Why is China investigating Cognac?

The Chinese government has launched an anti-dumping inquiry into all brandy and Cognac imported from the EU. What are the ramifications for the sector?

It’s been a shaky 12 months for Cognac, with volume sales dropping by 16% in the first six months of 2023, and many established brands seeing sales plummet. Euromonitor International anticipated marginal growth for the category by the end of 2023, but hopes for a stronger market in 2024 have been dashed by recent moves by the Chinese government.

On 5 January, China’s ministry of commerce announced it was launching an anti-dumping investigation into all brandy imported from the European Union, prompted by a complaint made by the China Alcoholic Beverages Association on behalf of the domestic brandy industry.

The ministry’s official notice specifies that it is investigating the import of spirits made from distilled wine in containers of less than 200 litres from 1 October 2022 to 30 September 30 2023. The investigation, to which producers and exporters are invited to respond, should conclude before 5 January 2025.

An anti-dumping investigation aims to establish whether a product being imported into a country is being sold at below the price in its domestic market, an act referred to as ‘dumping’.

Governments sometimes take action against dumping to protect their domestic industries. The World Trade Organization disciplines anti-dumping actions, with the country alleging the existence of dumping required to show evidence and calculate the damage caused.

‘Real’ value

If China can prove that the dumping has taken place, it will be able to charge extra import duty on Cognac and brandy to bring its price in line with its ‘real’ value and to remove injury to its domestic producers.

But how likely is it that dumping has taken place? A spokesperson for Spirits Europe said: “We are confident that our products and commercial practices fully comply with Chinese and international regulations. We trust that the EU and China will find a constructive way to resolve any bilateral disputes, as has happened in the past over other matters.

“Technical co-operation between the EU and China in the spirits sector is both long-standing and excellent. This co-operation will be further strengthened in 2024, not least through the revived wine and spirits working group, and will contribute to the good level of dialogue between the EU and China.”

The “other matters” that Spirits Europe is referring to could include two disputes over exports of wine into China, first with the EU in 2013, and again with Australia in 2021. The EU and China resolved their dispute following an investigation by the latter, but Australia has suffered anti-dumping tariffs of between 116% and 218% on wine exports into China since March 2021. Those tariffs are now under review. In both cases, it has been widely suggested that China had ulterior motives for its investigations. In 2013, the EU proposed anti-dumping tariffs on Chinese solar panels, immediately after which China launched its wine investigation. Its tariffs on Australian wine occurred after former Australian prime minister Scott Morrison asked for an international inquiry into the origins of Covid-19.

Similarly, many have highlighted the fact that the European Commission launched an investigation into EU imports of battery electric vehicles from China in October 2023. France has also introduced tax incentives for electric vehicles, although Chinese-made products are excluded. Some have argued that China’s investigation is a tit-for-tat move against France, which accounts for 99.8% of all EU brandy exports, according to Chinese customs data.

Florent Morillon, president of the Bureau National Interprofessionnel du Cognac (BNIC), alluded to this when speaking to The Spirits Business. “This investigation is part of a trade dispute between the European Union and China concerning other industrial sectors, unrelated to our business,” he said. “This political issue must, therefore, be dealt with at a political level.”

Political motivations aside, the consequences of China’s tariffs on Australian wine have been devastating for the sector. Wine Australia’s Export Report estimated that the tariffs wiped AU$2.08 billion (US$1.37bn) off the value of exports in the 12 months to 30 June 2022. According to a report by Daxue Consulting, in China, brandy was the largest imported spirit in 2022, with an import volume of 37.5 million litres. IWSR Drinks Market Analysis estimates that China accounts for 44% of global VSOP-and-above Cognac sales by volume and 48% by value. According to BNIC figures, China is Cognac’s second-largest market, with 32m bottles shipped in 2023. There is clearly huge demand for French brandy in China, specifically Cognac.

The consequences of a tariff on Cognac remain unclear for its producers. Morillon refuted the idea that tariffs will be introduced, saying: “We do not believe that this is possible, as our products and business practices comply with Chinese and international regulations.”

One producer that SB spoke to confidentially noted that any tariffs implemented are likely to have a bigger impact on Chinese consumers than Cognac brands because shoppers are more likely to pay the increased prices for a brand they know and consider to be prestigious than to switch to a cheaper domestic product.

“An emerging generation of new consumers and the rise of a bar and cocktail culture reflect the increasing demand for premium products and elegance among Chinese consumers, which has led to year-on-year growth in Cognac sales,” explained Morillon.

Hennessy, Martell, Courvoisier, and Rémy Martin are the world’s biggest Cognac brands, with China a key market for all four. Most released a special edition Cognac for Chinese New Year, with both Courvoisier and Hennessy partnering with Chinese artists to highlight the importance of this market. These limited edition releases retailed at up to US$10,500 per bottle, highlighting the super-premium-plus market in which Cognac sits – and throwing doubt onto the idea that these brands could have been undercharging.

Speaking with one voice

SB reached out to Courvoisier, Rémy Cointreau, Hennessy and Martell, however none wished to speak on the record about the issue. One producer said the major Cognac brands were working with the BNIC to speak with one voice on the difficult political issue.

Morillon confirmed the BNIC was working with both Cognac producers and Chinese authorities: “The BNIC has immediately taken in the full extent of this situation. As soon as we were informed of the Chinese government’s intentions, we organised a task force to secure the process and guide all the parties into the formal procedure.

“Cognac producers co-operate fully with the Chinese authorities to answer any questions they may have. We have taken note of the various points in the investigation, and will be looking into them further. It is our responsibility to help as much as we can organising a collective response, in collaboration with our law firm, to make things easier for Cognac houses exporting to China.

“We are confident that the investigation will not harm our excellent relations with China.”