Tariffs and currency manipulation are hurting small U.S. wineries

The U.S. small wine makers face an uphill battle making it into the U.S. marketplace and then expanding its reach. Because of their small size, it makes it very difficult to pick up proper distribution and distribution that is cost effective.

However, these small producers found a market where they can expand their reach and greatly increase their sales, the Chinese markets.

It seems like the perfect remedy for the small producer to increase its profits and expand their business. But recently the trade war between the U.S. and China has cut into this advantage and in some cases obliterated it, which puts small wine producers at risk.

The tariff effects

The Chinese government has stepped up its tariffs on American wine as part of their fight in the trade war. The Chinese first put a 15% tariff on American wine on April 2018 and increased the tariff another 10% on September 2018 and further increased the tariffs 15% on June 1, 2019. When these numbers are compounded with taxes, the new rate will be 93%. Further making matters worse is the Chinese government’s penchant for devaluing their currency, the Yuan. The Yuan is at its lowest point versus the dollar in 11 years and is down significantly, further adding increased cost to American wines.

Consequences of the tariff

U.S. wine sales are down 33% from the same period in 2017.

The wine industry is suffering from the effects of the tariffs. And unlike other industries it does not receive favored domestic treatment.  In the tariff war, the soybean farmers who suffer from the tariffs are receiving government payments to subsidize their lost income.

And interesting enough the wine issue the mainstream media focuses on is the retaliatory tariffs proposed on French wines in retaliation against the French government’s proposed 3% digital tax on Microsoft and Google.

Like the soybean farmer Microsoft and Google receive favorable treatment that small wineries will never receive.

Now there is the case that imposing a tariff on French wines will make them more expensive than American wines, and increase the sales of small domestic wineries.

That may be true in isolation but it doesn’t make up for the lost Chinese sales or that carrying small brands may not be cost effective for domestic distributors.

The dire consequences of missing out on Chinese opportunities

The tariff numbers don’t tell the whole story here, what really tells the story is the lost opportunity.

By conservative estimates China has a middle class of 400 million. To put this in perspective the U.S. has an estimated total population of 327 million. So, China’s middle class alone is over 22% larger than the total U.S. population.

The Chinese middle class is growing and so is its taste for wine. By 2021 China will overtake Britain as the second largest consumer of wine in terms of value. China’s wine markets are expected to see over 30% growth over the next five years. [1]

The most popular choice for Chinese consumers in wine priced between $5 to $20 a bottle. [2]

With tariffs and taxes compounding the price increase 93% and with currency manipulation leading to making the U.S. goods more expensive, a Chinese consumer could see a U.S. bottle that was previously in this $5 to $20 range, become increasingly higher and outside its price range.

So how are Chinese consumers dealing with this new trend? Are they paying more, possibly, but the more likely scenario is they are finding alternatives.

The U.S. wines have fallen 33% while the Australian, South American, and French wines have become a substitute. A Chinese wine importer indicated that U.S. wines are so expensive that he is switching to Australian and Chilean imports instead.[3]

But the consequences may be more than temporary. As a young people emerge into the market and the middle class grows, the wines from places like Australia and Chile may develop customer loyalty early on and be hard to displace. The U.S. wines may never get a chance to gain a foothold for millions of emerging customers.

The tide must turn

I remarked to a Chinese tour guide that I was amazed by the number of Volkswagens on the road. He indicated that the ‘Volkswagen was the first foreign car company to built a plant in China and that the Chinese are loyal to them.”

I am not an expert in Chinese consumer loyalty but I do know there is an advantage to being first in the market.

As millions of consumers enter the Chinese middle class, wine producers in America have a great opportunity to capture this market.

But its ability to compete is hurt by the weight of tariffs.  Unlike its competitors like the Australians, who face no Chinese tariffs on their wine, the U.S. small wine producers are being squeezed out of their price categories and having their inventory replaced by Chinese importers.

In concluding, the tariffs are hurting the wine industry presently and potential destroying their future in the Chinese wine market.

So, one may think the tariffs are temporary, but think again because their impact may become devasting to the future of our small wine producers.

 

[1] http://www.chinadaily.com.cn/a/201802/06/WS5a790d91a3106e7dcc13afff.html

[2] http://www.chinadaily.com.cn/a/201802/06/WS5a790d91a3106e7dcc13afff.html

[3] https://www.scmp.com/news/hong-kong/hong-kong-economy/article/2172354/trade-war-tariffs-sour-chinese-appetite-us-wines

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