At the beginning of 2020, it seemed like one topic would dominate the news cycle for the U.S. wine and spirits industry: Tariffs.
Then came a global health pandemic and, more recently, the growing social justice movement that’s swept the nation. Both issues have dominated the current news cycle — and rightly so, say multiple wine and spirit industry professionals contacted for this article. But the 25 percent tariffs imposed on certain European wines and spirits in October 2019 have continued to negatively impact U.S. businesses throughout this time.
When the tariffs were reviewed in February 2020, U.S. businesses were relieved to find that, while they remained in place, their rate was not increased to 100 percent, as might have been possible. The tariffs are now set for another round of reviews and the threat of 100 percent tariffs once again looms large over U.S. importers, distributors, retailers, and on-premise operators.
But this time around, those businesses are also dealing with substantial losses related to Covid-19. Not only that, the method by which consumers and trade can comment on the tariffs — the main tool at their disposal to oppose them — is set to become more complicated. Industry professionals worry this could dampen consumer and trade support in the fight against tariffs.
Why Were These Wine and Spirits Tariffs Imposed?
Announced by the Office of the U.S. Trade Representative (USTR) on Oct. 2, 2019, the tariffs on wine and spirits were enacted in retaliation to E.U. subsidies paid to airplane manufacturer Airbus. Also known as the “Large Civil Aircraft Dispute,” the World Trade Organization concluded that these subsidies were illegal, and granted the U.S. permission to tax E.U. exports up to $7.5 billion annually.
When the tariffs went into effect on Oct. 18, 2019, a lengthy list of imported goods became subject to 25 percent duties. Those goods included still wines from France, Germany, Spain, and the U.K. that are not higher than 14 percent ABV and not packaged in containers bigger than 2 liters. The USTR also imposed 25 percent duties on single malt whisk(e)y from Ireland and the U.K., as well as liqueurs and cordials from Germany, Ireland, Italy, Spain, and the U.K.
Under the Trade and Development Act of 2000, the USTR is required to periodically examine and revise the list of products subject to a retaliatory tariff. Announced in December 2019, the first revision was set for February 2020. The USTR also issued a request for public comments on the listed products, and whether or not the tariffs placed on them should increase, decrease, or stay the same. In the worst-case scenario, the duties could have been raised to as much as 100 percent.
Already struggling to cope with the 25 percent tariffs, the U.S. wine and spirits community came together to raise public awareness of the issue. Through social media campaigns and interviews with multiple media outlets, they encouraged as many people as possible to express their opposition to tariffs, arguing that not only were they harming their businesses, the dispute itself had nothing to do with wine or spirits.
By the time the comment period closed, the USTR had received nearly 26,000 responses (not all related to wine and spirits). Finally, on Feb. 14, the USTR announced no changes to the tariff rate or list of products in the wine, spirit, and liqueur categories.
The news gave some respite to business owners. But the next period of review is fast approaching. Slated for Aug. 12, the USTR will announce the start date of the next 30-day comment period at the end of June (most likely on June 23).
How Have These Tariffs Affected U.S. Businesses?
At this point, some might be questioning why the tariffs have negatively impacted U.S. businesses when it was E.U. wines and spirits that were targeted. The answer to that question lies in the way Prohibition was repealed, and the three-tier system of alcoholic distribution in the U.S.
When a consumer walks into a wine store and buys a European wine, that retailer bought the wine from a U.S. wholesaler. The wholesaler, in turn, purchased it from a U.S. importer. All three are American businesses and only the importer works directly with European producers. Besides alcohol, there is no similar system for other consumer goods in the U.S.
“When the federal government put tariffs on E.U. wine [and spirits], I don’t think they understood so much of the damage was being inflicted on U.S. businesses,” says Benjamin Aneff, president of the U.S. Wine Trade Alliance (USWTA) and managing partner of New York’s Tribeca Wine Merchants.
Aneff says the vast majority of the companies hit were small businesses, which only amplified the damage that was caused. There are 47,000 independent wine retailers in the U.S. and over 6,500 small distributors, he says, and most of them are family-owned. “Tariffs are just an extra burden around the neck of these very small companies,” Aneff says.
In recent months, the impact of Covid-19 has further increased that burden. The pandemic itself complicates analysis of the full economic impact of tariffs. But according to data shared with VinePair from the National Association of Beverage Importers, certain wine imports saw notable drops before the pandemic hit. This could suggest that U.S. businesses were struggling to pay the increased costs of tariffed goods.
