Tariffs Are Far From Terrific

For the most part, I have tried very hard to remain a-political on this blog. Why? Well, for the simple reason that I don’t believe that people come to a wine blog to read about politics. There are no doubt thousands of sites dedicated to the ins and outs of government policy and political ideology.

This is not one of those.

I do believe, though, that this country is severely lacking in civil political discourse. There was a time, not too terribly long ago, when liberals and conservatives would actually sit down with one another and reach compromises. Neither side was particularly happy with the final outcome, but nor was either side completely distraught.

By writing this post I hope to encourage healthy discussion. I do not expect all to agree with my point of view, in fact, I hope that there are at least some that disagree and explain why so that I (and people who feel the way I do) can better understand the other side with the goal of eventually reaching some sort of compromise.

All cards on the table: I am a liberal and proud to be so. I usually even state that I am “quite liberal” and, as one would likely surmise, I am not a supporter of the current president.

Having stated that I am not here to discuss the various shortcomings (as I see them) of Mr. Trump, but to discuss one of his administration’s use of tariffs in economic policy.

I am not an economist, nor am I an expert on the subject of tariffs, but I am a lover of wine, including European wine, so the proposed tariffs on many European goods (including wine) are of considerable concern to me.

After considerable research, it seems as though many people either don’t understand how tariffs work (or worse, don’t care) and how, if implemented, could greatly alter the wine business here in the U.S.

Here is how I see it (and please point out any inaccuracies–again, I am not an economist):

How trade normally works

Basically, importers to the U.S. order goods (e.g., wine) from a foreign company (e.g., France), who then ships the goods to a port of entry (e.g., New Jersey). The U.S. importer then has 30-60 days to pay the French company for the wine. For many, that 30-60 day cushion is key, to allow the importer to sell some (most?) of the wine to wholesalers/retailers by the time the bill comes due.

from econlib.com

How many people think tariffs work

On the surface, the idea of a tariff seems sound: when a foreign government, industry, or company is conducting unfair practices, a tariff, or tax is applied to the goods as a punitive measure. Many people (including, apparently, the president) seem to think the foreign entity is paying this tax (tariff) directly to the U.S. government.

For example, for years, the Chinese government has been subsidizing its domestic steel production, rendering Chinese steel less expensive than U.S. steel. The Trump Administration levied a tariff on Chinese steel, making U.S. steel much more competitive in pricing. Given the choice, American companies in search of steel for their products (e.g., auto manufacturers) opted for the more expensive but similarly priced, U.S. steel.

from marketbusinessnews.com

How tariffs actually work

Rather than the foreign entity paying the tariff, it is the responsibility of the importer in the U.S. to pay this tax immediately upon receiving the goods. In other words, there is no 30-60 day grace period to pay the tariff. Additionally, tariffs rarely are imposed without retaliation by the foreign government. In the case of steel, the Chinese government increased tariffs on many American goods that China imports, most notably agricultural products (e.g., soybeans).

The results? While on the surface it might seem like a good outcome, U.S. steel production increased, and more steelworkers were hired, but in reality, it resulted in substantial losses in agriculture (many family farms have gone bankrupt) and products that require steel became more expensive to consumers (as the American companies passed on the higher cost of steel).

President Trump’s claim that China will pay for tariff increases in his trade war, is as false as his claim that Mexico will pay for his border wall. From cleveland.com

The Current Situation with Wine

As of October, the Trump Administration has levied a 25% tax (tariff) on many U.S. wine imports from Europe in response to the European Union subsidizing Airbus, a French manufacturer of airplanes (and the largest competitor to Boeing, a U.S. manufacturer of planes). For the most part, this 25% tax has been absorbed by the importers and retailers who are loathe to raise prices for fear of losing sales altogether. In order to do so, many companies have been forced to layoff staff and/or not hire new employees.

This past December, the Trump Administration upset by the European digital services tax, which the Administration feels unfairly targets U.S. companies (Amazon, Facebook, Google). While the 25% tariff could be absorbed (at least in the short run), the wine industry is virtually unanimous that the proposed 100% tax would cripple the industry, having the largest detrimental effect on wine sales since Prohibition in 1919.

Some of my favorite bubbles–Gosset–are likely to become a lot more expensive.

 Potential Effects

While some (including the President) think that the tariffs will simply increase interest in American wine (thus further benefitting American workers and companies), those affected negatively will likely far outnumber those who benefit.

The Wine and Spirits Shippers Association estimates that nearly 80,000 Americans could lose their jobs if the tariffs were to be implemented. This includes importers and wholesalers (forcing many out of business), retailers (particularly fine wine shops), restaurants (where most profits come from wine and alcohol sales).

Additionally, there are countless small producers in Europe that depend on the U.S. market for the viability of their business. If that market were to disappear, it is conceivable that the small winery would either have to find a new market for their wines (a costly and time-consuming process) or go out of business altogether. If they are lucky, they will find a buyer for their assets (i.e., vineyards), thus eliminating from the market forever many small, artisanal producers.

A good friend of mine is the export manager for the oldest producer in Châteauneuf-du-Pape. He intimated that the U.S. represents roughly 20% of its business. A 100% tariff on their wines would likely cause them to pull out of the U.S. entirely, shifting those wines to Asia, Europe, and South America. In order to get those new contracts (if they can indeed procure them), it is likely that they will have to guarantee that they will continue to supply their new customers even after (if?) the tariffs are removed, thus eliminating a market that has been vital to the house since 1786.

Should the tariffs be implemented, I am not sure when I will see my buddy Christophe Bristiel of Chateau la Nerthe from Châteauneuf-du-Pape again

Domestic producers will also be affected. Since many distributors have a diversified “book” of producers, eliminating a large percentage of their products will certainly affect their bottom line. This would undoubtedly cause most distributors to lay off sales staff. With fewer salespeople working the market, fewer American wines will be sold. This might cause a few to go out of business as competition for replacement wines increases.

As always, I would love to hear your thoughts…

 

 

About the drunken cyclist

I have been an occasional cycling tour guide in Europe for the past 20 years, visiting most of the wine regions of France. Through this "job" I developed a love for wine and the stories that often accompany the pulling of a cork. I live in Houston with my lovely wife and two wonderful sons.
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2 Responses to Tariffs Are Far From Terrific

  1. lulu says:

    Thanks for a very well written article. I am somewhere in the middle of being liberal or conservative, but I do have strong opinions about our current president and his continuing antics. Tariffs is just one of the areas where I throw up my hands and wonder why. It seems more are hurt by them than helped. As to civil discourse, it has gone out the window and that is what makes everything so difficult. Voting in the next election is critical if we are to get a different voice.

    Liked by 1 person

  2. aFrankAngle says:

    Because of the link with wine, you did well. We pay … That is consumers … and tariffs do not have a glorious history.

    Like

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