In early March 2018 U.S. President Donald Trump tweeted that “trade wars are good and easy to win.”
His comment was directed toward China, and since then there has been a tit for tat back and forth between the two countries, each threatening retaliation if the other increases tariffs on goods and services.
China on Monday followed through on threats to raise tariffs on U.S. wines and a range of other American products, retaliating against the rat…
The core of Trump’s efforts centers on a real concern that China is engaging in unfair trade practices and intellectual property abuses. He would not be alone as past Presidents Obama and Bush also sought ways to address these very same concerns to little avail. However, the current administration’s approach has increased global trade tensions and given the Chinese government a rationale to retaliate, with the importation of American wine being one of the targets.
The future of China wine tastes a lot like France and Australia
In 2013 Xi Jinping became president of China and began an anti-corruption campaign that focused heavily on illegal gift-giving, which often included expensive watches, luxury cars and the world’s finest wine. Up to that point wine from France’s premier growing regions (First Growth Bordeaux and Grand Cru Burgundy) were the gifts of choice for many who sought to win favor with local politicians and malleable officials. The wines were doled out in huge quantities, spurring a surge in wine imports from France and also a burgeoning counterfeit industry that sought to capitalize on what was a growing trend.
But when Xi entered, things changed and imported French wines plummeted. Other countries saw their chance and rushed to fill the void with inexpensive wines and offers of special trade deals.
The result was that New Zealand and Chile crafted free-trade agreements that included no levies on their imported wine.
France also found ways to keep hold of its dominant position by a systematic marketing campaign and offering to send an army of French enologists and viticulturists to help build China’s growing focus on wine production.
Australia, too, found a path into the market through low-priced wines and years of quiet, back-channel negotiations that have resulted in its wines entering China with a tariff-free agreement next year.
The impact on California wine
Reading the March 12, 2018, edition of The New Yorker, I came across a piece called “The Spreading Vine” by Jiayang Fan. The article highlight…
Back in 2000, the market share of U.S. wines in China was 10 percent. In 2017 it had dropped to less than 3 percent, and it is still shrinking. The New York Times reported that in 2017 China’s imports of American wine yielded $82 million. During the same year, Wine Industry Insight reports that Australian wine exports to China were up 51 percent and topped $1 billion. Reuters reports that French wine exports to China reached nearly $1.5 billion.
China’s introduction of a new 15 percent import tariff on wine has already had a cooling effect on wine sales, with a few wineries reporting cancelled or stalled orders. The math is pretty straightforward. Already U.S. wines are at a disadvantage against other wines sold in China because of lopsided free-trade agreements or a history of superior market position, and so adding this additional cost to consumers will exacerbate an already tenuous position.
China’s efforts to consolidate power
As highlighted in the April 8, 2018, New York Times Magazine, in 2017 speaking at the national Communist Party congress, Xi said that the party would be exerting leadership (control) over all aspects of the country, economy and society, with no corner, product or person of Chinese lineage excluded. He went on to give what was essentially a “China first” speech that included the idea that all efforts must center around extolling “our party, our country, our people and our heroes.” Months later the government removed presidential term limits and opened the door for Xi to rule indefinitely.
Since then both the rhetoric and the policy changes in China have been increasingly directed toward building strong alliances with American allies while at the same time becoming more internally focused economically.
One big change in this effort has been that Xi has handed the reins of the country’s financial system to one of his closest allies, Liu He, a Harvard-trained economist. This appointment signals that Xi is both solidifying control over the economy and that he is focused on reducing debt and risky investments.
In the past these have often included the government’s support of real estate purchases in America, some of which were wine-related. For example, Beijing imposed new policies that curbed money outflows that may have already stalled EB-5 related wine projects in California’s Temecula Valley.
China’s investment in California’s wine-related projects slowing
The EB-5, often called the “golden visa,” according to CNBC, is a “program [that] allows Chinese individuals to invest as little as $500,000 in a business to get a green card. However, an escalating trade dispute between the U.S. and China could make it tougher to attract such investment.
Beyond these isolated impacts, Liu, according to The New York Times, is widely viewed as the force behind reining in “high-flying entrepreneurs who have borrowed heavily to pay for global expansion.” Liu is also a scholar who has studied the forces behind the Great Depression and the global financial crisis of 2008.
The hidden cost of trade wars
One thing is perfectly clear: Trade wars are not easy and they are actually very difficult to win.
We are witnessing a China with a single focus on becoming the dominant world power. If you don’t think so or if you find yourself saying, “Well, good, it’s about time someone else took over the reins,” I ask that you read more deeply into China’s recent economic efforts and its crackdown on free speech and human rights.
What does all this mean for the U.S. wine industry? First, expect further downward pressure on wine exports to China. Second, I imagine future reductions or stalls for wine-region projects funded by Chinese companies. Third, look for increased trade deals with historically American allies, with wine being just one area of focus.