China Sours on Australian Wine as Trade Spat Spirals

By Mike Cherney

SYDNEY--China is investigating whether Australia is dumping cheap wine into its domestic market, deepening a diplomatic and trade row between the two countries that has worsened since the coronavirus pandemic.

Chinese officials said Tuesday the anti-dumping inquiry would last at least a year. They didn't elaborate on the reason for the probe, though Australian officials said local Chinese winemakers had requested the investigation. Analysts said China could suspend imports during the probe or impose new tariffs once the inquiry is finished, a major blow to Australia as China is its top export market by value for wine.

The dispute comes as Australia's economy is under heavy stress, with its second-largest city in lockdown and its international border closed. Prime Minister Scott Morrison's government says the economy is experiencing its first recession in 28 years.

Chinese officials are also considering a countervailing-duties investigation in addition to the anti-dumping investigation, said Simon Birmingham, Australia's trade minister. That probe would look specifically at whether Australian winemakers received and benefited from government subsidies. Mr. Birmingham said Australian wine isn't sold at below-market prices and exports aren't subsidized.

"This is a very disappointing and perplexing development," Mr. Birmingham said. "Our wine industry has worked incredibly hard to establish itself as a world-leading producer and export powerhouse."

The investigations show China is increasingly willing to flex its economic muscle, particularly after Australia's conservative government campaigned for a global investigation into any missteps early in the coronavirus crisis that contributed to the pandemic. Australia, a close U.S. ally, has also placed restrictions on Chinese telecom giant Huawei Technologies Co. and criticized China's imposition of a national-security law on Hong Kong.

Earlier this year, China imposed tariffs of more than 80% on Australian barley exports and suspended beef imports from some Australian slaughterhouses. It warned its citizens not to travel to Australia due to what it said was a rise in racial discrimination toward Chinese people during the pandemic. Chinese students and tourists are a lucrative source of revenue for Australian universities and businesses. One Chinese official had even threatened a consumer boycott of Australian wine.

Still, China's economic recovery is dependent on Australian exports, especially iron ore, which is used locally to make steel. Beijing is trying to counter the economic effects of the pandemic by encouraging more spending on infrastructure.

Trading in shares of Treasury Wine Estates Ltd., one of the world's biggest publicly traded wine companies, was paused briefly on Tuesday, and the Australia-listed stock closed down 14%. The company said it would cooperate with the investigation, that China would remain a priority market and that it has had a long and respectful relationship with China over many years.

Treasury Wine and other winemakers were already struggling in the pandemic, as restaurants and bars world-wide were closed to stop the spread of the virus, retailers shifted sales to online channels and logistics networks were strained. The Chinese investigation, with the potential for future tariffs, creates even more uncertainty for Australian winemakers, said Hayden Higgins, Rabobank's senior wine and horticulture analyst for Australia and New Zealand.

"To pivot sales from China to other markets in this environment is going to be challenging," Mr. Higgins said.

At the moment, China doesn't levy a tariff on Australian wine imports because of a free-trade agreement between the two countries. The free-trade agreement, plus a growing Chinese middle class interested in premium wine, has generated strong growth in Australian wine imports into China. Some Chinese investors have bought Australian vineyards.

Australian wine exports to China were worth 1.2 billion Australian dollars ($865.7 million) in the fiscal year ended June 30, 66% higher than in 2016-17, according to government figures. Much of the Australian wine going to China is relatively high quality. In the last fiscal year, Australia's wine exports to China were valued on average at A$9.07 a liter, compared with A$3.13 a liter for wine going to the U.S. and A$1.65 a liter to the U.K.

"We were obviously very worried about political tensions earlier in the year, but it all seemed to have quieted down," said Tony Battaglene, the chief executive at industry group Australian Grape & Wine. "We're talking about dumping, and this market is where we have the highest-value product going to. It doesn't make a lot of sense to us."

Mr. Battaglene said one potential concern for the Chinese is an Australian tax rebate for winemakers, though it is capped at a certain amount and is designed to help smaller producers. Mr. Battaglene said it only applies to domestic sales.

In the Clare Valley, a wine-growing region in the state of South Australia that is known for its white wines, vintner Jeff Grosset said China now accounts for some 20% of his exports, up from zero about a decade ago. Mr. Grosset said his China business has grown as drinkers there branch out into premium white wines.

"We're happy to go through the process and hopefully that will show there is no subsidizing," said Mr. Grosset, who owns Grosset Wines. "And we can just get back to doing business."

Grace Zhu contributed to this article.

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