Understanding the Domino Effect of the European Wine Tariffs

By: Tracey L. Kelley

At press time, the Office of the United States Trade Representative is deciding the revised outcome of a controversial decision from 2019: an increase in import tariffs for European wines by 25%. This action is part of a World Trade Organization judgment against the European Union to end subsidies granted to aerospace giant Airbus. The USTR issued the tariff hike in response to what it believed to be an unfair disadvantage to U.S.-based competitor Boeing.

  In February 2020, the USTR announced it wouldn’t raise European wine tariffs to 100%, but for the upcoming review, it’s unclear if last year’s decision will be upheld, or if those WTO tariffs will shift to other European products. 

  To provide a more tailored scope of the issue, The Grapevine Magazine talked with Benjamin Aneff, president of the U.S. Wine Trade Alliance and managing partner of Tribeca Wine Merchants in New York City; and Eric Faber, chief operating officer of Cutting Edge Solutions in Cincinnati, a wine import and distribution business.

Why the Tariffs Create Conflict

  The Grapevine Magazine (GV): Let’s break down the issue for the layperson: what does U.S. and European wine have to do with Airbus and Boeing?

  Benjamin Aneff (BA): Great question. Nothing. Unfortunately, the USTR has decided to put large tariffs on most wines from the EU because of the dispute involving Airbus and Boeing. It’s incredibly unfortunate, given that these tariffs do roughly four times the economic damage to U.S. businesses than they do their targets overseas. They’re back-firing and hurting mostly small, family-owned businesses in the U.S.

  Eric Faber (EF): I’ve heard the arguments that these tariffs protect American jobs, that people can just buy domestic wines instead of European. In some cases, this may be true, but to believe this about the wine industry shows a complete lack of understanding into how our industry uniquely works and how it’s connected. These connections exist based on an industry that is among the most regulated in the U.S. Companies shouldn’t be asked to change their business model because of an international trade dispute of an unrelated industry.

  The truth is that these tariffs may cause job losses and business closures in Europe, but they will cause job losses for the American small businesses who rely on these wines for their livelihood. Ambassador Robert E. Lighthizer, the USTR, can try to tell us it will simply lead to new American jobs, but that only shows his lack of knowledge about our industry.

  It’s an industry that—unlike Boeing and Airbus—has always paid its fair share of taxes. In fact, the regulation of alcohol means we pay more than most businesses. We don’t get the tax breaks that massive companies like Boeing, Amazon, Apple and others enjoy. Taxes on the alcohol industry help provide billions of dollars to state and local governments. And we’re more than happy to do so, but we shouldn’t be burdened as a result of the poor practices of two of the largest companies on the planet.

  Airbus has recently offered a solution to this entire dispute, and it’s equivalent to the changes made in regard to Boeing. If the goal is to punish Airbus for its misgivings, then punish that industry. But leave the lives of millions of hard-working Americans who aren’t affiliated out of it.

  GV: What would be the direct impact of the 25% tariff increase on small- to medium-sized producers/vintners, and what tangible change happens for them if it’s defeated?

  (BA): Well, ending these tariffs would certainly help small- to medium-sized producers in the U.S., particularly producers looking for distributors that rely on this access to market. These are the companies that actually make sure those small producers in, say, Oregon or California, can make it to the shelf of a wine store or get poured in a restaurant in Chicago, Dallas or New York.

  When distributors are having trouble financially—which they are now due to the tariffs—it’s much harder for them to take the risk of bringing on a new U.S. producer, which generally are unknown and require time and capital investments from distributors. It’s less clear how it helps producers in, say, France.

  There’s pre-pandemic data from the Global Trade Atlas that showed, despite a huge drop in wine exports from France to the U.S. after the enactment of the tariffs, the overall wine exports from France actually grew. In a nutshell, they sold their wine elsewhere. This is just one of the reasons why these tariffs are such a bad idea. They do significantly more damage to the U.S., and they’re incredibly unlikely to influence the EU to change behavior.

  (EF): Should the tariff be justifiably rolled back, things will mostly go back to normal. I say “mostly” because the pandemic has its own role to play in our industry, which adds to the need for the tariffs to be lifted.

