American wine, beer and spirits producers are worried. Trade disputes between the U.S. and China, Mexico and the European Union are all impacting their businesses. And there's no end in sight to the battles.
"We might be driving off a cliff here," said Ridge Vineyards president David Amadia. He was speaking about the latest round of tariffs the Chinese government has imposed on American wine. As part of an ongoing trade war between the administration of President Donald Trump and the People's Republic, tariffs on U.S. wine exported to China have been creeping up for the past year.
China's latest round of retaliatory tariffs, which went into effect June 1, put an additional 15 percent tariff on American wine, bringing the total tariffs to 54 percent, on top of an already existing tax of 37 percent. That means U.S. wines will soon cost 91 percent more in China than they do at home.
Meanwhile, on April 8, the U.S. Trade Representative (USTR) announced a preliminary list of E.U. products that could be targeted with tariffs moving forward, including brandy, liqueurs, wine and non-alcoholic beer. Following the USTR's draft list, the E.U. responded in kind, threatening tariffs on American wine, rum, vodka and brandy (American whiskies are already under a 25 percent tariff in the E.U. as of last year).
And on May 30, President Trump tweeted that his administration will impose a 5 percent tariff on all goods from Mexico on June 10, with the rate rising to up to 25 percent by Oct. 1, in an attempt to pressure the Mexican government to stop migration of Central Americans across the southern border. Stock prices for companies like Constellation Brands, which owns Mexican beer brands Corona and Negra Modelo, dropped sharply.
The Distilled Spirits Council of the United States, the Wine & Spirits Wholesalers of America, the Wine Institute, the Kentucky Distillers' Association, and the American Craft Spirits Association—along with other beverage alcohol trade groups, representing producers and importers—have filed objections with the USTR in a bid to avoid implementation of the tariffs on E.U. products, which stem from a dispute between the U.S. and E.U. over aircraft subsidies.
The great trade wall
It's the battle with China that has West Coast wineries most worried, because they threaten plans to build a presence in a key emerging wine market. U.S. wines already face headwinds in China's market because rival wine-producing countries like Australia, Chile and New Zealand have recently negotiated trade deals that allow their wines to enter the Chinese market at a 0 percent tariff. As a result, the U.S. has been struggling to compete.
Making matters worse, two rounds of retaliatory tariffs were slapped on U.S. wine last year: 15 percent in April and 10 percent in September. In 2018, U.S. wine exports to China dropped 25 percent, compared to 10 percent growth in 2017, according to the Wine Institute.
The June tariffs—the third increase in just 14 months—have industry leaders concerned. "I did have orders go through after the first round [of tariffs], but I haven't had anything since then. Maybe in the last 12 months, I haven't had a single order," said Abigail Smyth, export manager for the Crimson Group, whose brands include Seghesio, Pine Ridge and Archery Summit.
Amadia said that while China is one of Ridge's five largest export markets, it only represents about 1 percent of their total sales. Ridge entered the Chinese market more than 20 years ago, but it's really in the last 10 years that they've started seeing significant growth. In light of the tariffs, their Chinese importer asked the Ridge team if they were willing to drop their prices to compensate. After some consideration, they decided not to, believing that the trade war is temporary. Amadia is still worried about the effects, though: "If I'm an importer in China, and I'm going to decide which wines I'm going to be selling, California is dropping down the priority list pretty quickly with these tariffs."
And their patience might not last forever. "We're in a wait-and-see situation. If we start to see our wine sales slow down dramatically, then we're going to have to make some hard decisions about how we're going to react to that," said Amadia. "We haven't seen that yet, but I do fear that [with] this latest round of tariffs, we may be moving in that direction pretty soon."
The tariffs could have an even bigger impact on lower-priced wines, competing for a spot on a supermarket shelf at a very specific price point. Chinese consumers shopping in a lower price range will be much more swayed by a slight price increase. Buyers who are already spending $100 or more on a bottle of wine might still be willing to pay a higher premium for their favorite brands. "We are still less expensive than the top-end Bordeauxs, and we're a top-end California wine," said Silver Oak director of international sales Vivien Gay.
The long game
American producers overwhelmingly agree that the Chinese market is important, despite the relatively small amount of exports the country currently represents. "I think it would be a mistake for us as an industry to abandon the work we've done for so many years," said Christopher Beros, the Wine Institute's Asia director. "If we say it's too difficult and we're going to go somewhere else, I think someone will gladly take our place, and it'll take a long, long time to get it back."
Given the sheer size of the market, the potential in China is immense, and U.S. wineries playing the long game realize this. Smyth said that Crimson Group has been in the Chinese market for over 10 years, and while the country doesn't rank among the group's top 10 markets in exports, they're in it for the long-term.
"The Chinese middle class is growing. The number of millionaires is growing, [as is] the number of Chinese tourists coming into California," said Smyth. "The hope is that they go back and they still desire those products."
Some are also betting that their efforts in China will open other doors in the region. "We believe that the impact of China's wine culture appreciation will be greater than just the sales themselves, but will spread beyond their borders to influence the broader Asian markets," said David Pearson, CEO of Opus One, which has been in China for more than 15 years.
Because of this potential, many wineries are reaffirming their commitment to the market despite the uphill battle. "As far as we're concerned, it's business as usual. It's important to show up and support our importers, and show the market that we're not going away," said Gay of Silver Oak, a brand that has been in the Chinese market for nearly 20 years.
But it may discourage newcomers. "I think we can safely assert that tariffs at these levels effectively block any entry of new wine brands into the Chinese market," said Pearson.
How long can even the most established wineries play in defense mode? "At this point we're trying to protect the business that we already have, instead of spending our time growing new business in that market," said Ryan Pennington, director of communications at Ste. Michelle Wine Estates. "We're eager to see this current situation resolve because we need to get back to building long-term demand and preference for American wine, and that takes time."
Source: https://www.winespectator.com/
