Australian wine producers are bearing the brunt of the deterioration in diplomatic relations between Canberra and Beijing. Their sales will experience the resultant hangover.
As of Saturday, China began imposing temporary anti-dumping tariffs of between 107.1% and 212.1% on wine from Australia. China claims the action is necessary due to unfair competition with its domestic wine producers, even though it says its investigation into the trade practices of Aussie producers will continue through next August, a year since they began. The higher duties came after China collected questionnaires from the Chinese wine industry two weeks ago, an unusual step to impose tariffs even while the investigation is ongoing.
Australia says the action is a punitive and unfair reaction to the diplomatic squabbles between the two countries. Australia has raised the hackles of Beijing for demanding an independent inquiry into the origins of the coronavirus, as well as for pressing China on human-rights violations in Hong Kong and Xinjiang.
China accounts for 37% of Australia's total wine exports, the government says, an industry worth A$2.9 billion (US$2.0 billion). So any loss of sales is sure to hit the bottom line.
Shares in Treasury Wine Estates (TSRYF) fell 6.9% on Monday, on top of losses of 10.9% from Friday, leaving them 47.1% lower for the year. The loss of almost half their value is in stark contrast to the broader Aussie market. Despite a 1.3% dip on Monday, the Sydney market is near parity for the year to date, down only 2.5% after the day's losses.
Treasury CEO Tim Ford says the company will divert wine bound for the China market to the United States, Europe and other Asian destinations. Treasury faces duties of 169.3% on its wine imports into China.
"We are moving on with a plan," Ford told Reuters, "to build the markets outside of China, and that's what we'll continue to do."
Ford, who took up this new role in July, says some of the wine is already in Shanghai but will be shipped elsewhere. "A strategy of hope is not a very good strategy," Ford added.
Treasury Wine counts Penfolds, one of the world's largest wine labels, under its brands, as well as Beringer, Wolf Blass and Lindeman's. It has raised prices on its wines around the world on the back of high demand for its wines from China. However, with consumers the world over having adjusted to those rates, "now consumers are willing to pay that, we are not going to discount the price to move volume," Ford says.
Accolade Wines, which makes Hardys Wines, faces a 160.6% levy. Casella Wines, which makes the mass-market Yellow Tail wines already popular in China, faces a 160.2% duty. Both Accolade, Australia's largest wine company by production, and Castella, the second-largest, are privately held companies, while Treasury Wines is third-largest and the largest listed producer.
The "China effect" is clear when you compare shares of Australian Vintage (AUVGF) , the fourth-largest producer. They fell 2.4% on Monday but are up 17.1% in 2020. Less than 2% of the company's wine sells in China, with most of labels including McGuigan and Tempus Two selling in Europe.
China has blamed government subsidies to the Australian wine industry for its investigation. It says the state financial support allows Australian winemakers to sell bottles for less than the cost of production.
Australia's Minister for Agriculture, David Littleproud, expressed Australia's "extreme disappointment" at the decision of the Chinese authorities, a "seriously concerning development and one which Australia will be vigorously fighting against." The Australian government "categorically rejects any allegation that our wine producers are dumping product into China," he added.
China on November 6 began an unofficial trade ban on seven product categories of Australian goods, including wine, part of a "gray-zone" strategy to scare Australian exporters. The sudden and unannounced changes in import permissions has already left tons of live Aussie lobsters rotting on the tarmac of the Shanghai runway.
Australian wine exporters say they haven't been able to ship into China since November 6. There are now at least 75 containers of Australian wine stuck in the ports at Shanghai and Ningbo since November 6, according to the South China Morning Post. The wines include multiple labels but primarily come from the state of South Australia, home to the Barossa Valley outside Adelaide.
Besides wine and lobster, China has also verbally suspended imports of Australian barley, coal, copper, sugar and timber. While it is typical for China to take aim at a high-profile product category such as wine, it is highly unusual for it to target industrial and commodity products, which are essential to China's economic output.
China is Australia's top trading partner, accounting for A$136 billion in imports into China in 2018, according to figures from the Australian government, with A$78 billion in Chinese goods heading the other way. That total two-way volume is up 35.8% since 2016.
Australian Trade Minister Simon Birmingham anticipates a "hellishly tough time for Australia's winemakers" until the trade spat with China is settled. The tariffs make it virtually impossible to sell Australian wine in China, doubling or even tripling the price as they do.
Birmingham says China's "discriminatory screening practices" imply a breach of World Trade Organization rules and a breach of the China-Australia Free Trade Agreement.
There has been a string of spats between China and Australia at a diplomatic level. Australia in 2018 introduced new national-security laws to prevent foreign interference in Aussie politics, widely seen as necessitated to counter Beijing's efforts at covert influence.
A Chinese-Australian community organizer and political donor, Sunny Duong, on November 5 became the first person charged over foreign interference in Australian politics, under the new laws. Duong, who heads the Oceania Federation of Chinese Organizations from Vietnam, Cambodia and Laos, has been a prominent donor to the pet projects of various Australian politicians.
It's unclear what the Australian authorities believe he has done wrong. Australian Federal Police deputy commissioner Ian McCartney says Australia "has taken preventative action to disrupt this individual at an early stage."
In a blockbuster 2019 allegation, the Australian spy service ASIO said it was investigating evidence that Beijing attempted to plant its operative as an elected official into the national Australian government.
