The California wine industry is a big winner in Trump's new trade deal with Canada and Mexico

Key Points
  • Canada is the largest single country market for American wine, and California vineyards produce more than 90 percent of the U.S. wine exported.
  • But the new North American trade deal comes as the American wine industry is being hurt by the latest round of retaliatory tariffs from China.
  • The additional duty of 10 percent that went into effect last month resulted in total import taxes of U.S. wine into China jumping to a whopping 79 percent.
Bottles of Constellation Brands Inc. Wild Horse Cabernet Sauvignon wine sit on display for sale inside a BevMo Holdings LLC store in Walnut Creek, California, Jan. 3, 2018. 
David Paul Morris | Bloomberg | Getty Images

The California wine industry was handed a big win with the revised NAFTA deal reached with Canada. It will bring wider access in a country that previously was accused of "discriminatory" trade practices.

It follows the Trump administration in May requesting the help of the World Trade Organization to resolve a wine dispute with Canada over grocery-store shelf access. A WTO dispute panel was set up this summer to rule on the matter.

Canada is the largest single country market for U.S. wine, with retail sales of about $1.1 billion last year. About 90 percent of the American wine exported comes from California vineyards.

American wine industry executives said U.S. trade negotiations with Canada produced meaningful progress in eliminating some protectionist policies, particularly in the province of British Columbia. The new trade pact announced late Sunday, known as the United States-Mexico-Canada Agreement, means the Canadian federal government agreed to resolve the grocery store access issue in B.C. with the help of provincial leaders and settle the WTO case brought by Washington.

In 2015, liquor authorities in B.C. amended rules to allow regular grocery stores to start selling wine and liquor but in doing so separated U.S. and other imported wine from B.C.-only product. The U.S. plans to delay WTO action on the wine issue for a year to give the province time to provide more market access.

The marketplace for alcohol in several big Canadian provinces is controlled by government-run enterprises and liquor control boards, and in some cases they own and operate state-run retail networks. California-produced wine is the No. 1 table wine category in B.C.

Australia also filed its own WTO complaint earlier this year against Canada, accusing B.C. of discriminating against imported wines and also citing barriers in other provinces, including Ontario and Quebec. The U.S., Chile and New Zealand are among other countries that reserved third-party rights in the Australia-Canada dispute.

The new USMCA, which modernizes the 25-year-old North American Free Trade Agreement, doesn't affect the Australian complaint. As a result, U.S. wine industry officials said they will continue to work in trying to make progress on access issues in Quebec and Ontario.

The new North American trade deal comes as the American wine industry is being hurt by the latest round of retaliatory Chinese tariffs on $60 billion worth of U.S. imports. The new round of tariffs by Beijing also impacts table grapes grown in the U.S., and California produces about 99 percent of the table grapes grown domestically, according to the California Farm Bureau.

China has been a growing market for California wines, but the additional tariff of 10 percent that went into effect Sept. 24 on American wine, when added with previous import taxes and duties, will equal a whopping tax of 79 percent.

In April, U.S. wine, nuts and fruit — major exports from California — were hit with a 15 percent tariff by Beijing. The Chinese government followed it up in early July with additional duties on some of the same products.

"China's new tariffs make the playing field unlevel and make it difficult for California wine to compete with other wine regions from around the world because we're more expensive on a relative basis because of this incremental tariff," said Linsey Gallagher, vice president of international marketing for the Wine Institute, a San Francisco-based wine trade group.

California's wine industry had been investing in the Chinese market in the past decade trying to build share against competitors from Europe and elsewhere. Many of the top competitors such as France have wines going into China duty-free but have a value-added tax of about 16 percent.

France has about 50 percent market share of imported wines in China. Australia also has been making inroads into Asia's top economy in the last several years and has about 30 percent share.

"Our share is in the single digits of that market," said Gallagher. "But it's still the fifth-largest export market for California wines."

According to Gallagher, California wine sales to mainland China are up over 300 percent over the last 10 years. She said the fundamentals for China's wine market had been "fantastic up until April, and now it's just a more difficult situation for us."