Why trade deals are changing the pecking order of wine markets around the world
By Richard Siddle
If you skimmed through the wine headlines of 2017 you might think you had stumbled across an index of public information films with the amount of "warnings" and "fears" and "alarms" there have been about the state of the global wine industry - or in particular the shortfall in the 2017 wine harvest.
Now whether you call that shortfall "dramatic" or "huge" or "major" depends on which side of the hyperbole bed you have got out of. But what you can't ignore is the fact there is a lot less wine to be bought and sold from last year's harvest - some 8% down on 2016 at 246.7 million hectolitres - the equivalent of France not producing any wine for a year, according to the OIV.
So you can see why those of us from the Fourth Estate have been flicking through our thesauruses for ever more dramatic ways of reporting on the state of world the market.
What makes this year's overall smaller vintage even more significant is the fact that it has affected both the northern and southern hemispheres.
The OIV, for example, estimates Italian wine production is down 23%, French 19% and Spanish 15%.
It also comes at a time when demand for wine is an at all-time high, particularly from major emerging markets on both sides of the world in the US and Asia. The OIV estimates there will be close to more people wanting to drink wine in the next couple of years than there is wine to supply them. 2017 will see production and consumption figures worryingly close at 240.5 to 245.8 million hectolitres consumed and 246.7 million hectolitres produced.
Which makes the shortfall even more frustrating, particularly for countries in the southern hemisphere like Argentina and Chile that have worked so hard to build that international demand in the first place.
FTAs to the rescue?
Which brings us to one big positive for the global wine market going in to 2018. The emergence of an increasing number of Free Trade Agreements between growing wine countries and emerging consumer markets. Deals that are quietly, but very surely, changing the mid to long term dynamics of the global wine market far more than the vagaries of this year’s harvest compared to the last
Now FTAs are hardly something new, but for those of us that are watching the Brexit negotiations closely between the UK and the EU, the mention of trade agreements has now passed in to everyday language. We are all far more aware of who is dealing deals with who than we ever were before.
But for the countries that are able to strike deals, then FTAs can have an enormous impact on exports and imports. Particularly for those looking in to make bigger inroads in to the economic powerhouse of Asia, and China, in particular.
Just last week we reported on the significance of the new FTA that is being struck between the EU and Japan, which will potentially open up this strategically growing wine market, already the EU’s fifth biggest export market for wine, for Old World producers.
The EU and Japan claim the FTA will create the biggest economic area in the world accounting for nearly a third (30%) of the world’s GDP and the biggest bilateral agreement signed by the EU.
You only need to look at the recent success of the FTA signed between Chile and China to see how big an impact such deals on the export strategies of major wine producing countries.
The two countries estimate overall trade between the two countries has increased 4.4 times since the initial FTA was signed in 2005. The real effects for wine have only really been since 2015 when final tariffs were removed, resulting in a 13% increase in the value of Chilean wine exports to China in 2016, with even more expected in 2017. China has now replaced the US as Chile’s biggest wine market.
In terms of bottled wine exports, Chile exported $195 million worth of bottled wines to China in 2016, compared to $183m to the US, the UK third at $148m and $142m to Japan and $122.5m to Brazil.
Australia is also now enjoying year-on-year success in China thanks to the roll out of an FTA agreement signed in December 2015. It has seen tariffs on imported Australian wines reduced down from 14% to initially 11.2%, and then a further 2.8% on January 1 every year until it reaches zero in 2019.
It means China has replaced the US as Australia’s biggest market and in the year to September 2017 exports to China were up 56% to a record AU$739. If you factor in Hong Kong and Macau then value exports to Greater China were up 42% to AU$853 million. Dwarfing the US in second place with AU$461m.
It means China now accounts for 30% of its global wine exports by value (Wine Australia).
Australia even outsold France in October to become the biggest exporter of bottled wine to China by value, with 8.42 million litres, worth US$69.6m, compared to US$63.7m of bottled French wine, and 12.89 million litres, according to the latest figures from the China Association for Imports and Exports of Wine & Spirits.
Big discrepancies
It means all around the world we are seeing huge discrepancies on which countries’ wines are being exported and imported thanks to these trade deals.
Georgia, for example, no longer has to worry quite as much about losing out on sales to Russia now that it too has a highly lucrative FTA with China that will see its tariff reduced from a staggering 93.9% to zero. It also means the fate and future of some wine countries are going to become increasingly embroiled in the political stance of their government.
Countries, for example, that would be usually falling over themselves to sign FTAs with the US are now having to switch their focus firmly to other parts of the world because of the negative attitude of President Trump to opening up its borders to any more imported goods.
That’s before we even consider the potential fall-out from the UK leaving the EU at the end of March 2019. The worry for the UK is that with so many FTAs being signed by those countries that it relies on so heavily for its wine imports with other potentially bigger, and closer markets to deal with, then it risks falling down not only the international wine export pecking order, but it is not able to put in place trade agreements to match when it is free to do so.
So when it comes to plotting, planning and sourcing wine going in 2018, wine buyers are going to be battling the diplomats and bureaucrats that are putting these FTAs together as much as they are fellow buyers in what are becoming more competitive markets to trade against thanks to the trade maneuverings behind the scenes.