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Michael Sainsbury

China tariff freeze won’t relieve wine industry’s hangover

As Prime Minister Anthony Albanese prepared for his trip to China this weekend, Australia’s largest two-way trading partner and export destination finally announced it would launch a review into the tariffs of up to 200% placed on Australian wine.

“Australia’s wine suppliers are waiting with bated breath — nervous and excited like school kids before a social,” one wine exporter told Crikey.

“Hoping it goes well but worried it could go terribly bad. This will supply more of a sugar hit rather than any long-term solution to the underlying problem which is simply that we produce too much wine in Australia.”

That sugar hit will be some time coming, with the Chinese government saying it will take five months to review the tariffs of between 107% and 200% it imposed on Australian wine in 2020. In return, Australia has agreed to suspend action in the World Trade Organization.

“We’re very confident that this will result in, once again, Australian wine, a great product, being able to go to China, free of the tariffs which have been imposed by China,” Albanese said earlier this month.

The tariffs, which came with others on a range of commodities including coal, barley and lobsters, torpedoed Australia’s $1.2 billion wine export market to China. after the 2015 China-Australia free trade agreement, the tariff on Australian wine had dropped from 14% to zero, which led to Australia doubling its market share from 12% to 24%, according to a recent report by Rabobank. At its peak, China made up 18% of Australia’s wine export volume and 40% of its export value.

But rather than being the sole source of the industry’s woes, the collapse of the China trade served only to exacerbate the chronic oversupply in the Australian industry, and while the review is welcome news for the industry, it’s far from a panacea. Industry insiders estimated to Crikey that when China trade comes back, Australian exporters would be lucky to get to 50% of previous volumes, saying the real hit to the wider Australian wine market was only about $400 million.

“The pre-tariff Australian wine trade to China was split into about three equal pieces,” a manager of Asian sales for a major Australian wine brand told Crikey. “The first was Treasury Wines; the second was Chinese owners and entrepreneurs who came into the market and also included those who set up wine exporting businesses to fill business visa requirements. So only one-third was really about the rest of the wine sector.”

It also remains unclear just who will be let back in when the tariffs are relaxed. As part of its crackdown on Australian wine, China imposed a sliding scale of tariffs, offering the most relief to those importers who would open up their books. The stated reason was that China claimed Australia was dumping cheap wine into the market, but insiders believe it was to scrutinise the Australian wine industry.

“It was quite intrusive … They wanted to know financials, they wanted to know costs of labour and costs of goods,” the exporter said.

Treasury Wines, at least, is confident, telling shareholders last week that it was “well placed to rebuild its business in China”.

The $6 billion-a-year sector’s broader oversupply problems mean that storage vats around the country are already full. 

Rabobank has estimated that Australia has the equivalent of more than 2.8 billion bottles of wine — 859 Olympic swimming pools worth — in storage. Many are red varieties. One thing the China boom did see was white wine grapes being ripped out and replaced with the red overwhelmingly preferred by Chinese consumers. This has seen plummeting prices for red varieties of grapes and a decline in domestic red wine prices.

And there are further existential problems for the sector. Global wine consumption is in decline, deteriorating by 3% in volume during 2022, according to market research firm IWSR. China’s market for imported wine is also in a continuing period of gradual decline; 2023 is on track to be the worst year in a decade, having fallen from a peak of 7.5 hectolitres in 2017 to 3.5 hectolitres in 2022.

It is unclear whether the market that was once there for Australian exporters remains, and whether the years of vitriol poured upon Australia by state media will have cruelled the pitch for Australian retail products.

Australian winemakers’ declining fortunes in China add to the headache of major markets dropping last year, including the US and UK. There are reports of growers ripping out vines, and insiders say conciliation and rationalisation of the sector is the only answer for a sustainable industry.

Australian Trade Minister Don Farrell has a history of picking winners. When he sold his eponymous wine business earlier this year it was seen as removing a conflict of interest, although his name is still very much associated with the brand. But perhaps, given the woes in the sector that are unlikely to be solved by whatever moves China makes next, it was just a savvy deal.

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