Impact of Trade War on American Wine

In light of our upcoming case discussion covering the potential export of American wine into the growing Chinese market and looming March 1 trigger for additional tariff introductions, I wanted to dig into the impact on domestic wine producers and exporters. As many of us have been following, the Chinese government has tactfully targeted American export industries to exert maximum political influence in an escalating tit-for-tat trade war (think Harley-Davidson or dairy / beef / corn farmers, all largely based in the battleground upper-Midwestern states). Despite domestic wine production's concentration in the largely left-leaning states of California, Oregon and Washington (of course, setting aside the "emerging regions" discussed earlier!), the industry has actually found itself ensnared in the trade war as well.

In April 2018, China implemented a ~15% tariff increase on American wine in April 2018, which raised the effective China import tax to ~66-68% (N.B.: this compares with the statistic in the case that the fully-burdened import tax in China was 48%, which was written prior to Apr '18). [1, 2] Later last year, as a part of China's $60bn tariff announcement in September 2018, wine was among the subjected goods (joining meat, crops, and industrial products), which was vaguely reported as an incremental ~5-10% hike, accompanied with the threat of it rising to 25% by 2019 (presumably if the current "cease-fire" sunsets on March 1 without a trade deal or bilateral extension). Simple arithmetic would suggest a current "all in" tariff on American wine of ~71-78%, with potential of increasing to ~90%+.

As the case discussed, the combination of a 48% import / consumption tax and VAT significantly ate into wineries' profit, "making Chinese market entry financially unviable for more moderately priced wines". Despite the macro / political overhang, US wine exports to China rose 14% YoY in value for the first six months in 2018, suggesting the continued attractiveness of the rapidly growing Chinese market. [3] However, I'm curious to see how the numbers look for 2H'18 (and more importantly, 2019), as tariff fears have shifted from tail risk to a real financial headwind. Tangentially (though related), I'm also interested in the impact of the more recent shifts in the Chinese domestic market (i.e. crackdown on guanxi as part of anti-corruption measures, as discussed in the case, as well as early indicators of the luxury consumption environment rolling over).

[1] https://www.sfchronicle.com/business/article/California-wine-among-60-billion-in-U-S-goods-13239467.php
[2] https://www.bizjournals.com/sanfrancisco/news/2018/09/19/california-winemakers-china-tariffs.html
[3] https://www.farmprogress.com/grapes/wine-industry-frets-over-additional-chinese-tariffs

Is Older Wine, Better Wine?

Interestingly, most wines produced in the world today are made to be consumed in the near rather than far future. On the other hand, the most expensive vintages tend to be aged. Clearly, there is a correlation between wine age and shelf price - but does this correlation also follow with regards to wine quality?

The most critical factor in the aging of wine are tannins, which alter chemically in response to small amounts of oxygen seeping through the cork over time. Temperature, light exposure, and humidity also play a role, resulting in a limited time window within which a given wine is at its peak. Many aged wines stored in cellars and brought out years later for special occasion have passed this peak, and yet consumers continue to be excited by and pay top dollar for older vintages despite their not necessarily being in the optimal taste phase.

Wine can taste better with age, but only in combination with the right creation processes and storage techniques. If there is a connection between age and wine quality, it is more likely to be found in the concept of scarcity: older wines are rarer, and price follows this traditional demand-and-supply driver accordingly.