China’s anti-dumping investigation into Australian wine exports will provide a substantial impact on South Australia’s export performance and more importantly our world class wine industry. South Australian wine exports to China make up around 30% of SA’s exports to China, and just under 10% of SA’s global exports. This threat of an anti-dumping finding against the Australian wine industry has vastly more impact on the South Australian economy than the previously announced restrictions on barley and beef.
On August 18, the Ministry of Commerce issued Announcement No. 34 of 2020, deciding to conduct anti-dumping investigations on wines imported from Australia in containers of 2 litres or less. This investigation will is scheduled to be completed before August 18, 2021, although it can be extended to February 18, 2022 under special circumstances.
Dumping generally occurs when a company exports a product at a price that is lower than the price charged in the country of manufacture. In this instance it would indicate that a bottle of wine is available for sale (at wholesale normally) at a lower price that available in the Australian market.
Another aspect of anti-dumping finding will be whether there are subsidies applied which may allow the exporter to sell their goods to China at a lower price. Subsidisation is a financial benefit an exporter receives from a government.
o There will likely be an argument made that the Wine Equalisation Tax (WET) which is a 29% tax applied to domestic wholesales (but not to exported wine), is in effect a state subsidy that lowers the price for exporters of Australian wine, when compared to the normal sales price in the Australian market.
China can recommend anti-dumping or countervailing measures if material injury has been caused by dumped or subsidised imports. Material injury to Chinese wine industry can include:
o loss of sales, profits, market share and productivity
o negative impacts to prices, cash flow, inventories, and employment
o The injury must be greater than what normally occurs in the normal ebb and flow of business.
China’s anti-dumping investigation will seek to find Australian wine exporters have sold wine to China at lower than the equivalent cost in Australia. This does not have to be all wine segments and from every winery. However in the current political environment if China can identify a difference, and demonstrate that there has been an injury to Chinese domestic winemakers, then the Australian wine industry is in trouble.
We shouldn’t be naive to believe that this will all blow over, and that China needs our wine. Australian wine has been very successful in China, but so have wines from Chile, France, Spain and Italy. Additionally there is a vast Chinese domestic wine industry, with many homegrown brands that have improved their quality due to collaboration with Australian and European winemakers who have introduced world class wine making techniques to the Chinese wine industry. Most Australian’s won’t realise that China has the second largest area of vineyard plantings in the world, after Spain, with 875,000 hectares of vineyards. This is 6 times larger than Australian vineyard areas at 146,000 hectares. China is also the 10th largest global wine producer, not far behind Australia in 7th position. China’s wine industry is following a well-trodden path of learning how to domesticate an international industry and do it themselves.
The Australian wine Industry, which is made up of grape growers, winemakers, wineries and tourism operators contributes more than $45billion to the economy and supports more than 165,000 jobs across Australia, according to economic modelling undertaken by the industry. South Australia is by many measures the heart of the Australian wine industry, producing more than 40% of the wine produced, and almost 70% of Australia’s exports of wine. PIRSA reports that South Australia’s wine production and processing industry contributes around $3billion to South Australia’s economy and this contribution is underpinned by the nearly $2billion of wine South Australia exports each year. These numbers are to a large part, why the South Australian Government, and the wine industry should be concerned about the moves this week by the Chinese Government to announce an anti-dumping investigation into Australian bottled wine exports to China. There is much at stake.
There has been ongoing tension between the Australian and Chinese governments over recent year regarding everything from bans on Chinese companies operating in Australia, support for an independent investigation into COVID-19, and even freedom of navigation in the South China Sea. Our bi-lateral relationship at a political level has been weak at best. This has not been the case for our business and trade relationship, with increasing exports, and investments across a range of sectors, which has included our wine exports to China which have gone from $330 million in 2014, to more than $1.2 billion in 2019. Business has been good, despite the deteriorating political relationship.
There have been warning signs that our export and trade relationship may start to come under pressure. In April the Chinese Government announced they were implementing anti-dumping tariffs of 80.5% on Barley, which has effectively stopped Australia’s $1billion exports to our largest market. Similarly, the meat processing and export industry has seen a number of companies de-registered, and in July, beef exports to China were hit with a 12% tariff for the rest of the year after hitting the annual export quota early. There are numerous business and industry examples where it has become harder to conduct business with China over the past 12 months. Earlier this year the wine industry was warned by the Chinese Ambassador about the risk to other Australian export industries such as wine, if the Australian government continued to pursue an independent review into the origin of COVID-19. It is hard to see how these warnings and Chinese government actions are not interrelated.
This is no idle threat to the Australian wine industry. We have seen how this has played out with the Barley industry recently, and more specifically we have evidence of how China has used trade barriers to punish countries who aren’t prepared to play by China’s rules or engagement. Since the US started a trade war with China in 2016 the tariff on US wine has gone from 14% to now 106%. Consequently US exports of wine to China are comparatively small, and still declining.
South Australia’s wine industry has become overly focused with the huge expansion in wine exports to China, which has at times come at the expense of our export performance to traditional markets such as USA, UK, and Canada. These three markets have been declining in value of exports over the past 5 years, which we will need to address if our industry is to thrive without the need for our China market. We need our state and federal governments, and the industry here in Australia to acknowledge the threat, and start developing a plan to diversify our export focus to other markets in North America, Europe and emerging Asia markets such as Japan, Vietnam, Singapore, Malaysia and Thailand. If we don’t actively develop this plan now, particularly during the current pandemic conditions, and after the devastation of the recent bushfires, the financial impact to the South Australian wine industry could be catastrophic.
Any objective analysis of the market conditions in China will identify the storm clouds brewing on the horizon. We need our wineries to rise to the challenge and start preparing for a future that involves much less reliance on the Chinese market. Preparation and risk mitigation is the key, and the good news is that there are still plenty of export markets out there for our wineries to tap into and develop.
Dr Nathan Gray is Managing Partner of AsiaAustralis, an Adelaide based Strategic Management Advisory firm that specialises in international trade, export development, and economic development.