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Trump Tariff War Raising Supply Chain Costs for California Wineries

Trump Tariff War Raising Supply Chain Costs for California Wineries

Ask small business owner Greg Martellotto his opinion of Trump tariffs, and he’ll talk about the unintended consequences that are not being discussed and are largely invisible.

“They’re trying to punish the Chinese for something that clearly has nothing to do with (glass.) And who’s paying the bill? Me! And American small businesses. No one’s talking about it, no one that I’m aware of,” says Greg. “These things don’t seem to be well thought out. It doesn’t make sense.”

Here is a bit of background of the U.S. - China tariff situation:

  • 5/10/2019: U.S. increased tariff rates on $200 billion of Chinese imports from 10% to 25%, an escalation of ongoing trade tensions with China.
  • 6/1/2019: China increased tariffs on American wine from 48% to 93%.
  • 9/1/2019: China increased tariffs by 5-10% on one-third of American imports. U.S. retaliated with an additional 15% tariff on $112 billion of Chinese imports.

Tariff War Raising Supply Chain Costs for California Wineries

The California wine industry, already dealing with tight domestic glass supply amid rising costs, shifted sourcing to China. Today most California wineries use bottles made in China. But now new tariffs on Chinese glass make managing costs and margins that much more challenging.

Greg’s Santa Barbara County winery, Martellotto Winery, produces Martellotto wine and private label wine. For a recent private label bottling, he absorbed a 21% tariff on Chinese glass, a direct impact on his bottom line.

“The Chinese glass that we use for an inexpensive private bottling now has a 21% tariff on it, as a result of Trump’s tariffs. When you’re dealing with inexpensive wines, this is a real number, because there’s not much margin.”

Finding alternative sources for glass can be a challenge due to timing and costs, but many find themselves searching. Shifting supply takes time, and many wineries, especially smaller ones, might not have that luxury.

For example, when Greg tried to buy domestic glass, the lead time was 3 months. U.S. suppliers were either sold out and backed-up with orders. He had to turn to buying imported glass from China in order to keep his business moving and bottle the wine.

The unintended consequences of tariff wars affect the wine industries in both the U.S., and China, on both sides of the supply chain.

When Trump increased tariffs on Chinese imports to 25%, China raised rates on a range of U.S. imports, including California wine. 

China Tariffs Raising Supply Chain Costs for California Wineries

China then levied rates of up to 93% on California wine, resulting in a dramatic reduction in the sale of California wines to China.

China can source wine from other countries such as Australia, New Zealand, and South America, which have much lower rates and free trade agreements in place. 

A small-businessman like Greg might seem to have an advantage because not only does he own a winery, he has an import/wholesale wine business, and a direct-to-consumer wine business. But the tariff wars impact each of these businesses in different ways. 

No one in the wine trade is exempt from some impact and even if the tariffs are short-lived, the consequences might not be.

Greg asks of the politicians in Washington D.C.:

  • What was the original intention of the duties and why? 
  • Who do we intend to punish?
  • What are the unintended consequences? 

All excellent questions that remain unanswered.

“If the politicians don’t consider the impact on small businesses of these decisions, more small businesses will suffer, and many will go out of business.”

Martellotto Winery

About Martellotto Winery

Set deep in the heart of Santa Barbara wine country, Martellotto Winery makes handcrafted, beautiful and exciting wines using selected grapes from across California’s Central Coast. American Viticultural Areas (AVAs) include Happy Canyon AVA, Sta. Rita Hills AVA, Santa Ynez Valley AVA, and Santa Maria Valley AVA. 

Owner and winemaker, Greg Martellotto, specializes in Bordeaux varietals. Martellotto Winery is one of the few wineries producing single varietal wines of all five of the noble Bordeaux grapes: Merlot, Cabernet Sauvignon, Cabernet Franc, Petit Verdot, and Malbec.

Contact:

Greg Martellotto, Owner            

Martellotto Winery

https://martellotto.com/

Small Business Owner Calls Out Unintended Consequences of Trump’s Tariff Wars

Small Business Owner Calls Out Unintended Consequences of Trump’s Tariff Wars

San Diego businessman and wine entrepreneur, Greg Martellotto, recently spoke out against the tariff wars, including the proposed 100% on European wine currently under review by the Trump administration. 

Greg is concerned about the unintended consequences that are not discussed and tend to be invisible. The proposal will have dire consequences for both European and U.S. wine industries, hitting American small businesses and consumers especially hard.

