If you have a favorite bottle of Côtes du Rhône, a special Tempranillo, or a bottle of Barolo you hold near and dear to the heart, it would be wise to stock up now; the Trump administration is still mulling over a 100% tariff on all wine imported from the European Union (EU), originally proposed in early December. The Office of the Trade Representative concluded the comment period on January 13th, and is now in the process of making a final decision on the tariff.
The tariff proposal comes from two separate issues both involving the European Union. Over the summer, the French Government passed a Digital Service Tax that targets some of the largest tech companies in the world (Apple, Google, Facebook), requiring them to pay a 3% of their gross revenue derived from the value of their French users. In essence, France is imposing taxes these American-based, but internationally-used, giants. The Office of the U.S. Trade Representative compiled a report deeming the DST unfair.
The other major issue is the result of a long-standing dispute over Boeing and Airbus. In September 2019, the World Trade Organization (WTO) ruled that the EU had illegally subsidized Airbus, resulting in over $7 billion in damages to the U.S. commercial aviation industry (aka Boeing). The U.S. and Boeing are under investigation by the WTO for the very same issues. Rather than calling it a wash, the Trump Administration, urged by Boeing, imposed a 10% tariff on European aviation imports and a 25% tariff on European agricultural goods, including most wine, to recoup the damages. These tariffs went into place in October. In December, the Trump Administration floated the idea of raising the tariffs on agricultural goods to 100%, in part a response to the report on the French DST tax and an unsuccessful appeal by the EU over the original WTO Airbus ruling.
So why is European wine industry being targeted in a trade war, especially when the instigating factors had nothing to do with them? The reasons seem unclear (and are well above my pay-grade). However, wine and beer do represent the largest portion of agricultural imports from the EU ($6.4 billion in 2018) according to the Office of the U.S. Trade Representative. Overall, the EU is the 2nd largest source of imported goods for the United States. The U.S imports mostly machinery ($80.2 billion), pharmaceuticals ($71.9 billion), and vehicles ($56.4 billion) from the EU.
According to advocates against the tariff, the effect of a 100% tariff could be detrimental to almost everyone involved in the wine industry. The three-tiered wine selling process in America means tariffs affect people at every level of the supply chain. Producers (winemakers and importers) can’t sell directly to retailers, but instead sell to distributors, who then sell to retailers, who sell to consumers.
The effect on importers should be obvious. They will have to pay increased tariff fees to import European wines, and will most likely have to raise prices to afford to do so. However, many distributors will also have to absorb that impact, because they make up their portfolios of wines by combining both domestic and international products. That means they either won’t be able to afford to take on European wines, or will have to sell them at a higher price. A tertiary result of distributors losing out on European wines is that they might also have to sell their domestic products also at a higher price, to make up for the loss. This could all result in the closure of small business importers and distributors, who rely on EU wines to make up their stock.
Consumers will also suffer due to higher prices. However, this isn’t a zero-sum game. A person who enjoys Burgundy reds isn’t automatically going to switch to Washington State Pinot Noirs. The matter of taste, while seeming superficial, could drive consumers, especially those just starting to learn about and enjoy wine, away from wine in general if they are unable to find the wines they like. The wine-industry has experienced growth since the 1990s, but the rising prices and decreased selection caused by a 100% tariff could lead to a major dip in wine sales. 2019 already marked the first decrease in wine consumption in the U.S. since the early nineties, although it is unlikely that the 25% tariffs imposed in October had much to do with it.
The aim of the tariffs is to hurt the EU wine industry and ultimately force EU lawmakers into coming to the negotiating table, but with ever-expanding markets in Asia, some analysts believe the tariffs will not have the desired effect. Analysts predict EU winemakers will simply switch their focus to those expanding Asian markets, where the history and quality of their wines make them very popular. The EU has also said it will respond with retaliatory tariffs should the 100% tariff be imposed, further hurting American exporters and winemakers with markets in the EU. It’s not a pretty picture.
The 100% tariffs are yet to be put in place, and they may only be a scare tactic, but people are bracing for impact should the tariffs be approved. Given the nature of this trigger-happy, spur-of-the-moment nature of the current administration, there is no telling what the future might hold.
By Aldo Moreno