Wine Tariffs — The End Game

Mid-January 2020 looms large in the world of wine. That’s when the Office of the U.S. Trade Representative closes the window on two public comment periods for the proposed 100% tariff on agricultural products emanating from the European Union, including wine. Most everyone in our business knows the story: Trump’s tariffs are in retaliation for a looming tax on tech giants doing business in France and for “unfair” public subsidies granted to the aerospace consortium known as Airbus. Never mind that Boeing, the beneficiary of Trump’s tariffs, has tragically proven its recklessness in pursuit of profit. Perhaps Mr. Trump, it would be better policy for us to assume a public stake in our scientific research and key infrastructure assets as Europe has with some of its own.

But I digress.

If you’re not up to speed on the potential consequences of tariffs to the wine industry and the wine drinking consumer, check out what author Jon Bonné and winemaker Jason Lett of Eyrie Vineyards have to say. Both have penned open letters to the government’s chief trade negotiator, Ambassador Robert Lighthizer, explaining pretty much everything you need to know.

While I fully support the ongoing letter writing campaign and strongly condemn the use of retaliatory tariffs I would like to explore some potential outcomes beyond the gloom and doom of most observers. In order for me to do so, we must anticipate the tariffs will be implemented. Trump has proven he is not one to bluff in these circumstances. He has also proven to be spiteful when it comes to punishing his perceived enemies, chief among them: globalist leaders, Democrats and wine-drinking coastal elites. As a kicker, his teetotaling evangelical base will no doubt be pleased with the tariff’s prohibitionist undercurrent.

Let’s get right to the exercise. I don’t believe, as some do, that America’s allocation of top wines is at risk. It’s unlikely the well-heeled importers of DRC, or First Growth Bordeaux, and others like them, will suffer in the long term or be forced to renounce allocations. They have the rather simple option to pre-sell the wine and hold it in storage until the dispute is resolved. If the wines do go elsewhere, most can be purchased oversees by well-connected consumers, sans tariff, with a phone call or an email. After all, the wealthy are quite skilled at tax-free asset accumulation and international purchases are already part of their arsenal. Worst case for the wealthy consumer: the tariffs are paid and the wines go to those who put patriotism above wealth.

I’m also not convinced America’s restaurants will suffer any more than they already are. Those with a professional wine staff should be able to piece together an interesting list from the available mix of domestic, non-tariff Europe (hello Switzerland), and Southern Hemisphere wine. Granted, it may not be feasible for the local Italian restaurant to keep a healthy supply of Chianti on hand, but everyone else will be at the same disadvantage and the customer will no doubt show some understanding. Besides, restaurants have bigger things to worry about (rising rents, staff shortages, changing demographics) than how authentic their wine list is.

As for me, I’m saving my tears for the less well insulated mom and pop operators who import the bulk of EU wines, as well as the small local distributor and the poor European farmer who has had to endure successive crippling climate events and an uninvited trade war. Let’s face it, there is no market in the world ready to absorb what we don’t take. I wouldn’t be surprised to see other wine producing nations set up their own trade barriers to stem the tide — China included.

But with the anticipated demise of the distribution network where will restaurants, retailers and consumers get their wine?

This is where things could get interesting. 

The specter of failed businesses, bankruptcies and lost jobs across the industry may be enough for state governments to liberalize markets and strike down unwieldy franchise laws. The almighty three-tier system itself could be dismantled allowing for free interstate trade and direct shipment of wine among the critical nexus of producers, retailers and consumers. This is a scenario that could actually benefit the wine business in the long run — admittedly at considerable pain. These concessions are something business associations should be addressing with their state representatives ahead of the tariffs. If it is, indeed, time to kill the three-tier system and other artifices to the free flow of wine, then let it be on the back of these destructive tariffs. 

And with the three-tier system gone where will Amazon be? Will newly liberated wine producers and retailers siphon-off enough business to quash its ambitions? Stay tuned.

In the short term, look for more own-label and branded wines from California as the industry works through its current glut. For those with cellars-full of unsold wine protection from European wine represents a fabulous window of opportunity to unload inventory for more money, and more quickly, than they could have dreamed of only months ago. Look for Big Wine to go big in bulk with a direct pipeline to the grocery stores of America conveniently emptied of European wine.

As an alternative to closing up shop, I hope to see strategic partnerships between small importers and distributors. When survival is at stake there is security in the hive and and incentive for diversification.

None of this sounds particularly appealing given the circumstances, and hopefully the tariffs will be short-lived with little impact on the industry. Letters and public comment are fine, and I encourage everyone to contact the relevant parties, but preparation is essential too. Hold on everyone, it may be a long, bumpy ride.

Happy New Year.

 

 

 

 

 

 

 

 

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