MY VIEW: Do we want to save the China wine market?

Writer Jeremy Oliver states his thoughts on how Australian wine may weather the storm cast from trade tensions with China.

As someone with around 15 years of experience in developing the China wine market and its wine media, commentator and author Jeremy Oliver is regularly asked by Australian brand owners for his view on the current situation. Oliver says he doesn’t pretend to be an expert on foreign affairs, but that he does, perhaps, offer a perspective that Australians with little or no experience in China might find valuable as the trade conflict currently plays out before our eyes*.

Most Australians are by now crucially aware that Australian wine has been roped into the list of industries chosen by China to demonstrate its unhappiness with this country’s attitude towards its government and its policy positions. And, no doubt, are aware of the crippling ‘tariffs’ now targeted at importers of Australian wine.

Given that many Australians take a view towards this issue at odds with my personal opinion, it’s only fair that from the outset I make my position clear.

Optimistically, perhaps, I believe it’s still possible to resolve this immediate issue which threatens the livelihoods of many within and around the wine and its associated industries, provided of course there is the political will to do so. I believe this can be done without compromising Australian ideals. I also believe it’s an absolute necessity to do this, since there’s too much at stake for Australian wine and other verticals within our business and society.

For either of these objectives to succeed, Australia will need to modify the style and level of its communications with China. We need to be less reactive, more patient and show more perspective. We need to focus on what we want to achieve and not take our eyes from that goal.

Most Australians have little to no idea about China or what makes it tick. It’s hard to blame them for that, since what little history most of us learned at school had more to do with Europe, the US and the UK, with perhaps a smattering of post WWII in our region thrown in. We therefore make the frequent mistake of treating others the same way we treat others in the West, and then wonder afterwards why we make such little headway in Asian countries. Visit the vibrant and successful expat communities of Australians in China and across Asia today and you will see the difference that cultural knowledge can make.

It’s become common for Australians within Australia to trumpet: ‘China needs Australia more than we need them’, ‘We should immediately ban the sale of Chinese goods in Australia’, or ‘We should slap a 1000% tariff on Australian iron ore’. To examine each of these comments briefly, the University of Western Australia and the Australian National University as reported by Katrina Grace Kelly in The Australian studied the outcome of closing down the Australia-China trade in products by 95%. The results were that Australia’s GDP would drop by 6% with a loss of real disposable income of 14%. Conversely, China’s GDP would only drop by 0.5% and its loss to real disposable income would be a mere 2.4%.

In 2019 we bought goods to the value of $55 billion from China, while China bought goods from us to the value of $139 billion (UN’s COMTRADE database), around one-third of our export revenue. That equates to a balance of $84 billion our way – on the value of the trade alone. Add to this the associated benefits enjoyed by supplier and associated industries in terms of profits, jobs and infrastructure and it becomes even more important.

To return to the positions listed above, it is challenging to see any merit in any of them, unless of course we had alternative markets queuing up for precisely the same goods and services. We might well replace our lost copper market in China with others, but other industries such as nickel, timber, iron ore, wool, lobster, cotton and wood chips would face serious, if not impossible challenges. There is no other significant and untapped market for Australia’s iron ore or lobster, for example. Some agricultural products like barley can be redirected, but it is safe to assume this is broadly not the case.

Similarly, those calling for a complete halt in the trade between our countries might contemplate the effect such a ban would have on the ability of Australian citizens to buy toys and games, textiles, lighting, household equipment and furniture, computers, clothing, phone and telephony equipment, as pointed out by David Uren of the Australian Strategic Policy Institute. China is Australia’s leading supplier of each of these, providing more than 60% of our requirements. It is fanciful to think Australia could rapidly tool up to meet our own needs in these cases.

Australia does have some leverage over China with respect to iron ore and to a lesser extent with coal. But is it in our interests to risk these lucrative markets to resolve this current dispute? Many Australians appear to be champing at the bit to play poker with President Xi. In my view, however, we are not at that stage yet and we don’t have to endanger our industries and our national wellbeing, nor our principles, to achieve a short to medium term resolution.

Which brings us back to the wine industry. We are suddenly realising the extent to which China’s new ‘tariff deposits’ (in the absence of an official tariff) of between 107-212% will damage not only Australia’s wine industry but a raft or others that depend on it. If this issue is allowed to become long-term, the harm inflicted will be felt across all rural areas where wine, specialty food and tourism drive economies, infrastructure and employment. The impact will be significantly higher than simply a loss of $1.2 billion in sales.

Producers will need to develop alternative markets and a significant amount of wine packaged for China will need to be repackaged before it’s sold anywhere. While there’s genuine potential upside in renewed engagement with South Korea, Japan, Vietnam and Singapore amongst others, there are no markets lining up to replace anything like this volume of wine. It could also take years to reopen several Asian markets feeling snubbed by the wine industry’s recent near-exclusive focus on China within the Asia region.

It’s my estimate that around $650 million of Australian wine destined for China was being shipped by Chinese residents as part of a process to gain them permanent residency in Australia. This wine, much of which resides at the very cheapest end of the bottled wine market, is mainly sold as OEM product (BOB), and is referred to in China as ‘immigration wine’. None of us in this country would miss it, but it does keep a large number of growers, shippers and producers actively employed. There’s a significant risk that much China-bound wine will be dumped onto the domestic market, which will further drive down prices at retail. COVID-19 has already done pretty well in this regard, but prices are very likely to fall further.

At time of writing, I’m still not prepared to give up on the China market for Australian wine, and this is why. Whether we like what they say or not, whether we like the way they say it or not, and whether we like the person who says it or not, the Chinese Government has been surprisingly clear in telling us what it wants from us in order to resume our trading relationship.

I take seriously the words expressed in late November by foreign ministry spokesman Zhao Lijian who said communication at the working level between China and Australia was ‘unimpeded’. He gave China’s stance towards us: ‘It is Australia that caused the current difficulties in bilateral relations,’ he said. ‘We urge Australia to face up to the problems, correct mistakes and create conditions for bringing bilateral relations back on track.’

There’s good news in that – for those words indicate that it’s a relationship problem, not a trade problem.

Rowan Callick, one of Australia’s most experienced China watchers, wrote in The Australian that China wants to be surrounded by ‘tribute states’ that ‘defer to it as the paramount power and are in return offered its shield of security and economic opportunity’. For much of the last four thousand years, countries wishing to trade with the Middle Kingdom have been required to pay respect and tribute to the Emperor, whose authority and status have been assumed in modern times by President Xi.

Australia then has a decision to make. How much does it value its trading relationship with China? Does it value this trade sufficiently for it to focus on the rebuilding of the relationship between the two countries, knowing full well that this will involve some measure of a demonstration of respect and gratitude? Are we prepared to be pragmatic about this, or will our emotions overrule our other instincts? Are we prepared to hold our collective tongues to achieve what we want, provided that we do indeed want the trade to resume?

And how much are we prepared to take on face value the encouragement from the US to hold our line with China, given that any scaling back of the trade war between those parties is likely to replace Australian exports to China with comparable products from the US?

The ball, I believe, remains well and truly in our court – although the longer we take to start rebuilding the relationship, the deeper for sure the hole will be from which we will need to extricate ourselves. It’s our call.

I believe it’s in Australia’s national interest – and particularly in the interests of the wine and tourism industries – to resolve this matter as quickly as possible. And then, with perspective and patience, we can start rebuilding the foundations for the longer term. It won’t be easy, but to walk away from China right now would be unconscionable.

Original Media Source: https://winetitles.com.au/do-we-want-to-save-the-china-market/