Nathan Cardella, co-owner Cardella Winery in Mendota, believes a trade war with China may actually benefit his business exporting to the country.

published on April 9, 2018 - 2:01 PM
Written by David Castellon

When Chinese officials threatened tariffs last week on agricultural goods from the U.S. in retaliation to U.S. tariffs on Chinese goods Stephen Schafer wasn’t surprised.

“I was expecting it,” the farmer and Madera winemaker said, noting that he figured some sort or tariff on American agricultural exports was likely to occur after President Donald Trump announced earlier this month his plan to slap big tariff’s on foreign steel and aluminum, raising concerns that trades wars might ensue.

“Trade wars do not end well for us,” as banning or putting tariffs on ag products often is among the first actions countries take in trade disputes, he said.

So China’s threat after the Trump administration announced last week additional tariffs on that country’s exports to the U.S. seemed par for the course, said Schafer, a partner in San Joaquin Wine Co., which exports some of its wine to China and other Pacific Rim countries.

It’s not just Schafer’s wine sales that could be affected if China makes good on its threat, as he also is a grower of grapes — for wine and raisins — and almonds, both of which also are commodities that Chinese consumers buy in large volumes.

In fact, China and Hong Kong combined are California’s third top export market for ag goods — after the European Union and Canada — having spent more than $2.04 billion on those commodities in 2016, the latest figure available.

Most of them, including nuts, table grapes, plums, fruits, raisins, milk and cherries, were largely produced in the Central Valley, which means a decline in Chinese demand for those goods could hurt sales here.

“It becomes concerning when these kind of actions are taken, and it affects our foreign markets,” said Ryan Jacobsen, CEO and executive director of the Fresno County Farm Bureau.

If a trade war is on the horizon, it would come at a particularly bad time, he noted, as the prices paid for ag commodities here and across California have been down, to the point that “The ag economy is depressed compared to 10 year ago.”

Like manufacturers dealing with the repercussions of the Trump administration’s steel and aluminum tariffs, farmers here are just as uncertain what may happen, as Chinese officials have threatened to slap 15 percent tariffs on fruits, nuts and wines, but it’s not clear if they’ll be imposed across the board or just on certain varieties, Jacobsen said.

“The instability that is going on right now jeopardizes the U.S economy.”

Over the past decade, China has increased its consumption of U.S. ag goods as its economy has grown substantially, along with its middle-class population that now outnumbers the entire U.S. population, Schafer said.

That larger middle class can afford to buy more U.S.-produced goods, with wines and foods from California developing particularly strong followings.

In fact, some have speculated that China’s government may not carry out its tariff threat as not to risk the ire of a wide swath of its population that has come to enjoy American foods.

“China is one of the fastest-growing wine markets in the world and will soon be second only to the U.S. in value. U.S. wine exports to greater China (and Hong Kong) were up 10 percent in 2017 to $197 million,” and the value of California wine exports to that country has grown 450 percent over the past decade, states a press release from the Wine Institute, an advocacy and public policy group representing more than 1,000 U.S. wine makers and associated businesses.

“Chinese retaliation against U.S. wine would put our producers at a significant disadvantage in one of the most important markets in the world at a critical time,” Robert P. “Bobby” Koch, CEO of the institute, said in a written statement. “As a result of free trade agreements, a number of our foreign competitors will soon have tariff-free access to the Chinese market. This, combined with additional punitive tariffs on California wine, could result in lost market share for years to come.”

“I haven’t heard anybody call me up and say, ‘I won’t buy any wine from you because of the tariff,’” Schafer said.

If China does impose its threatened tariffs, the effects certainly would be felt here, but how intensely likely would depend on how Chinese consumers react.

Schafer said it wasn’t clear if China’s markets could absorb some or all of the added costs from the tariffs. If not, he wondered whether prices of American goods on Chinese store shelves might rise no more than 15 percent or if quirks in the pricing system there might elevate retail prices even higher, maybe 25 or 30 percent.

“Then it could hurt sales,” and more significantly hurt the bottom lines of wineries here, he said.

It’s not just Valley wineries exporting to China that could be affected by a trade war.

“Most of my bottles come from China,” said Bret Engleman, owner of Englemann Cellars in Fresno, who doesn’t export his wines.

“We were buying American glass and happy to have American glass, but Chinese was cheaper and better quality.”

Engleman said he is also is concerned other countries affected by the steel and aluminum tariffs might also threaten reciprocal tariffs against the U.S.

“I don’t know if there is going to be tariffs coming out of Spain for my corks. There’s some specialty products in wine that are not made in the U.S., so that’s something we are always looking out for.”

The potential for trade wars over the U.S. imposing tariffs is one of the reasons why Trump wants to “push the reset button” on trade to eliminate the imbalances he says favor foreign markets, the president’s advisor on agriculture Ray Starling said in an interview with the Business Journal earlier this month during a visit to Visalia.

“The idea that when we assert our rights — we say we have been wronged in a relationship and we want to fix that — and then our trading partner, our friend if you will, is going to turn around and retaliate against one of our really significant political sectors, economically significant sectors.

When that happens, that shows you the rules of trade at a very high level are not as fair as we want them to be,” he explained.

“The administration absolutely acknowledges there could be a retaliation against ag,” but fairer trade agreements lessen those chances, Starling added.

Nathan Cardella, co-owner Cardella Winery in Mendota, said he sells wine to an entrepreneur who sells it in China under a private label, and that person told him not to worry about losing that market.

In fact, a Chinese tariff on U.S. wines actually could benefit wineries in the Central Valley, he said, noting that during the recent recession a lot of U.S. wine drinkers found themselves unable to afford expensive California wines, most of which come out of the Napa Valley and Central Coast regions, so they turned to drinking less expensive wines that more commonly are produced in the Valley.

Cardella said if Chinese consumers find higher-end wines too expensive because of the tariff, “You may find them seeking out guys like guys like me,” who sells wines in the $20-a-bottle range, and other Valley winemakers.

In fact, Cardella said, the person selling his wine in China has been rushing samples to potential buyers, possibly in anticipation of a rush in demand for lower-cost wines.

Still, Schafer said, “The hope I have is this is a game of brinksmanship, and somebody will call the other guy’s bluff and this will feather out,” before a trade war actually occurs and the sides start using ag exports as their bullets.

Staff writer Frank Lopez contributed to this report.

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