  The European wineries we work with love the American wine market and experiencing the amazing wine and restaurant culture so many Americans have worked hard to create. Right now, they’re facing difficult choices about where to sell their products and how to maintain their businesses in the face of tariffs. I think it’s important for Americans to know that the effect on European wineries isn’t money lost from paying the tariffs—because American businesses pay them. It’s from lost sales due to price increases and importers downsizing or going out of business.

  From a larger view, you don’t have to look farther back into our history than the Smoot-Hawley Act of 1930 to see the negative effects tariffs can have on our own economy and the global economy we’re part of. It turned a difficult recession into the Great Depression. It set people back 20 years and created a “lost generation” across the world. These tariffs will harm people across the globe, so by lifting them, we give small businesses—specifically here at home—the opportunity to be successful, experience growth and create jobs.  

The Domino Effect

  GV: As an example, how does an import/distribution company balance its portfolio to include both international and U.S. wine products?

  (EF): We strive to have a portfolio that represents top producers from around the world, specifically boutique producers that fit our model in terms of quality and price point. Domestic wines are the backbone of our portfolio. 

  Like most small distributors, it’s important to have a good mix of products from around the world so we can provide our accounts with a wide variety of options. Domestic wines are certainly a large part of this, and the balance is largely driven by the demands of our customers and the wine-buying public. For us to be successful, we work with producers that we believe in and that our customers have a desire to purchase. While we have very strict standards for the producers we add to our portfolio, we’re ultimately driven by the market.

  The other part of this is profitability. We typically work on lower margins on domestic wines than we do on imported wines, specifically the wines we import ourselves. The slightly-higher margins we make on European wines allow us to keep our prices on our domestic portfolio lower. This is commonplace for most companies in our industry.

  GV: What type of trickle-down effect does the tariff issue have?

  EF: The tariff has an enormous impact on importers and distributors. Many people who argue the tariffs are a penalty on the producers, or the countries on which they have been levied, are simply wrong. We pay the tariffs—not the producers and not the EU.

  A 25% tariff means prices on those products have to go up for importers and distributors to maintain their ability to function. In a state like Ohio, for example, we’re legally required to have a certain margin to our accounts to maintain state tax revenue. We legally can’t make less on the wines, so we have to charge more. This means our retailers and restaurants must raise their prices to the consumer.

  While this may not be the case in every state, no industry could suddenly take a loss of 25% or even 15% of its margin and still be successful. How do people pay employees if they don’t make any money on the products they sell?

  In terms of how this affects domestic producers, the biggest issue outside of distribution is money. Our industry works on “terms”—meaning, we pay for our products typically 30 days after receiving them. This model has been set for decades. But with tariffs, they’re paid as the product clears customs. This creates a significant problem in terms of cash flow.

  So if we’re typically paying a few thousand dollars to clear product into the country, and suddenly have to pay upwards of $25,000, that depletes our bank account in a way our long-standing model wasn’t prepared for and makes it more difficult to pay our domestic suppliers on time.

  We also have to pay our employees, our bills and our taxes. If it takes longer for our domestic partners to get paid, this cash flow problem moves on to them, then to their vendors.

  GV: If certain import relationships fail, do fewer distributors mean fewer channels of retail and restaurant opportunities for U.S. products? Why?

  EF: That’s an excellent question and raises one of the most important points of this debate. If our company relies on a mix of producers from the U.S., Europe and other countries to be successful, then eliminating sales from one of these avenues would force us to close. If companies like Cutting Edge go out of business or contract significantly less, who will sell domestic wines to restaurants or independent retailers that the wineries rely on as the largest part of their sales network? For most domestic wineries, they can’t sustain their business through direct-to-consumer sales alone.

  This leaves wineries without a home. It’s not as simple as just finding another distributor if you’re a domestic winery. Boutique American wineries need to be in a portfolio that gives their products appropriate attention to attract sales and create valuable placements in restaurants and independent retail. They have to find someone who cares about their wines and their stories, someone who can pay for the products, and who can actively promote their products to accounts and consumers.

  Larger, multi-state distributors typically don’t work with smaller domestic producers because it isn’t a part of their business model. They have obligations to their own, typically larger and more corporate, partners. This means that smaller wineries have no focus in their portfolio.

