As if the wine industry didn’t have enough to deal with already, the threat of a major escalation in US tariffs on European imports is back on the table.
The first round of tariffs has been in place for eight months now, so I thought it would be useful to take a step back and assess how they’ve impacted imports so far. Before I get into the numbers, I’ll briefly summarize the existing and proposed tariffs and how the matter has unfolded over time.
In October 2019, the US imposed a 25% tariff on certain still wines originating from France, Germany, Spain and the United Kingdom (FR/DE/ES/UK). This tariff was part of a larger package enacted in retaliation for illegal subsidies being provided to Airbus. It remains in effect today.
Notably, Italian and sparkling wines were excluded from the list. And the tariff applied only to still wines packaged in containers smaller than two liters and with alcohol content lower than 14%. In other words, wines shipped in large-format containers or in bulk and those with higher ABV were exempted. See my October post for more details on the size and scope of the tariffs.
Last winter, the United States Trade Representative (USTR) issued a notice announcing that it was contemplating expanding the tariffs in relation to the Airbus dispute due to a lack of progress in resolving the case. This included extending the tariff on wine to encompass all European Union countries and virtually all wine categories (irrespective of package size or alcohol content). Moreover, the proposal threatened to raise the tariff from 25% to a more punitive 100%. My January blog discusses this proposal and its potential implications for the wine industry.
For obvious reasons, the proposal was met with vigorous opposition from the US wine trade, and to almost everyone’s relief, the USTR announced in February that it would not impose further tariffs on imported wines.
End of story, right? Nope. The trade spat still hasn’t been resolved and the threat to expand the tariffs, including those on wine, is back on the table. The provisions for wine are essentially the same as those in the previous proposal: an expansion of the tariff to virtually all European wines; and a possible escalation of the rate to 100%.
To be fair, the current review is a normal part of the dispute resolution process and its intent is to re-evaluate the situation in order improve the effectiveness of its measures in producing the desired outcome (stopping illegal subsidies to Airbus), as well as to reduce collateral damage to US businesses. Thus, it is also possible that the existing tariffs could even be eliminated. The USTR is accepting comments through July 26, and is slated to render its decision by August 12.
You may have also heard that the USTR decided not to levy a tariff on French wine imports last week in the “digital services tax” case: this is an entirely different dispute and has no bearing on the Airbus trade action.
Impact on Imports
Given that the tariffs are back on the negotiating block, this seems like a fitting time to explore how the first round of tariffs has impacted US wine imports. Let’s start with the big picture. The charts below show the trend in US wine imports before and after the introduction of the tariffs in October. They are based on my analysis of data from the United States International Trade Commission.
As you can see in the first chart, there was no obvious change in the trajectory of import volumes in the first four full months after the tariffs went into effect. In dollar terms, a modest dip is evident during November and December, but this was followed by a sharp rebound during the subsequent two months. A more pronounced decline, especially in value, is evident starting in March, which coincides with the beginning of Covid-19 lockdowns in the US.
Thus, the temporal patterns here don’t provide compelling evidence to suggest that the tariffs have caused a pervasive disruption to supply in the US wine market. Nevertheless, finer scale country-level data do show that imports from FR/DE/ES/UK have declined in an absolute sense since the tariffs were enacted as well as in terms of their share of total imports.
The metrics in the final set of charts exclude sparkling wine because it is exempt from the tariff and represent a comparison between the seven-month period following the introduction of the tariffs (November 2019 through May 2020) to the same period a year earlier. This is the most relevant baseline because the data are seasonal. They indicate a 14% decline in the volume of still wines imported from FR/DE/ES/UK during the post-tariff period. All four countries lost ground, though the severity varied. It is also important to point out that France plays an outsize role here, as it accounts for approximately two thirds of the volume and three quarters of the value of the collective still wine imports from these nations.
