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The Impact Of Chinese Tariffs On U.S. Wine, As Seen At ProWine China

www.forbes.com by Cathy Huyghe26/11/2019  

Last week I stood at an intersection inside Hall W4 at the ProWine China trade fair in Shanghai, and the contrast of energy on either side of me was palpable.

Buzz, crickets. Buzz, crickets.

The Australian wine booth, at one side of the intersection? Buzz. The California wine booth, on the other side? Crickets.

It’s tempting to rationalize that contrast along the lines of “Tariffs, no tariffs. Tariffs, no tariffs,” and that generalization is justified to a large extent. The Trump administration’s current trade war with China has provoked retaliatory tariffs by the Chinese on US goods, including a 93% tariff on American wine since June. That’s a significant boost from the already-heavy 48% tax prior to the hostilities. The tariffs and taxes are scheduled to increase even further, to 106% on December 15.

None of this makes California wine in China an easy sell. Lower to mid-priced wines will likely be especially hard-hit, given the bountiful options at those tiers available by competitors like Chile and New Zealand (which enjoy tariff-free status into China) and Australia, which enjoys the tailwind not only of all that buzz and more favorable tax status, but also a $50 million Export and Regional Wine Support package from the Australian government.

Buzz, crickets, indeed.

It’s a particularly resonant contrast at the ProWine China stage, which this year drew more than 20,600 professional visitors and trade buyers, a 9% increase from last year’s edition. ProWine China is one of several multi-day international trade fairs for wine and spirits that Messe Düsseldorf organizes in Europe and Asia each year; it is also an indicator of the strategic positioning of Shanghai and the health of the Chinese market, which continues its evolution as one of the largest and most complex in the world for wine and spirits.

It was challenging enough already. The tariff situation is almost crippling.

Yet US wine businesses and trade organizations, from the Wine Institute in California to Deutsch Family Wines and Spirits to Delicato Family Wines, dug in – for ProWine China itself, and the Chinese market in general. Here are three reasons why.

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visitors ProWeinMESSE DüSSELDORF / TILLMANN

The Long Game Matters

Bill McMorran, vice president and general manager for Gallo Asia, considers the long-term perspective of his business particularly within the Chinese context. Culturally speaking, it’s less about a “bad quarter” or even a “bad year,” and more about a “good decade.”

“We’re a long-term company,” he said. “We know we’ll take a hit for a few years but if we weren’t here [at ProWine] this year, we’d set ourselves back ten years.”

Part of the goal, for Gallo and other producers who attended ProWine China, is to maintain visibility and relationships in the market over time, despite the current headwinds blowing against them.

Focus on Key SKUs and Key Cities

Duckhorn, which has been in the Asia market since 2004, shares that perspective. The company is certainly being hurt by the tariffs, according to Karl Coveney, Director of Asia Pacific Sales, and they’ve had to take multiple hits to their profit margins as they’ve provided help to their importer on pricing.

However, to leave the market entirely now and wait until the tariffs right themselves would be “counterintuitive,” Coveney said, “to all the hard work we have done and brand building we have achieved over many years.”

Duckhorn has decided to stay in, if they can, and ride out the storm rather than leave and try to rebuild from scratch later. The number and volume of their focus wines has shrunk, but they’re trying to focus on key SKUs and key cities.

“Our persistence to show up at shows like ProWine is crucial to keeping our brand familiar while we go through these tough times,” Coveney said.

Maintaining Relationships, Continuing to Educate

Honore Comfort, Vice President of International Marketing at the Wine Institute in California, recognizes the slower sales of California wines in China because of the current impact of retaliatory tariffs, but says she remains hopeful that there will be a vibrant return to their business once the trade issues are resolved.

“It will take time to rebuild our position in the marketplace,” she said. “However interest in and demand for California wine remains high with our importers and customers. I heard frequently from our partners in the market that they are waiting for the tariffs to be lifted in order to restock their warehouses with California wine.”

In the meantime, the focus is on maintaining their relationships and presence in the market through their trade and education programs.