Francois Steichen: Wine Tariffs May Go into Effect as Early as Tuesday

By Francois Steichen

Many small and medium-sized Wine Distributors and Retailers in Greenwich and throughout Connecticut are facing the real prospect of being forced out of business, as the United States Trade Representative is due to set tariffs of 100% on certain European wines as early as this Tuesday, January 14.

The move comes at a particularly bad time for small and medium-sized businesses in the wine and spirits trade, who have been waging a 15-year battle against the rapid consolidation of their sector. It follows 25% tariff increases that were placed on Scotch Whiskey – and French, German and Italian wines and cheeses – this past October.

Reaction to the Tariffs

The tariffs have brought together and galvanized a hitherto fiercely independent and entrepreneurial group of small and medium importers, distributors and retailers. Small, but nimble, they are the innovators in the wine and spirits industry, bringing to market wines and wineries that may not be as well known, or that are often ignored by larger distributors whose business plans center on volume-based brand-name producers who can move large amounts of wine in a short period.

Initially taken aback, small wine businesses have mounted an inspiring counterattack. Last Tuesday, January 7th, about 30 industry professionals, studded mostly with importers and distributors, but also featuring a member of the Zacharia family from the renowned Zachy’s, in Scarsdale, testified before the USTR against the tariffs. The stars of the show, by acclamation, were Mary Taylor, an importer from Massachusetts and New York, who has a five-person company in danger of closing, and Ben Aneff, of Tribeca Wine Merchants, one of the leading retailers in Manhattan

On a Facebook page called “Organizing Wine Tariff Response,” information is exchanged, including how to contact Congressional point persons and contacts at the U.S. Trade Representative’s Office. An importer/distributor from South Carolina, Harry Root, has camped out on Capitol Hill to attend every meeting related to the tariffs, and even sponsored his own meeting for Congresspersons, featuring – what else? – wine!

In Connecticut, Representatives Jim Himes, Rosa DeLauro and Jahana Hayes have assigned their Trade Aides to focus on the wine tariffs full-time. A number of persons in the wine trade have reported receiving phone calls from their offices to help explain what is going on at all times. The fact that these Representatives are also part of the Congressional Wine Caucus is not lost on wine-industry workers.

The Massachusetts Package Store Association, through Ryan Maloney, has also been at the forefront, devoting its funds, and most importantly, a real political organization, to fighting the tariffs on Capitol Hill and with USTR.

100% Tariffs Set to go into Effect this Tuesday

The new tariffs would target two new categories of wines: sparkling wines, and wines above 14% alcohol by volume. These two categories most obviously include Champagne, Prosecco, Franciacorta and Cava. Other famous wines included are Port wines, Sherries, Sauternes, Barsac, and the famous dessert wines of Central Europe: Tokai from Hungary, and Beerenausleses and Trockenbeerenausleses from Germany and Austria.

The tariffs also hit non-liquid accessories to the wine and spirits experience, like the go-to authentic Maraschino Cherries in syrup that are a must in Old-Fashioneds or Manhattans for so many cocktail imbibers in the area. (Or on the ice cream their children are eating!)

The taxes go after many staples of Greenwich’s Table of Abundance: “Italian Cheeses” of virtually any variety; “blue-veined cheeses” specifically including Stilton, Gorgonzola and Roquefort; “Swiss-style cheeses” like Emmenthal, Gruyère, and Comté; Dutch cheeses like Edamer and Gouda; Irish Butter like Kerry Gold; Parma, Ardennes, and Pata-Negra hams; Olive Oils of every variety; Roasted Coffee; Olives; and even Belgian waffle cookies.

Why these Tariffs? Why Now?

Greenwich consumers of Single-Malt Scotches have already noticed the price increases brought by the 25% tariffs of October. Afficionados of The Macalan 12-Year Single Malt, for example, have seen its price go from $78 to $108 virtually overnight. The vast majority of Scotches are seeing similar increases. And these, on top of meteoric increases for brown spirits over the past five years, brought about by frenzied Millenial demand and lagging supply.

The tariffs amount to the end-game in a 15-year fight at the tribunal of the World Trade Organization (WTO) between the United States and Europe over Airbus, the European consortium of plane manufacturers. In May last year, the WTO ruled that European nations had provided illegal subsidies and financial assistance to Airbus. On October 2, 2019, the WTO authorized the United States to tax up to $7.5 billion in European goods as a penalty. That same day, the United States gave notice of the goods it would tax, and on October 18th, it placed tariffs on any of these goods appearing at American ports of entry. The goods included those listed above, but not sparkling wines or wines above 14% alcohol by volume. Some in the industry credit executives of the major Champagne houses with influencing the USTR to keep sparkling wines off the list.

