China has wine in its firing line – will Scott Morrison bail out Australian producers?

In recent months, Australian ministers have advised companies selling to China to diversify their export markets to reduce the risk of relying overly on a single buyer. As it turns out, China is doing the job for us.

The decision by China’s commerce ministry, which handles trade policy in Beijing, to open an anti-dumping investigation into Australian wine imports is the latest in a series of measures designed to punish Canberra over political disputes.

There is no shortage of Australian government decisions which have angered Beijing, ranging from the decision to ban Huawei from 5G telecommunications to the call for an inquiry into the origins of Covid-19.

Beijing’s hawkish media outlets, notably the Global Times, owned by the ruling Communist party, have repeatedly warned that many of Australia’s exports could be sourced elsewhere if we didn’t adopt more accommodating policies.

“Wine is highly replaceable,” the Global Times quoted a Chinese importer of Australian product in April. “If Chinese customers choose to boycott Australian wine, they can easily find alternatives from France, Chile or South Africa.”

With sanctions already in place against Australian beef and barley, and with wine now in the firing line, China is well beyond the warning stage and actively in punishment mode.

Beijing’s aim is not just to punish Australia, although that is important. They would like to turn the businesses suffering from the sanctions into lobbyists in Canberra for a more China-friendly foreign policy.

As defined by World Trade Organisation agreements, dumping is commonly accepted as the practice of a producer selling products into export markets at a lower price than it sells it at home, according to Zhou Weihuan of the University of New South Wales.

In “dumping” its products into another market, the foreign producer is able to unfairly gain market share. If dumping is proved, governments can then impose tariffs on the imports to level the playing field.

Earlier this year, China’s decision to impose an 80% tariff on Australian barley after a separate dumping investigation instantly wiped out a $1bn market which local producers had held for decades.

On the face of it, China’s claim on wine is “baffling”, to quote the head of the National Farmers’ Federation.

Australian winemakers have spent decades investing in their brands in China to win over Chinese consumers. Often, Australian wines sell at prices higher in China than they do at home.

Only last year, an Australian company was fined $400,000 for exporting wine to China using labels which made it look as if it was sourced from Penfolds, one of Australia’s best-known brands. If the case proved anything, it was that Penfolds was a valuable brand in China, as copycats saw gain in infringing its trademark.

The way in which anti-dumping investigations operate in all likelihood means that Australia’s wine exports to China have a stay of execution for the moment, perhaps for as long as 12 to 18 months.

The process of proving dumping takes time, with the target of the investigation, in this case Australian wine producers, usually given an opportunity to provide information to support their case that they are operating according to market principles.

A delay might also suit China, as the threat of winemakers losing their most valuable export market will allow pressure to build on the Australian government. A delay also gives Chinese importers time to look elsewhere for new suppliers to replace Australia.

Australia’s biggest export to China, iron ore, is not yet replaceable with minerals from elsewhere, but that could change in a few years, if Brazilian producers recover and a new Chinese-owned mine in Guinea gets off the ground.

The Australian winemakers’ plight drew little sympathy in some quarters.

“The wine industry has been making huge profits while taking a KNOWN risk by becoming dependent on China market,” tweeted Clive Hamilton, the author of recent books about Chinese interference operations abroad. “If they didn’t insure against it, then they have to suck it up and don’t ask taxpayers to cover their business risk.”

With the budget already under water because of the Covid-19 crisis, Scott Morrison might be inclined to agree. The alternative, bailing such producers out, would be wildly expensive.

Just ask Donald Trump. In response to Chinese tariffs imposed on US agricultural goods in the two countries’ trade war, Trump has spent US$32bn in direct payments to farmers in 2020, triple the amount spent in 2017.

You can be sure that Morrison will not want to go down the same road, which means that local wine producers, if tariffs are imposed, can expect to take a huge hit.

• Richard McGregor is a senior fellow at the Lowy Institute