In January 2020, imports of still table wine from France, Germany, and Spain decreased by 26.9 percent, 13.1 percent, and 41.6 percent respectively, compared to January 2019. In contrast, imports of still wine from Italy — which is exempt from the tariffs — saw YOY growth of 12.3 percent.
It wasn’t just wine that took a dive. According to the Distilled Spirits Council (DISCUS), imports of liqueurs and cordials from Germany, Ireland, Italy, Spain, and the U.K. dropped 20.6 percent between October 2019 and April 2020 compared with the same period one year prior. It’s harder to gauge the impact on Irish and Scotch whiskeys because the U.S. trade statistics database does not distinguish between single malts and blended whiskeys. But DISCUS estimates these categories are also down nearly 30 percent YOY in the same period.
While we cannot definitively conclude that import decreases are entirely linked to tariffs, the manner in which tariffs are applied makes it seem likely. Importers have had to pay the added duty when the goods arrive at port. As wine distribution typically operates on credit, this means importers have paid the fee out of pocket and have had to wait to recoup the costs. Some businesses have struggled to accommodate the unexpected financial commitment.
“The biggest impact from these tariffs has been the cash-flow implication,” says Kate Laughlin, vice president of California-based importer and wholesaler Martine’s Wines. “We extend credit to all of our accounts, so by the time that we get paid for that wine, we’ve already paid the tariff weeks or months in advance.”
Though importers are paying the added duty upon arrival, the additional 25 percent in costs is often spread across the distribution channel. This is particularly challenging for small businesses right now. On-premise operators, and the distributors that serve them, have had to cope with the impact of enforced bar and restaurant closures because of Covid-19. Meanwhile, mom-and-pop wine and spirits stores are struggling to compete with large-scale online retailers with efficient delivery channels.
Even though Covid-19 seems like the more immediate threat, some restaurant operators warn that tariff increases should not be ignored. “They don’t feel as worrisome as dealing with opening under the virus, but it’s actually a bigger deal than before,” says Andrew Fortgang, co-owner and wine director of Le Pigeon and Canard in Portland, Ore. “Previously, a successful restaurant might’ve had the margins to absorb some of those costs — there are no successful restaurants anymore.”
The Next Round in the Fight Against Tariffs
Ahead of the August tariff review, U.S. business owners hope the wine and spirits community will rally in a similar fashion to the beginning of 2020. But this time around, the nature of the process has changed.
Following the overwhelming number of responses received in December and January, the USTR has sought to change the manner in which people can submit comments. Previously, that was as simple as clicking on a link to a Regulations.gov page, writing a comment (or uploading a PDF file), sharing some basic personal information, then clicking submit.
Now, the USTR has received approval to launch a multistep online portal. The exact submission process will only become clear when the portal goes live. In its proposed guise, however, users must input a range of detailed information before they can submit a comment. This includes details such as a 10-digit “Harmonized Tariff Schedule” code, which relates to the specific product users wish to comment on.
The USTR estimates the process could take commenters up to two hours to prepare and submit. In a document supporting the changes, the USTR writes, “The electronic portal facilitates the collection of comments, enhances USTR’s ability to view/organize data, and allows the public to more easily search/view public submissions.”
Some industry professionals have questioned whether there are additional, ulterior motives. “It definitely feels like a bit of a roadblock is being put up,” says Martine’s Wines’ Laughlin. (VinePair reached out to the USTR on multiple occasions for additional comments on the portal, but did not receive a response by the time of publishing.)
Either way, many in the industry are worried the process will be too complex for many consumers to complete. “Our concern is that people will get frustrated and they’ll never get to [the step] where they can attach their comment letter or type in their and general comments,” says Robert Tobiassen, president of the National Association of Beverage Importers (NABI).
The USWTA’s Aneff shares his concerns. “As Jeff Bezos can tell you, Amazon Prime works with one blue button. If you make [consumers] fill out six blue buttons, you lose people at every step,” he says.
In the coming weeks, the role of organizations such as the USWTA and NABI will be working to help consumers navigate the “blue buttons” of the online portal. But even these organizations are in the dark about the specific comment process until the portal launches.
Once the review process is over, the USTR has discretion on when it announces any modifications to the tariffs, and when those changes would become effective. If the history of these particular tariffs is anything to go by, that period should be around two to three weeks. The USTR first announced the 25 percent tariffs on wine and spirits on Oct. 9, 2019. They then went into effect on Oct. 18, 2019.
When the tariffs were reviewed on Feb. 14, the USTR announced the modifications (which didn’t affect wine or spirits) a week later. Those changes then became effective on March 5.
The conclusion to this particular battle should therefore be quick. Whether or not it will signal the end of the trade war, and spare the wine and spirits industries further damage, is less clear.