Because of the relatively short delays, most Scotch producers were not able to send their products before the tariffs took effect. Some Scotch distillers – most notably Glenmorangie – took the hit upon themselves; others stopped exporting Scotch to the United States. The majority of Distillers had to pass at least some of the burden on to their importers, who had to pass it on to retailers and end-consumers.

Wasn’t 25% Enough? Why a New Round of Tariffs?

On December 2, the US Trade Representative’s Office opened a second front in the US – Europe Trade War of 2019.   It released a finding that so-called “digital taxes” discriminated against American internet service providers. Digital taxes are usually assessed as a percentage of the revenue an internet provider makes in the country that assesses the tax.

The USTR stated that it would be seeking tariff taxes on $2.4 billion worth of goods imported from Europe. In this round, the tariffs would amount to 100% of the value of goods imported. Moreover, goods subjected to the original 25% tariff would now also be charged 100% tariffs. Lastly, wines above 14% abv and sparkling wines would be included in this round.

Potential Effects of the 100%Tariffs

The effect of tariffs can be illustrated with an example. Let’s say an importer buys a bottle of wine from the winery in Europe for $5. Transport costs to the United States usually average about $2.50, for an all-in cost of $7.50. An importer/distributor will then sell that bottle, at full markup, to the Retailer for double that amount, or $15. The retailer will then sell the bottle at full markup in the store for $22.50.

In fact, many factors – most importantly, competition – will reduce the final consumer price of that bottle to as little as $15. Volume, scarcity, the producer’s reputation, or the fame of the wine’s Appellation, on the other hand, will tend to keep the price closer to full markup.

Under a 100% tariff regime, the $5 bottle will now cost $10, and with transport costs, $12.50. The importer/distributor’s markup will make it $25. And the retailer’s markup will make it $37.50. The bottle is now $15 higher on the shelf. It goes from a bottle the consumer might buy every week or once a month, to an aspirational bottle that someone might buy only for a special occasion. Even in an affluent community like Greenwich, customers will tend to substitute away from such wines.

Why are the Tariffs a Bad Idea?

Small importers, distributors and retailers argue that wine tariffs will hurt the United States economy more than the European economy. European wine allocations historically sent to America will now be sent to China, Russia and other emerging markets. The losses could amount to $10 billion.

Moreover, the wine and spirits industry is made up of 65,000 importers and distributors, and 200,000 employees, with 47,000 retail shops and thousands of restaurants. Many of these would close due to the tariffs.

They also say that job losses in America could mount to 78,000 positions across importation, distribution, retailing, restaurants, transportation, logistics, and other ancillary industries

And because – by law – they are not allowed to sell other products than wine, spirits and beer, they have no other product lines that could otherwise cushion their losses.

Ironically, many American winemakers who would seem to be in a position to expand their placements in stores and restaurants have come out against the tariffs. They argue that their products are often marketed by the same distributors who carry European products. If those distributors fail, then domestic winemakers will have the same trouble distributing their products in the 50 States as European producers do.

Also, the United States simply does not produce enough wine to make up for the European wines lost due to the tariffs. So the wines we do produce will be bid up and become more expensive as well.

The tariffs may also hurt small shops that have been shutting their doors in increasing numbers over the past 15 years. In a headlong rush to provide customers with competitive pricing, very well-capitalized volume stores have been lobbying State governments to reduce the archaic regulations of the wine industry that go back to the end of Prohibition, in 1933.

This consolidation is arguably overdue, but it also favors a business model based on large brands that can move large volumes. In the short run, consumers may get more competitive pricing, but in the long run, the variety of wines they can buy is drastically compromised. The timing of the USTR’s tariffs does nothing to alleviate the stress on small wine businesses; in fact, it accelerates the day of doom.

As the zero hour approaches, more and more big-name influencers in the trade are making their positions known to Congress and the Trade Representative. Letters are coming in from Italian and French winemakers. A true coalition appears to be forming. Whether it will be enough to overturn the tariffs is anyone’s guess, since the USTR is under enormous pressure from Boeing and Facebook, Amazon, Apple and Google to let the tariffs go through.

François Steichen founded and owns Frenchy’s Wine Road, a Connecticut company that writes copy and content for the wine, spirits and cider industries.  He is a resident of Old Greenwich with 12 years’ experience in the Wine Industry.  Francois started at Harry’s Wines in Fairfield; worked at Acker, Merrall and Condit, in New York, the oldest wine store in America; and managed Vinifera, in Mamaroneck, NY, for 5 years.  Francois holds the WSET Diploma, the gold standard in wine education. At 10 years of age, Francois took his first – chaperoned – sip of a sparkling wine.  The magic of fermentation and spontaneously-produced bubbles has never truly relinquished its hold on his curiosity since.