“They’re trying to punish the French and Chinese for something that clearly has nothing to do with wine. And who’s paying the bill? Me!  American small businesses. No one’s talking about it, no one that I’m aware of,” says Greg. “These things don’t seem to be well thought out. It doesn’t make sense.”

tariff war actions and escalations

Recent Tariff War Actions and Escalations

  • 5/10/2019: U.S. increased tariff rates on $200 billion of Chinese imports from 10% to 25%, an escalation of ongoing trade tensions with China.
  • 6/1/2019: China increased tariffs on American wine from 48% to 93%. 
  • 7/11/2019: French-imposed levy of 3% on gross revenues for digital services of U.S. tech giants. 
  • 9/1/2019: China increased tariffs by 5-10% on one-third of American imports. U.S. retaliated with an additional 15% tariff on $112 billion of Chinese imports.
  • 10/19/2019: U.S. levied 25% tariff on wines from France, Spain, Germany, and the U.K.. Did not include sparkling wines, wines over 14 percent alcohol, or large-format bottles. Was a reaction to the Airbus subsidy dispute.
  • 12/2/2019: U.S. threatened tariffs of up to 100% on $2.4B of French goods, including Champagne, as a reaction to the French digital services tax.
  • 12/11/2019: U.S. announced expansion of the proposed 100% tariffs to include ALL E.U. wines. Action related to the Airbus dispute and to keep pressure on the digital services dispute.
  • 1/13/2020: Cutoff date in the U.S. for public comments on the proposed 100% tariffs.

Tariff War Impact and Unintended Consequences

Tariffs are intended to punish Europe and China for trade practices, but have nothing to do with wine. Depending on how long these taxes are in place, below are some of the unintended consequences for the wine industry:

wine tariffs

U.S. - France/E.U.:

  • As of October 18, 2019, many European wines became 25% more expensive in the U.S. Suppliers, importers, and customers bear the costs. The result was lower margins for producers and importers and somewhat higher prices for consumers.
  • If tariffs rise to 100%, prices will double for everyone in the supply chain, putting European wines out of reach for most U.S. consumers. Some importers and retailers, mostly small businesses, will suffer from lower sales, and some may go out of business. 
  • Most consumers and businesses will be priced out of the world’s most famous wine regions. They won’t be able to afford to drink or serve what they desire.
  • Many restaurants across the U.S. may have to change their wine lists. Those focused on European cuisine (Italian, French, Spanish, etc.) will have to serve wines from other countries.
  • Domestic wine production cannot completely replace the loss of European wines, so substituting California for European wines is, at best, only a partial solution. 
  • California and European wines have very different profiles, so again, replacements are limited. Wines from other countries may partially replace those at lower price levels.
  • European suppliers and exporters might lose their largest market, potentially devastating the industry there. Shifting to other markets will take time, but the U.S. is a significant market that has long-standing and deep relationships with Europe.

us china trade war

U.S. - China:

  • China has recently been the fastest-growing market for California wines. As a result of 93% tariffs, Chinese demand for California wine fell dramatically in 2019. 
  • California may lose a vital customer whom the trade spent 20 years building a relationship. 
  • Most California wineries use wine bottles made in China. These bottles are now subject to an 18-21% tariff, raising production costs. Chinese suppliers pass on 100% of all tariffs to their customers.
  • Wineries may have to find alternative suppliers, if the timing of bottling allows. Chinese glass producers will lose customers.
  • Domestic glass is not a ready alternative due to higher local costs and limited supply. 
  • Such price increases impact smaller wineries significantly. They may not have the financial resources to survive.

trade war affects american small businesses

American Small Business: Not the Target, but the Side Effect

Current tariffs relate to U.S. global corporations such as Boeing, Google, Apple, Amazon, and Facebook. These are companies with bottomless pockets. No matter the eventual outcome, they will survive.

No one in the wine trade is exempt from some impact:

Both large and small businesses will suffer some level of negative impact from tariffs. However, the unintended consequences for small companies, including those in the wine trade, may ultimately be unsustainable. Even if the tariffs are short-lived, the consequences might not be.

The U.S. wine industry is a vast, national economic engine employing thousands that could lose billions of dollars and thousands of jobs. The wine business in the U.S. will likely contract. 

As tariffs continue, Europe will look for new markets and U.S. consumers will be forced to change habits. The U.S. wine industry will suffer permanent damage, changing the very nature of the wine business globally.

Instead of a growing and robust wine trade between the U.S. and China, China will shift supply to other countries with more favorable trading terms. Chile, New Zealand, and Australia are gaining market share in China at California’s expense.

Back to our small-business owner, Greg asks, “Why am I paying more to import wine because Airbus is getting subsidies? Why should U.S. consumers pay more for European wine and other products?” 

If politicians don’t consider the impact of tariffs on small companies, many will go out of business, taking jobs and economic prosperity with them.

NOTE: On Monday, January 20, 2020, an apparent agreement occurred between Donald Trump and Emanuel Macon to temporarily freeze mutually proposed tariffs related to the digital tax dispute. However, no details were released and the impact for the wine industry is unknown. There was no word about tariffs related to the ongoing Airbus dispute.