As you may have heard, the Trump Administration sent our industry a New Year’s surprise in the way of new tariff categories. My WhatsApp has been blowing up with questions from producers and all of you clients, so here is a quick, apolitical look at what is going on:
Q: Who is imposing these new tariffs?
A: The United States Trade Representative (USTR), which operates as part of the Executive Branch of the US Government and lies under the jurisdiction of the President, in this case Donald Trump. Upon entering office, President Trump appointed Robert Lighthizer, an economic nationalist, to run this department, which has resulted in a frenzy of new tariffs and trade wars across many industries at a rate not seen since the 1800’s.
Q: What categories of wine do the new tariffs affect, and at what percent?
A: These tariffs (with few exceptions) affect all French and German wine that is over 14% alcohol, in all size formats, with the exception of Champagne and other traditional method sparkling wine. They are collected as a 25% tax to be paid by importers over invoiced ex-winery cost at the time of customs clearance in the US port of entry. They go live on January 12th (yes again this frustratingly includes wine already on the water which means negative margins on presold programs).
Q: Wait — Didn’t the Trump Administration already impose 25% tariffs on French wine in October of 2019, and aren’t we still paying those?
A: Yes, but the original tariffs were limited to wines that were 14% alcohol or lower, in size formats of 2L or smaller, meaning many global-warming-era white wines (many checked in at just above 14% in the past several vintages), and most red wines (reds are usually higher in alcohol) were exempt. In many cases producers made special high alcohol cuvees for the American market in order to avoid the new tariffs (think about all of those 14.1% alcohol Sancerres and Provence rose’s that popped up last year, many of which were shockingly balanced/nervy/delicious we might add…were they really all above 14%? We don’t have a way to measure alcohol in house but we have our doubts…).
Q: What about people shipping French wine over in bladders and bottling them in the USA to avoid tariffs – Does this end that whole loophole also?
A: These new tariffs cover ALL sizes, with the idea being that any bulk bottled wine produced using this route would be subject to tariff as well…Those who impose tariffs hate smart loopholes and generally squash them right around the time new businesses are set to capitalize on them (this is the reason we did not get into the bulk Chablis bottling game in Grapeland). ***I’ll add that we did just book some brilliant (already stateside) Macon Uchizy that Guillaume Touton bottled in New York State using this strategy.
Q: Why was the original alcohol level set at under 14%?
A: Our guess is as good as yours, the most likely explanation is that the persons writing the tariff schedule assumed that most European table wines were under 14%. We will present this without further comment, but think back to the Clemson Football Team’s McDonald’s dinner at the White House and you will understand our line of thinking.
Q: Why did the Trump Administration expand the scope of these tariffs to include 14%+ wine and larger sizes?
A: The short answer was that this was an easy/major subcategory that had not yet been slapped with tariffs…The long answer is that this is all part of the continuing US versus EU trade war pertaining to aircraft manufacturing subsidies – The WTO issued Europe’s reparation ruling this Fall, Europe set their tariff allowance figures using Covid-era revenue data, and the Trump Administration cried foul stating that Covid era revenue data is artificially low and therefore unfair. These new tariffs on 14%+ wine/larger size formats is the Trump Administration’s way of “shooting back” at Europe for the use of what they consider unfair revenue accounting practices when setting retaliatory tariffs.
Q: Why is Champagne not included?
A: Your guess is as good as ours, but our thinking is that the Trump Administration needs one more high profile tariff threat to dangle in front of France for use in retaliation to the ongoing digital services tax dispute.
Q: We heard that Europe wanted to end this trade war by agreeing to erase tariffs on both sides – Is this true?
A: Yes, although like anything, the real story is more complicated than that. From what we hear and read, the Trump Administration seems uninterested in such a resolution and plans to issue new (non-wine related) tariffs literally the day prior to Biden entering office. It is what one could call “turning the volume to 11 at the end of the night?” We will again simply reiterate our opinion that nobody wins in a trade war.
