Update: Since publishing this article, Donald Trump has won the 2024 election, and said upon taking office he would immediately order a 25 percent tariff on all items coming into the U.S. from Mexico and Canada, and an additional 10 percent tariff on goods from China. He has also threatened BRICS nations with 100 percent tariffs. This is a developing story.
When Becky Harris co-founded Catoctin Creek Distillery in 2009, she believed her target market went beyond Loudoun Valley and its rolling northern Virginia hills. Though most business would come from the mid-Atlantic region, she also set her sights on customers across the Atlantic.
“We worked really hard,” Harris says of eking out a distribution network and gradually building a consumer base in the European Union. “Just about the time we started to make progress in the market was when the tariff battle really accelerated. And it basically killed our business there.”
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It was 2018. The EU had just imposed a 25 percent tariff on American whiskey in retaliation for tariffs imposed by the United States on European steel and aluminum imports.
In the tumultuous years that followed, Catoctin Creek Distillery and countless other members of the U.S. beverage alcohol industry would find themselves collateral damage in transpacific and transatlantic industrial trade wars.
Though a détente between the U.S. and EU has eased the feud, this year’s presidential election risks upending that. Despite vastly divergent approaches, the campaigns of both former President Donald Trump and Vice President Kamala Harris have expressed support for tariffs—indicating the potential return of the trade wars, which some fear will destabilize an already precarious beverage alcohol market.
How a Quarrel Over Aluminum and Steel Hurt U.S. Whiskey
Trade wars are fought with different weapons, but in recent years it is tariffs that have inflicted the greatest damage on the industry. “A tariff is a tax on imported products. It’s a tax on the people in the country, and it’s collected at the border,” explains Mike Veseth, an economist whose books and blog, The Wine Economist, cover the global wine market. “Tariffs are used to protect a specific industry in certain cases and for tit-for-tat retaliatory measures in certain situations.”
For decades, American and EU companies enjoyed tariff-free trade of beverage alcohol with one another. But in March 2018, then-President Trump imposed a 10 percent tariff on aluminum products and a 25 percent tariff on steel products imported from most countries, including the EU, out of concern for “national security,” and, among other reasons, because American metals manufacturing was in decline. In retaliation, the EU in June 2018 introduced tariffs, including a 25 percent tariff on American whiskeys. Not until 2022, under President Joe Biden, did the two trading partners begin to suspend the tariffs, with both parties agreeing in late 2023 to extend the suspensions until March 31, 2025, pending further negotiations.
Damage to the American beverage alcohol market had been done. By the end of the nearly five-year trade war, the Distilled Spirits Council of the United States estimates that American whiskey exports to the EU fell by 20 percent, from $552 million to $440 million, between 2018 and 2021.
Many craft producers effectively lost future business opportunities altogether. “Through those four years, we were blocked out of the European market,” Becky Harris says. “Before the tariffs, we were one of the only American rye whiskeys in Europe. During the four years of the tariffs, European rye whiskeys entered the market. By the time the tariffs were lifted, there were a lot of European rye whiskeys. We went from making gains and anticipating growing in the EU to essentially nothing.”
If bolstering American metals manufacturing motivated the president and his trade representative to impose tariffs on imported aluminum and steel, why would it seemingly punish other American producers in its efforts? “It’s always important to bear in mind the international political game is tit-for-tat,” Veseth explains. “The EU put a tariff on Kentucky bourbon. [Senator] Mitch McConnell represents Kentucky and the tariff was meant to punish.” He adds, “It’s not just politics—it’s dirty politics.”
Aircraft Dispute Threatened Imported Wines and Spirits
For more than 20 years, the U.S. has accused the EU of subsidizing airplane manufacturing in violation of international trade agreements and to the detriment of U.S. interests. In October 2019, then-President Trump imposed a 20 percent tariff on certain wines and spirits imported from France, Germany, Spain, and the U.K., and even threatened a 100 percent tariff in late 2019. The parties eventually agreed to pause the dispute, and President Biden suspended these tariffs in July 2021 for a period of five years.
During that dispute, however, importers and distributors had to respond quickly to the sudden price increases. “The most immediate impact was a price increase that we passed [on to buyers] to cover the cost of the tariffs,” says David Kenney, the partner and vice president of Uncorked, an importer and distributor of French wines in New Orleans. “We did not initially pass along the full cost of tariffs, choosing to reduce our profit margin, along with our importer partners doing so as well. As the timeline progressed, we eventually raised our prices to cover the full tariff cost.”
According to Veseth, these tariffs fell hard on U.S. importers and distributors. “They were at the front line. They had to pay the tariffs. They found themselves paying for them on products they contracted for months before or even years before. And they found retailers were hesitant to raise prices. They were caught in a squeeze.”
