US-China Trade War and Its Effect on the Alcohol Industry

Trade War

Despite hopes that the trade war between the US and China will be resolved soon, analysts are convinced that it will continue through the US midterm elections in November. After six months of tension, negotiation remains at an impasse.

In the past weeks, both countries have continued to threaten the other with new tariffs. China recently claimed it would impose tariffs ranging from 5% to 25% on about 5,200 US products after US Trade Representative, Robert Lighthizer, announced plans to raise tariffs from 10% to 25% on $200 billion worth of Chinese goods.

Products Affected by the Tariff Threats

While the US’s tariffs are focused on Chinese industrial and tech products, China’s are heavily focused on agricultural commodities. Among the major categories targeted by China are: meat, fish and other seafood, dairy, vegetables, nuts, grains, fruits and other produce and tobacco products. Some alcoholic beverages are also affected.

How US Alcoholic Beverages are Faring in the Standoff

By April, American importers of whiskey to China were already complaining about shipment delays and tariff hikes. Both big businesses and small traders have expressed anxiety over the deepening trade dispute right when the industry is booming. In 2016, China’s overall market for wine and spirits hit $611.5 million, with Scottish whisky being the single largest category. US imports of whiskey to China are growing and are expected to continue to grow rapidly.

In the wine industry, business owners continue to be confident, albeit worried, by the extra 15% import tariff imposed by the Chinese government. In March, Australian giant Treasury Wine Estates, owners of popular American brands, Stag’s Leap, Beringer and BV Vineyards, expressed confidence that their diversified portfolio could manage geopolitical issues like the trade war. Last year, wine exports from the US to China reached $210 million and are expected to increase by 10% in 2018.

Silver Lining in the Melee

While China’s traditional spirit, baijiu, remains the best-selling liquor in the country with its whopping $286.5 million sales in 2017, the whiskey and wine figures have been healthy. Recent reports indicate that sales of whiskey are still rising, while imported wine now amount to over 40% of all wine consumed by the Chinese. Other alcoholic beverages, especially beer, have also been keeping up.

Beer sales in China have risen to $84 million, with 34% growth year-on-year. Moreover, sales of imported beer are expected to increase by 21 percent in the next four years, reaching $106 billion. In fact, international brewers are scurrying to expand their business in the Chinese market, which continues to be the biggest in the world. Heineken recently announced plans to buy a 40 percent stake in China Resources Beer, the country’s largest beer maker. The $3.1 billion investment is expected to boost the Dutch company’s market reach.

Opportunities for Non-US Producers

While the trade war is affecting US-China business relations, other countries are facing no such problems. Chile, China’s third biggest source for wine, is expected to rise up to the challenge and replace the $75.6 million exported by the US from last year. Its 24% market share is predicted to expand, a happy byproduct of the Free Trade Agreement signed by the two countries.

Since 2015, Chilean wines have been allowed to enter China with zero import tariffs. The recent levy threats, on the other hand, have forced US alcohols to be subjected to close to 68% in taxes, including 25% import tariffs, consumption tax, and VAT. France and Australia are also expected to continue expanding their reach in the Chinese wine market.

With the Chinese palate becoming more open to premium and imported beverages, it is expected that foreign alcohol will continue to increase its share of the consumer market, regardless of the trade spat between the US and China.

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