A 15-year international fight over the airplane industry has claimed a surprising victim: American wine consumers. Starting today, the U.S. will impose 25 percent tariffs on many wines from France, Spain, Germany and the U.K., as well as dozens of other European products, from Scotch and Irish whiskies, to Italian cheeses and olive oil, to Greek yogurt.
The tariffs went into effect just after midnight, after talks between European officials and U.S. trade representatives failed.
Wineries and importers are baffled and furious. They say the tariffs are so large that they will have no choice but to pass along at least some of the cost to American consumers, though they may cut profit margins to try to minimize the price increases. They expect to lose sales and suffer financially until the trade dispute is settled and they fear that they may lose customers for years to come.
How did this happen?
In 2004, the U.S. and European Union began arguing over subsidies to their respective airplane companies, Airbus and Boeing. In 2006, the U.S. filed a complaint with the World Trade Organization (WTO), arguing that European Union countries had been unfairly subsidizing Airbus, primarily by offering subsidized loans to the company for the development of new products. The E.U. countered that Boeing had also benefited from unfair practices by the U.S.
After several years, the WTO ruled against both sides. The U.S. and E.U. then asked to impose trade sanctions against each other to compensate for the financial damages their airplane industries had suffered. On Oct. 2, the WTO gave the U.S. permission to impose $7.5 billion worth of tariffs.
The federal government was ready, quickly announcing that tariffs would go into effect on Oct. 18. Airplanes and airplane parts face 10 percent tariffs. A variety of other products from E.U. nations, including wines under 14 percent alcohol by volume (ABV) from Spain, France, Germany and the U.K., face 25 percent tariffs. Wines over 14 percent and sparkling wines are exempt.
Wait, did you say airplanes? Why is wine targeted? And why under 14 percent alcohol?
The administration has not explained how it chose the products on the list and why the airplane industry is facing 10 percent tariffs while wine faces 25 percent. One factor may be that Airbus has a factory in Germany but also has one in Alabama. Trade wars often target symbolic products. Wine is a source of pride for nations like France. What's more, they're unique to their countries. Scotch can only come from Scotland and Chablis can only come from France.
The U.K., France, Spain and Germany were responsible for the Airbus subsidies, but other European countries are being hit too. The U.S. imported 31.2 million cases of wine from the four targeted countries in 2018, according to Impact Databank. France in particular has enjoyed strong gains in the U.S. market in recent years, growing 19 percent in 2017 by volume. Italian winemakers breathed a sigh of relief, while their neighbors who make cheese or olive oil are upset.
The government has not explained why only wine under 14 percent ABV is being targeted, either. Until recently, wine under 14 percent was considered table wine while wine over that was considered dessert wine and taxed at a higher rate. But the 2017 tax bill changed the level to 16 percent.
But the distinction means that lighter wines from cooler regions will be most impacted. Châteauneuf-du-Pape should be fine. Burgundy and Beaujolais and Provençal rosé? Not so much. Patrick Mata, whose Olé & Obrigado imports Spanish and Portuguese wines, often from small producers, believes everyone will suffer, but "white wine and rosé, and low-alcohol reds from Galicia will be hurt the most," he said.
Who will pay the price?
"The costs will be borne at all levels of the trade—producer, importer, distributor, retailer, restaurateur and by consumers too," said Martin Sinkoff, former vice president at importer Frederick Wildman & Sons, who now works as a consultant. "Consumers can expect to pay 20 to 30 percent more for the same wines they buy now."
Multiple wineries and importers say that they will try to swallow at least some of the cost, but they cannot swallow it all. "We are asking our producers for help but ultimately the consumer will have to pay more for these wines," says Mata. This isn't like a small fluctuation in the exchange rate.
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Wineries that offer value will be particularly hard-hit, because they have smaller profit margins to work with and price point is key to their sales. Burgundy lovers might be willing to shell out a bit more for a collectible grand cru, whereas someone who sticks to $15 a bottle will pass by a former favorite that now sells for $18.
Wineries and importers face a devil's choice: Keep prices level and lose money or raise prices and lose customers. But the consumer loses too as they either fork out more cash or have fewer options to choose from.
Could Europe strike back?
Count on it. American wine producers and whiskey distillers have already written to the U.S. trade representative's office protesting the new tariffs, partially because they worry the E.U. will retaliate against American products. Whiskey exports have already slumped thanks to tariffs imposed in a battle with the E.U. over the steel trade.
"We are concerned that this action will lead to increased tariffs on U.S. wines and set back our efforts to continue growing U.S. wine exports," said Bobby Koch, Wine Institute president and CEO. The E.U. is American wine's biggest export market—in 2018, American wine sales to the E.U. totaled $469 million, according to the Wine Institute.
What's more, the WTO has already found that Boeing also received illegal subsidies. A committee is expected to allow the E.U. to impose its own penalties in early 2020. In April, the E.U. published a list of U.S. exports that could be targeted, including aircraft, frozen fish, citrus and ketchup.
How long will this last?
The European Union's incoming trade commissioner said on Oct. 14 that he is hoping to reach an agreement that will stop the U.S. from imposing the tariffs or have them lifted soon afterward. "The commission is convinced that both the United States' and the E.U.'s trade interests are best served by a negotiated solution to the longstanding Boeing-Airbus dispute, which is at the origin of these tariffs and which has been ongoing for 15 years," said Phil Hogan, who will take over as the E.U.'s top trade official later this year, in a statement.
Hogan said the E.U. had made a "serious and credible" offer to the U.S. in July to hold aircraft discussions, but was rebuffed by the Trump administration. "We should be focused on de-escalating tensions rather than adding further uncertainty to an already delicate world trade and economic situation," he said.
"We expect to enter into negotiations with the European Union aimed at resolving this issue in a way that will benefit American workers," said U.S. trade representative Robert Lighthizer.
It may be that the White House is willing to inflict some financial pain on Europe for now and negotiate when the WTO makes its decision on the Boeing ruling. If that's the case, wine lovers could face a pricy holiday shopping season.