China finds wine pairs well with a trade war

Retaliatory tariffs are a blow to exporters increasingly catering to young

Cabernet isn’t the most obvious pawn in a trade war between the United States and China. Airplanes and their parts are the leading American export to China. Soybeans and wheat grow in Trump country. But China’s selection of wine as a target of retaliatory tariffs did not surprise Michael Honig, a winemaker in the Napa Valley, where the tariff would hit hardest.

“The reason the government realises they should penalise us is, we are branded,” said Mr Honig, the president of Honig Vineyard and Winery. “It’s hard to go after a wheat grower, because who is a wheat grower? It’s a commodity. We are not a commodity.”

The news was an unwelcome turn of events for Mr Honig and many California winemakers, who have spent years trying to carve out a place in the hearts of wealthy Chinese consumers. That hard work has earned them a prized sliver of what is becoming one of the fastest-growing markets for wine imports.

China’s imports of American wine reached $82 million last year — not including bottles entering duty-free through Hong Kong — a sevenfold increase in the last decade. But growing visibility may have turned Napa wine into easy prey.

The 15 per cent tariff, announced Monday, on top of existing tariffs and taxes, is a gut punch to winemakers marketing their wares to the mushrooming legions of young, recently wealthy Chinese. It is that group, one or two levels below China’s ultrarich, that holds huge potential for California vintners. Those consumers are far more numerous than 1-percenters. And more crucially, they’re the ones driving the recent blossoming of a wine culture in China in which bottles are actually consumed rather than simply traded among elites as trophies.

Mr Honig and his business partner and wife, Stephanie, have spent a decade wooing that clientele, making a trip a year to China to pitch sommeliers in top restaurants and hotels. He has recently expanded beyond the obvious stops in Beijing and Shanghai, visiting cities like Guangzhou, in southern China. “There are people who want to spend the most, but there are also aspirational buyers,” Mr Honig said. “You may want to buy the RollsRoyce, but you can afford the Mercedes.” And that’s his sweet spot.

His most popular cabernet goes for around $25 a bottle wholesale, and he sends more than 500 cases of it every year to a plucky Shanghai importing business started by two brothers with dual citizenship. With existing tariffs and value-added taxes mixed in, the total charge tacked on to California wine was already close to 50 per cent. After the importer factors in shipping, takes its cut and passes the bottles to a hotel or retail store, which takes its cut, the Napa red ends up selling for the equivalent of around $100.

An extra 15 per cent charge would be brutal. Chilean and New Zealand wines face no Chinese levies, thanks to freetrade agreements. Australian bottles will enter the country tariff-free next year.

Larry Yang, an importer in Shanghai, said his customers liked California wines, but not enough to ignore an even higher price tag. The wine isn’t cheap as it is, he said, and if it gets pricier, he will look elsewhere.

“I could choose from New Zealand, Australia, Chile and South Africa,” he said. And Chinese drinkers have a growing array of homegrown brands to choose from. Expert winemakers have spent years harvesting cabernet sauvignon, merlot and cabernet franc varietals at the foothills of the Helan Mountains in Ningxia, a region that borders Inner Mongolia. They have started winning international awards, even beating out French favorites.

Then the government began protecting its domestic players.

When the European Union put tariffs on Chinese solar panels in 2013, Beijing blustered back by opening an inquiry into whether European winemakers were dumping cheap, improperly subsidized bottles onto the Chinese market. It ended the investigation a year later, after the Europeans agreed to help train Chinese winemakers.

Sophisticated wine shops have sprouted up across Shanghai, the online retailer Alibaba now runs a yearly wine sale, and other sites will deliver cases to people’s doors within two days. In August, China got its first master sommelier, a distinction reserved for people who can pass a rigorous series of tests, including verbal and tasting exams.