September 10, 2020 9:58AM

China Is Learning from the Rest of the World: From Winemaking, to Trade Agreements, to Antidumping

There are probably many hotter trade news stories out there right now, but this one intrigued us because it has a number of different elements. It's about how China learned the techniques of a new industry, using a combination of market forces and government intervention; negotiated a liberalizing trade agreement, roughly following the model of the United States and others for such agreements; and then creatively used anti-dumping measures, with techniques it had also learned from others, to limit the competition that resulted. There is not necessarily a grand moral to this story, but a theme underlying it is that China is learning from the rest of the world, in both good and bad ways. There may be a lesson in here about how to nudge China in particular directions, but that's something for another blog post.

China Learns to Appreciate Wine

Neither one of us is a wine aficionado, but we think it’s safe to say that China has not traditionally been known for its winemaking prowess or for its love of wine. Even though ancient Chinese started grape cultivation more than 2,000 years ago, grape production in China had been negligible for a long time. It was not until 1892 that the first modern Chinese winery was established, and its operation mainly relied on imported vines from the United States and Europe. The policy of "reform and opening-up," which began in the late 1970s, boosted the Chinese wine industry in several ways: The resulting economic growth led to a rapid increase in grape and wine production; strong western influence introduced wine to more Chinese; and economic development generated more wealth and income that allowed the Chinese people to afford more imports. Furthermore, China’s accession to the WTO substantially lowered tariffs on wine, from 65% to 14% for bottled wine. These factors resulted in a significant increase in China’s wine imports. Between 2000 and 2011, China’s wine imports rose from $4.9 million to $1.3 billion per year.

Clearly, China is moving up the learning curve for wine, developing both a taste for drinking it and a knack for producing some unique products. The story of award-winning Chinese wine production starts with a bit of government intervention as well as some private sector consulting. As a 2018 New Yorker article tells us, the center of Chinese winemaking is Ningxia, a province in the northwest that is described as "a poverty-stricken coal region whose dusty scrubland was in danger of desertification." In the 1990s, the Chinese government

began to invest seriously in its infrastructure, irrigating immense tracts of desert between the Yellow River and the Helan Mountains, much as the phoenix had done. A few years ago, local officials received a directive to build a 'wine route' through the region, similar to Bordeaux’s Route des Vins. European winegrowers, hired by the government as consultants, had identified Ningxia’s continental climate, high altitude, dry air, and sandy, rocky soil as ideal for vineyards.

Not exactly a free market approach, but nonetheless, it makes sense for developing countries to think about replicating the commercial successes of more developed countries. If the conditions were suitable for wine production in Ningxia, someone was going to come up with the idea of producing wine there at some point. Entrepreneurs keep their eye out for these sorts of market opportunities.

People often accuse China of stealing intellectual property. While cyberhacking into foreign companies' networks to steal their ideas is certainly a problem, the process of winemaking is out there in the public domain. It doesn't seem reasonable to object to China figuring out how others are producing good wine and then doing it themselves. Wine made in China will always have a unique character in the same way that Cabernet Sauvignon from California, Chile, and France have distinguishable characteristics. Trying to learn how to make good varieties of wine through consultation with experts shouldn't be a problem, even for the hawkiest of China hawks.

The New Yorker then offers some additional details about the growth of wine consumption and production in China:

Growing demand for wine in China—imports increased twenty-six thousand per cent in the first eleven years of this century—has prompted a surge in domestic production. China is now the seventh-largest producer of wine globally, and has more acreage devoted to vineyards than any other country besides Spain. There are a dozen or so Chinese wine-growing regions, of which Ningxia is the most significant. Ningxia now has around a hundred wineries, spread across a hundred miles, which, in 2016, produced a hundred and twenty million bottles’ worth of wine. Most of this comes from large, state-backed enterprises, but the region’s reputation is anchored by privately owned boutique operations, which have been accumulating international prizes.

So far, the wines produced are mostly Cabernet Sauvignons, Cabernet blends, and Chardonnays. The noted wine critic Jancis Robinson told me that she’d found the best ones to be “fully ripe, satisfying, well-balanced wines that seem to have some potential to age,” closer in style to French than Californian wine, something that may reflect the involvement of several French companies in Ningxia. She added, “I’ve never come across such a determinedly wine-focussed local government,” and recalled how, when she visited in 2012, all the most senior officials involved in the wine region’s development insisted on meeting her.

At this point, Chinese wine production and consumption are certainly scaling up, and may one day rival the large wine producing countries. This expansion is not at the rate of manufactured goods, which China is famous for, but it has been significant nonetheless.

