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Wine distributors in China stock up amid fear EU trade fight will drive up import tariffs

June 17, 2013

Chinese wine distributors are scrambling to secure bottles from Europe, fearing that a trade spat between the European Union and China—the world’s fifth-largest wine market—might lead to significantly higher tariffs on imported European wine.

“Every import company is trying to finish the duty clearance as soon as possible to avoid paying more taxes,” said Jared Liu, chief executive of the online wine retailer Yes My Wine, which sold more than 400 million yuan ($65 million) in wine last year. Mr. Liu said that his company, based in Shanghai, is spending an extra 10 million yuan in the coming weeks to make sure all its wines in bonded warehouses—a secured area for storing dutiable goods—are released.

“We don’t have details on how much [the tax] will be raised, but the rumor we hear is that the policy will be deployed within 60 days and [the increase] could be very high.”

China earlier this month launched an antidumping probe of European wine in response to the EU’s move to increase tariffs on Chinese-made solar panels.

The investigation, wine distributors say, could lead to a substantial increase in duties.

Wine merchants are taking a wait-and-see approach. But Mr. Liu said people in the government are telling him that taxes are in the pipeline, hence his moves.

But extra tariffs on European wine could be a boon for producers from other regions who are ready to fill China’s empty glasses if the trade spat drags on.

China has accused Europe of flooding the country with cheap wine. Currently, all imported wines to China are subject to taxes that amount to about 48% of the declared value. A punitive tariff would be charged in addition to that rate if China’s antidumping probe concludes unfavorably for the EU.

Ian Park, chief executive of importer Summergate Wines, said that domestic Chinese wine producers have been complaining for months that cheap wine from Europe, especially Spain, has invaded the Chinese market. Only in the past year, he said, have cheap Spanish wines appeared on supermarket shelves at the equivalent of $3 a bottle.

“This runs deeper than solar panels,” he said.

The big beneficiaries of the trade spat will be Chile and New Zealand, he said, because both countries have bilateral free-trade agreements with China over wine.

Mr. Liu of Yes My Wine said he expects a major increase in the tariffs and estimates his current tax payment would double, pushing drinkers to simply switch to other countries’ wines.

“We are looking more into suppliers from other countries like Australia, the U.S. and Chile,” Mr. Liu said. “The market won’t change. People will drink. But the structure of the market would change a lot.”

China imported 266 million liters of bottled wine last year, an increase of 10% from the previous year, with more than two-thirds coming from the EU, according to an industry data provider, International Wine and Spirit Research. China has a particular fondness for French wines, which made up 48% of imported bottles.

Should extra taxes turn Chinese drinkers away from Europe, that could open the door for California, whose wine industry has been heavily marketing itself to try to break into the China market. The state’s wine industry in April even joined a trade mission to China with Gov. Jerry Brown.

“Half of the drinking population in China isn’t even aware that California makes wines, so we’re still building awareness,” said Linsey Gallagher, director of international marketing at Wine Institute, a group that represents California wineries. “If we are cheaper than Old World wines, especially France, then we are poised to benefit.”

Meanwhile, fine-wine merchants in Hong Kong who deal in prestigious bottles from France’s Bordeaux and Burgundy regions say the increased duty would be negligible on their business. The bigger problem for them is Beijing’s crackdown on smuggling.

Hong Kong has emerged as a regional wine hub, largely because wines are significantly cheaper as the former British colony doesn’t charge import duties. The city’s merchants say a large portion of the wines sold are bought by wealthy mainland Chinese clients who then hire individuals to smuggle them across the border.

According to Greg Brossard at wine merchant Goedhuis & Co. in Hong Kong, the mainland Chinese government has been more vigilant during the past six months in checking individuals who cross the border multiple times, and is on the lookout for illegal cargo.

The crackdown has damped sales, Mr. Brossard said. “A part of our business is affected by that,” he said.

Source: Wall Street Journal