  To sum it up from the point of view of our domestic producers: if 20 Oregon producers suddenly lose their distribution in a state like Ohio, maybe 10 will eventually find a new home and those that do will likely lose significant sales because the new distributor has to essentially re-build the brand in its own portfolio. This is especially daunting when you look at the current climate in our industry as a result of COVID-19. If a producer loses representation in just a small number of states, especially now, it would likely lead to bankruptcy.

  GV: Please explain why a zero-tariff policy on wine imports benefits U.S. producers/vintners in our wine industry.

  BA: Wine from the EU is a keystone species for the health of the U.S. wine market. It represents critical profit margins for tens of thousands of U.S. wine businesses–the same businesses that sell wines from the United States. If those businesses are weak, it’s going to be harder for them to adequately support particularly small- and medium-sized U.S. producers.

  Those wines are often handsels from distributors, retailers and restaurants. That means you need more staff, more time for training, more samples. Further, there may come a point where U.S. distributors are so weakened by tariffs that they’re forced to ask for lower prices from everyone. That’s what happens when companies industry-wide are faced with such hardship. U.S. domestic producers could be one of the first impacted by this need.

  Bottom line, the entire wine industry, from producers to distributors, to restaurants and retailers, are significantly better off when there aren’t tariffs on wine.

Make Connections in Congress

  GV: At press time, the U.S. will have experienced more than 5 million COVID cases, and many wineries continue to be shuttered or downsized in production and tourism. How do you encourage them to take an active stance on this issue when so many other factors have them at a disadvantage? What immediate results will they see from their activism?

  EF: We’ve worked with dozens of domestic wineries to raise awareness of the tariff situation and how it will negatively affect them. I’ve spoken to many of them personally to get them involved, as have countless other distributors. No independent domestic winery thinks the tariffs will benefit them in the short- or long-term.

  We’ve helped provide information on how to contact their elected officials and make their case to members of Congress, the administration, and the USTR. Many have spoken out publicly to condemn the tariffs. People like Jason Lett of Eyrie Vineyards in Oregon have led the charge to raise awareness amongst their peers. They need a strong economy here at home to promote their brands and continue to operate their businesses, and strong partnerships with successful distributors to weather the current storm.

  It’s tough to say what results any of us will see from our activism on this issue because we don’t get to make the final decision. As a community, we have been able to gain support from elected officials from both sides of the aisle and raise public awareness of the negative effects the tariffs will have. Hopefully, awareness will lead to a better understanding of why it’s so important to remove the tariffs currently in place.

  Truly, if there’s anything positive from the battle against tariffs, it’s been the coming together of so many in our industry from all facets: importers, distributors, domestic producers, European producers, restaurants and retailers. I’ve even had wineries we work with in Australia and Chile ask how they can help. All see the incredibly negative outcome of these tariffs on the American wine industry and are united in standing against them. Hopefully, this will help to sway the decision-makers.

  BA: There are so many hardships right now, in every corner of our country. I would say the voices of U.S. wineries can be incredibly impactful with their representatives. We are so interconnected; I think many see how clearly that we rise and fall together. 

  We don’t begrudge the job of the U.S. government to protect our trade interests abroad, but there are better, less damaging ways to do so. We’re all trying to get back up off the mat right now. It’s the wrong time to try to pull the rug out from underneath us.

  Though the public can no longer submit comments to USTR, Congress can! Tell your elected officials, both in the House and Senate, to reach out to the USTR and voice their opposition to these tariffs. There are better ways to influence the EU than a tariff policy that does disproportionate damage to mom and pop businesses in the U.S.—particularly during a pandemic that just saw the U.S. economy contract by 33%. [Editor’s note: The carousel date for the expected USTR announcement regarding its decision, was August 12. Look for an update on thegrapevinemagazine.net]

  When the wine industry is healthy, everyone benefits. When we’re suffering, we all see the impact. Bottom line, we’re in this together.

UPDATE: August 31, 2020; Update from the U.S. Wine Trade Alliance: “The USTR published their decision regarding the August 2020 carousel for the WTO / Airbus award. The tariffs on wine remain the same, with no changes to either tariff percent or category.” Read the full statement here

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