Q: Since the United States Trade Representative (USTR) operates as part of the Executive Branch, does this mean that their leadership will change and that “Tariff Man” Robert Lighthizer will be replaced this month with a new “Trade Czar” appointed by President Biden?
A: Yes – Exactly – President Biden has tapped Katherine Tai to replace Robert Lighthizer as the person leading the USTR. Robert Lighthizer will return to public-sector work as an attorney/partner at Skadden.
Q: Tell us more about Katherine Tai…
A: Ms. Tai is a candidate who both sides of the aisle are apparently very happy with – A native mandarin speaker, she is expected to keep a firm stance on Chinese trade matters, and expected to approach negotiations with our European allies in a more traditional “pre-Trump” manner.
Q: Does this mean that when Biden enters office in a few weeks, that the new Katherine Tai led USTR will sign these tariffs away?
A: No. We do not expect any changes until Summer at the earliest – Trade negotiations take time, the Trump Administration has famously blocked any transitions with Biden’s incoming trade team, which means a slower timetable still (This is a most unusual circumstance and means that Biden’s incoming USTR appointees will start with zero information regarding ongoing trade related negotiations). Even then, Biden continues to imply that he will not come out and make fast changes to Trump-era precedents. It is a shame also that Biden isn’t a bit more like Obama (or most other former Presidents) in his approach to the personal appreciation of all things wine – The fact that Biden himself doesn’t drink at all isn’t very helpful here!! Think if this all happened upon Jefferson taking office…we’d see a rollback within minutes!
Q: Ok, so in a nutshell what does this mean for the wine market?
A: It means continued pressure on French and German wineries to further lower export prices, which will certainly force many multi-generational family wineries to sell or close forever (this is an awful one two punch coupled with Covid). Most producers will lower their ex-winery costs by 10%-15%, expecting importers to lower their margins in cooperation. Regardless of such adjustments, 25% tariffs mean higher laid-in costs for importers and distributors, and they also mean a huge cash flow crunch on importers (tariffs are due at time of entry in port and not in 90 days as are the usual terms between importers and wineries). Coupled with increased freight rates due to Covid and a continual decline in the strength of the US Dollar against the Euro you can expect a 15%-25% cost increase in our industry on any previously non-tariffed French and German wines. This will be most dramatic in situations where the wine changes hands through multiple middlemen (i.e. wines handled by national importers and resold to distributors will suffer the most – You’ll start seeing some basic Cotes du Rhone from the large importers trading in the high teens at retail).
Q: What does this mean for wine I buy from Grape Expectations?
A: Like everyone else, we will pass on some of the increased costs that come our way out of all of this, but we expect our 2021 pricing on staple categories to sit at or below where most of the market was in 2020 on the same categories (i.e. our culty single-vineyard Gigondas this year will trade at the same price that most other people’s culty single-vineyard Gigondas traded at before these new tariffs).
Q: How is that possible?
A: We operate on a notoriously lean business model, and your collective embrace of our digital platforms (Flash offers via email, Brine offers via web, and SOMM offers via text message) during this past year has allowed us to double down on this leanness. While we always reiterate that nobody wins in a trade war, EVERYONE WINS when wine flows in/out of our warehouse in giant chunks within days (as opposed to the average industry inventory turns of several times per year).
Q: In summary, what is the takeaway then?
A: We will approach this new reality in the same way that we’ve dealt with any of the other curveballs that have come our way in our 45 years of sourcing and delivering wine to you (and there have been many!!) – We stay positive, and will continue with the creative approaches. We see these tariffs as one more challenge to overcome in our mission to bring you jaw-dropping value, with great content to boot, in all price ranges, from family wineries who make things we deem exceptional. We made it through nine months and counting of Covid, we made it through the first round of tariffs, and we will make it through this little bump. First up on the “you dared us” docket (and a deal we are negotiating today) is tariff-era sub-$30 retail top-flight Chateauneuf-du-Pape, so stay tuned. There is nothing more celebrated in Grapeland than the hard-won completion of a tough challenge.