Of course, we can’t attribute this drop to the tariff alone, as many other forces impact import dynamics, including pandemics. Nonetheless, shipments from countries not subjected to the tariffs grew by 3%, and those from Italy – the single best “comparable” in this case – fell by just 1% in the same period. To put this differently, the share of US imports originating from FR/DE/ES/UK has declined from 19.3% to 16.6% since the tariffs were enacted. These facts strongly imply that the tariffs have been a primary driver of the decline.
I don’t think this finding will surprise many: obviously, charging an additional 25% fee on European wines in today’s price-sensitive market environment will reduce demand for them. Indeed, you might be wondering why the impact hasn’t been even greater.
Part of the explanation lies in the fact that the USTR omitted several relevant HTS (harmonized tariff schedule) codes from the list, which left the door open for producers to circumvent the tariffs in some instances.
For example, wines packaged in containers of at least two liters were excluded – so more wine has been shipped in bulk and large-format packaging. More importantly, wines with 14% or more alcohol were ignored, so wineries have bumped up alcohol content or simply relabeled bottles when regulatory tolerances permitted.
The chart below illustrates this. Still wines from FR/DE/ES/UK imported under the HTS codes covered by the tariffs plunged by nearly 4.2 million cases in the seven months following their enactment – but this was partially offset by an increase of more than 2.2 million cases imported under codes exempted from the tariffs. This includes a doubling in the volume of bulk wine imports (though they still represent a small fraction of the total), and a tripling in packaged wines arriving with at least 14% ABV.
Nevertheless, imports from the offending nations have suffered a far more severe 32% decline in dollar terms. This compares to a 2% year-over-year increase in the value of Italian imports and a modest 2% drop for all other nations.
The steeper deterioration in value has mainly been driven by a 27% drop in the average price per liter for wines imported under the HTS codes hit with the tariff. This suggests that foreign producers have cut prices and are sharing some of the pain with their US importers, who are ultimately responsible for paying the tax. However, even after adding the dollar value of the tariffs paid to the total, the average cost per liter for still wines originating from FR/DE/ES/UK is still lower than it was a year ago, indicating that there has been a shift in the product mix toward lower-value wines too.
In sum, it looks like the first round of tariffs has had a negative, but not devastating, impact on the collective imports from France, Germany, Spain and the UK. Moreover, they appear to have had little impact on the broader trajectory of US imports and there are no signs of an escalation in import prices overall. This is not particularly surprising given the relatively limited size and scope of the October tariffs.
This is not to say that the tariffs haven’t disrupted some segments of the market or caused serious pain for importers, distributors, retailers and restaurants – they most certainly have. They likely haven’t benefited US producers in a material way up to this point either.
Obviously, this is just a rough sketch and the complete story is surely much more nuanced than these broad-brush observations imply!
A variety of outcomes are possible when the USTR meets next month, ranging from a full repeal of the existing tariffs to an expansion that encompasses all European wines and a quadrupling in their rate. I’m not an expert on trade policy so I won’t attempt to put odds on the result. If you’d like to try to influence the outcome – comments are still being accepted for a couple of more days.
The path of least resistance would simply be to leave the existing tariffs in place. If this happens, I would expect their impact to build in the coming months as businesses find it increasingly difficult to stomach reduced margins on these wines, and passing the cost on to consumers doesn’t seem like a promising strategy in the current economic environment. Indeed, still wine imports from the tariff-impacted nations have deteriorated faster than overall imports since the pandemic took hold in March, though this could also be due to a greater on-premise orientation.
The maximal proposed escalation in the tariffs has staggering implications for the US wine industry and market, as well as for European producers. My gut tells me that the probability of this result is low, as it would seemingly defy logic to increase the tariffs given the damage to US businesses already being wrought by Covid-19. Nonetheless, the current administration has made a habit of defying logic and convention – so anything is possible.
Given this, the spectre of an escalation in the tariffs should be taken seriously and wine businesses, both in the US and abroad, should be prepared to act quickly and strategically should a major change in the tariff regime be announced next month.