As I’m sure you’re all aware of by now, the Trump Administration recently levied tariffs on $7.5 billion of European goods in retaliation for EU subsidies to Airbus, including a 25% tariff on wines from France, Spain, Germany and the U.K. Notably, the import leader by volume, Italy, escaped the tariffs. Nonetheless, the first three countries on the list are major exporters to the U.S., ranking 2nd, 4th and 9th in terms of volume respectively and France takes the number one spot based on value.
The objective of this brief piece is to provide additional perspective on the tariffs and their potential implications for the U.S. wine market and industry.
What the Tariffs Cover
According to information released by the Office of the United States Trade Representative, the tariffs will apply to wines imported under HTS code 2204.21.50. This heading includes essentially all still wines packaged in containers of 2 liters or less, with an alcohol content of 14% or less. Notably, sparkling wines, bulk wines, and all wines exceeding 14% alcohol are exempted.
Based on data from the United States International Trade Commission (USITC), 20 million cases of wine would have been subject to the 25% tariff in 2018 – or 16% of total import volume. This breaks down to 13.9 million cases of French wine, 4.1 million cases from Spain, and two million cases of German wine. The U.K. is a minor producer and contributes just 45,000 cases to the total. As the graphic below shows, the tariffs would have hit the vast majority of still wines imported from these countries, including 92% of French still wines. The 20 million cases represent an even greater share of total U.S. imports by value – 25% – due primarily to the high value of French imports.
The USITC data are too coarse to provide much detail on the specific categories that will be affected by the tariffs, but it appears they will have a relatively broad reach. Nearly half of the 20 million impacted cases, or 9 million, were classified as red wines, white wines constituted 6.2 million, and “other” wines – the vast majority of which originated in France and are presumably Rosé – totaled 4.8 million cases. The average “customs” value (essentially the price paid by the importer) of the impacted wines was $8.52 per liter – substantially higher than the $6.32 overall average for still wines imported into the U.S. This breaks down to $9.81 for the French wines, $5.38 for the German, and $5.34 for Spanish imports. Thus the tariffs will hit wines in both the value and premium segments of the market.
Implications for the U.S. Wine Market
A 25% tariff on more than 1/6th of U.S. imports clearly has the potential to disrupt the market as it would be impossible to pass a price increase of this magnitude on to consumers in today’s hyper competitive marketplace without a substantial loss of market share. But to put this into perspective, the 20 million cases represent just 5% of the total U.S. wine market, so the amount of shelf space potentially up for grabs is relatively modest overall.
Moreover, the impact of the tariffs will depend heavily on how long they remain in effect, which is anyone’s guess at this point. In the short run, many producers and importers will likely choose to sacrifice some margin rather than try to pass the full tariff on to consumers in order to defend market share. This is particularly true for higher priced wines, which generally have more margin to operate with.
Margin cutting may be a viable short-term strategy but is clearly not sustainable over the long run. If the trade war drags on, producers from the impacted countries have several options to attempt to circumvent the tariffs. For one, they could boost the alcohol content to exceed the 14% threshold, which is rather arbitrary to begin with. This strategy would clearly be most viable for reds from warm climate regions but also comes with some degree of risk due to an apparent shift in consumer preferences toward lower alcohol wines in recent years. A second potential strategy is to ship in bulk and bottle in the U.S. because bulk wines are exempted regardless of alcohol content. This may be a workable option for many lower-priced wines, though the logistics could be daunting.
Given the relatively limited scope of the tariffs and potential for circumventing them, the tariffs are not likely to reduce competitive pressures for domestic producers in a meaningful way, at least in the aggregate. Nonetheless, they may present opportunities within specific categories if they persist. For example, the data suggest that the tariffs may have an outsize impact on the rapidly expanding premium Rosé category where French imports maintain a commanding lead. Pushing the alcohol content of these wines beyond 14% or shipping in bulk may not be feasible and the resulting price increases could present an opening for U.S. wineries to undercut French producers and steal share in this lucrative category.
The escalation in the trade war also poses risks for U.S. exporters going forward in the form of lost good will in foreign markets and the potential for retaliatory tariffs, though the United States exports substantially less wine to the impacted nations than it imports.
Contact Chris Bitter for additional analysis on import and export dynamics and other strategic issues facing the U.S. wine industry.