Tariffs on European wine and spirits don’t necessarily benefit domestic producers, either. Jason Haas, the partner and general manager of Tablas Creek Vineyard in Paso Robles, California, submitted a public comment to the Office of the U.S. Trade Representative in December 2019 in opposition to the then-proposed increase of the tariffs of up to 100 percent. “In my experience, distributors react to the loss of a major supplier (a similar impact to these tariffs) by attempting to source new wines for their portfolio, rather than by selling more wine from their existing suppliers, many of whom are unable to increase production in the short term,” Haas wrote.
“The entire industry—from suppliers to importers to distributors to retailers—is under immense pressure, with little room to absorb or distribute the cost of additional tariffs. Passing these costs onto consumers would only exacerbate the already fragile state of the wine market, leading to further deterioration.” — Dina Opici, Opici Family Distributing
Today, Haas remains concerned. “For us, I just found the distributors were a little more distracted than usual,” he says. “What you ended up seeing was people trading down to lower-price wines in the same category.”
A Renewed Trade Battle Will Strike a Less Resilient Market
The trade war is not over; it is just on pause. Both sides have agreed to stand down on trade barriers while they attempt to negotiate a compromise. Reigniting that trade war by reimposing tariffs on EU imports could devastate many in the U.S. beverage alcohol industry.
“Unlike in 2019, when the first round of tariffs was introduced, we are now navigating a market fraught with challenges,” says Doug Shaw, the president of wine and spirits for importer and distributor M.S. Walker. “Back then, our industry was able to insulate consumers from price hikes by absorbing some of the costs, thanks to a stronger economy and a more resilient marketplace.”
As Veseth points out, “That was a period when the U.S. dollar was rising.” That, coupled with historically low inflation, generally meant the U.S. economy was strong and resilient. Fast forward to today, and the outlook dims significantly. “Today’s economic environment is vastly different,” says Shaw. “Inflation, the high cost of doing business, and the financial strain on consumers mean that any additional burden, such as tariffs on products like French wine, would inevitably be passed on to them.”
In its recently published report on U.S. craft spirits sales, the American Craft Spirits Association found, for the first time since it began its reporting in 2016, the U.S. craft spirits market volume decreased year over year. And it is no secret that U.S. winemakers are seeing declines in domestic consumer demand and an oversupply of planted vineyards.
For many craft producers, options for offsetting losses may be limited.
As Haas wrote in his public comment, the U.S. three-tier system has established controls in place, in particular franchise laws and restrictions and limits on direct shipments to retailers, that can make it difficult for domestic producers to quickly adjust to sudden economic changes. Increasing exports is one of the few ways they can increase revenue.
Though the campaigns of Trump and Kamala Harris differ in many ways, they both seem to share an inclination toward tariffs. Trump has proposed tariffs of up to 20 percent on all imported products, and between 60 and 100 percent on Chinese goods. Since 2018, China has maintained a 15 percent tariff on American wine (on top of existing import taxes) in retaliation for the U.S. tariffs on imported aluminum and steel. In 2016, U.S. wine exports to China peaked at $88.3 million. Although China remains amongst the top 10 importers of American wines, the U.S. Department of Agriculture reported that 2023 exports totaled $63.86 million, a loss of nearly 28 percent from 2016.
The Vice President has been sharply critical of her opponent’s universal tariff plan for not taking into consideration the return on investment or the economic impact on everyday people, but when it comes to her own approach, the Harris campaign has been less specific. In August, a campaign spokesperson reportedly said that her tariffs would be “targeted and strategic.”
If the U.S. and the EU are unable to resolve their trade conflicts, the next round could result in even higher tariffs that would affect all tiers of the U.S. beverage alcohol industry. “At a time when consumers are already cash-strapped, asking them to shoulder the burden of these tariffs could have irreversible consequences for the wine industry,” says Shaw. “If these tariffs are reinstated, we risk putting the industry on a trajectory from which it may not recover.”
Dina Opici, the president of Opici Family Distributing, agrees. “Any new tariffs on wine and spirits in today’s economic climate would be extremely disruptive,” she says. “The entire industry—from suppliers to importers to distributors to retailers—is under immense pressure, with little room to absorb or distribute the cost of additional tariffs. Passing these costs onto consumers would only exacerbate the already fragile state of the wine market, leading to further deterioration.”
Despite the uncertainty ahead for foreign markets, both Becky Harris and Haas are carefully building their markets abroad. “We have made a lot of investment in the export market and our exports are bigger than they ever have been in history,” says Haas. “We’d be more exposed to more risk if tariffs happened again.”
Last updated: December 2, 2024
Dispatch
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Brian Fink is an attorney at Foster Garvey PC. He represents members of all tiers of the alcoholic beverage and cannabis industries, as well as people and companies who do business with them. The information provided in this article does not, and is not intended to, constitute legal advice.
