China finds California wine pairs well with a trade war

Natalie Kitroeff
Motivate Publishing | Getty Images

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 realizes they should penalize 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.

"Wine is something people can relate to," said Jim Boyce, who has been covering the industry from Beijing for a decade on his blog, the Grape Wall of China. "It's like putting a tariff on Chinese dumplings. It's something you can feel on an emotional and personal level."

The 15 percent 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 Rolls-Royce, 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 percent. 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 percent charge would be brutal. "No one wants to overpay," Mr. Honig said. "If all they're looking at is two different bottles side by side, and we are competing with Australia and Chile, that's a big competitive disadvantage."

Chilean and New Zealand wines face no Chinese levies, thanks to free-trade 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.

"There are so many countries producing fine wine," he said. "I don't have to buy relatively expensive California wine. I could choose from New Zealand, Australia, Chile and South Africa."

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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.

It wasn't like this when David Pearson made his first business trip to Beijing 15 years ago, intent on selling Chinese customers on his super-premium Napa wine Opus One. The rich drank French Bordeaux if they drank wine at all. He had to make the case for his California winery, a joint venture between Robert Mondavi and Baron Philippe de Rothschild.

He found a natural audience.

"People will buy symbols of luxury — watches, cars, expensive bottles of wine — to demonstrate they have the means to do that," said Mr. Pearson, the Opus One chief executive. "There was no middle market. You were either spending all your money on the highest quality of wine or you couldn't afford to buy anything other than the least expensive wine."

The change started when Xi Jinping became president in 2013 and began an anti-corruption campaign that zeroed in on illicit gift-giving. Wine imports dipped for a couple of years but then recovered as sellers began to learn how to market to a person who would buy a bottle at a time, not several cases.

"The distributors who learned how to deal with consumers survived and got better at it," said Mr. Boyce, the wine blogger.

It isn't clear how exactly the new tariffs will affect Opus One. Mr. Pearson sells the wine to a group of intermediaries in France known as negociants, who then send it to Chinese importers. It's also unlikely that anyone willing to spend the $600 for Opus One in China would even notice the added charge.

The middle-market wine buyer — with $20 or so to spare — would notice. France and Australia are already monsters in that market, sending half of all of the foreign wine that went to China last year. The United States share is just 2 percent, and it has been shrinking. The Wine Institute, which represents California growers, says that's partly because they're selling less for a higher price.

"California has had a tough time getting into the conversation," said David Amadia, the president of Ridge Vineyards. "It wasn't considered a top wine region in China."

After his Geyserville zinfandel blend was served at a meeting between Mr. Xi and President Barack Obama in 2013, a flurry of new importers began asking for 1,000 cases at a time. He was initially excited about the attention. Then he realized he had no idea where it was going, or who exactly was so interested in it.

"We had concerns about gray market and counterfeiting," he said. So he rejected those orders, and says other American winemakers may also be choosing control over quantity. No one knows how much fake wine flows in China, but experts say French and Australian labels are stolen most often, and slapped on random bottles, because they are so well known and abundant.

On Mr. Pearson's desk, in Napa, he has a box of counterfeit Opus wines on display. The scammers did a terrific job on the box, he said, other than the "X" they inserted into the name Rothschild.

"Part of me takes a strange amount of pride in it," he said. "Your brand has to have enough value associated with it in order for someone to think it's worth counterfeiting."