the current trade feud. “It’s just this is sort of a short-term thing where we’re collateral damage where we don’t need to be.”
Treasury Wine Estates, the Australian-based company that owns Napa stalwarts Beaulieu Vineyards and Beringer, as well as famed Australian winery Penfolds, said through a spokesperson on Tuesday, “We’re confident we can manage the impact of any geo-political issues of this nature in the ordinary course of business.”
The company has been diversifying its sourcing footprint it said, “introducing other country-of-origin portfolios such as our French portfolio, building on our Australian and American portfolios, to allow us greater flexibility to manage situations like this.”
“We’ll continue to focus on growing our American portfolio across all of our priority regions, including Asia.”
As for what steps can be taken on the national level to alleviate the effects of the tariffs, Kaiser said, “There’s not much that can be done from a legal or regulatory or legislative standpoint on this.”
What might improve the situation, he said, would be for Congress to pass legislation that would stop the aluminum and steel tariffs that ignited the trade fight.
“But if they passed that, obviously the president would veto it and I don’t know if there would be enough opposition to overturn that veto,” he speculated. “So there’s obviously very little appetite in Congress to do anything right now.”