Trade Liberalization with Australia

While you may not have heard much about Chinese wine, you almost certainly have heard of Australian wine. The Australians have been making wine for generations and have gotten quite good at exporting it in recent years. In the midst of the Chinese expansion of wine production and consumption, and the Australian export growth, Australia and China signed a free trade agreement, which went into effect in December 2015. Given what you hear about China's trade practices, it may sound odd that China is signing trade liberalizing agreements, but in fact it has an active bilateral trade agreement program, just like the United States and many other countries do.

A key feature of these agreements is to lower tariffs on a bilateral basis. As part of the China-Australia FTA, Chinese tariffs on bottled wine went down from 14% in 2015 to zero in 2019.

Not surprisingly, then, Australian exports of wine to China began to increase after the FTA was signed. Lower tariffs should lead to lower prices, and this made China a more enticing market for the Australian wine industry, who had noticed the increase in Chinese wine consumption. The price advantage helped Australian wine producers compete against wine producers from other countries. According to the China Alcoholic Drinks Association (CADA), for small bottles of wine (2 liters and less), imports from Australia accounted for 14.31% of China’s wine imports in 2015, and this figure almost doubled, to 26.49%, in 2019. With regard to the share of the Chinese market, according to CADA, in 2019 13.36% of small bottles of wine (2 liters and less) consumed in China came from Australia, compared to only 3.66% in 2015.

Enter the Dragon's Anti-Dumping/Countervailing Duty Laws

Was there anything "unfair" about the Australian approach to pricing its wine? On the face of things, it seems that the Australian industry was simply benefitting from the lower tariffs, rather than engaging in any anti-competitive or unfair behavior. But if you have read anything about anti-dumping/countervailing duties from our Cato colleagues over the years, you will realize that these so-called "trade remedy" laws are not really about anti-competitive behavior. They can be used to harass foreign competitors and to get tariffs imposed on these competitors even in the absence of any actual anti-competitive behavior.

A couple weeks ago, we blogged about how the Chinese government was using a creative methodology, learned from practices in the United States and other developed countries, to accuse U.S. chemical producers of massive "dumping" of products in the Chinese market. Now, that same methodology is being invoked by Chinese wine producers in a case against their Australian counterparts.

In July of this year, the CADA filed a petition for an anti-dumping investigation on Australian wine. It claimed that there is a "particular market condition" in the Australian wine industry, on the basis that both federal and local governments in Australia intervene in and control the wine industry. Such intervention and control includes legislation, industrial plans, and other supportive measures. Laws and industry plans highlighted by the petitioner include the Wine Australia Act 2013, and the 2020-2025 Strategic Plan and Vision 2050 put forward by Wine Australia, an Australian Government authority that regulates the wine industry. The petitioner also identifies 40 programs that allegedly support the wine industry, including the Wine equalization tax rebate, The Export and Regional Wine Support Package, and Wine Tourism and Cellar Door Grant, to name a few. These supporting measures, according to the petition, have distorted the production, demand/supply, and price of Australian wine. The Chinese industry claims that such distortions not only led to a surge of Australian wine imports, but also resulted in a shrinking of the Chinese domestic wine industry’s production and revenue. It claims that China’s domestic production in 2019 is nearly a third (38.9%) of the production in 2015, and the revenue of the domestic industry fell 69% during the same period.

On this basis, the petitioner estimates a 202.70% dumping margin, which, if confirmed by the Chinese investigating authorities, would lead to a tariff in that amount.

The CADA also filed a petition for a countervailing duty investigation on Australian wine on the same day, which requests additional tariffs on the basis of the alleged subsidies received by the Australian industry.

In response to these industry petitions, the Chinese Ministry of Commerce has announced that it would launch both anti-dumping and countervailing duty investigations on Australian wine. We will not know the conclusions of the Chinese investigating authorities for another year or so.

Conclusion

At some point, if the Chinese wine producers are able to start exporting significant amounts of their production, the Chinese support for this industry could make Chinese wine subject to complaints about "unfair" trade practices of its own. For now, though, the complaints about "unfair" trade are going in the other direction: It is the Chinese producers who are complaining about "unfair" trade by Australian wine producers. Perhaps these Chinese actions are the result of broader conflicts in Australia-China relations, but if so, that fact can't be used to stop the investigations from going forward. When anti-dumping/countervailing duty laws are on the books, they can be abused in this and many other ways.

If the abusive anti-dumping methodologies that Chinese authorities learned from the United States and other countries become a new normal, we may see more and more high anti-dumping rates coming out of China, just like we have seen from the United States, Australia, and others over the years. Australia and China accuse each other of unfair trade; the United States and China accuse each other of unfair trade; these days, everyone is accusing everyone else of unfair trade. If we are going to copy from each other, winemaking seems like a much better target of appropriation. All of these abuses of anti-dumping, far from allowing us to enjoy what other markets have to offer, may just leave a bitter finish instead.