The Tariff Wars: You’re Going to Need a Drink
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  • The Tariff Wars: You’re Going to Need a Drink
    12/10/2020 | By: Asher Rubinstein, Esq.
    The United States and the European Union are in the midst of a damaging game of retaliatory tit-for-tariff.  Since October 18, 2019, wine, Scotch and other alcoholic beverages from the EU are now subject to a 25% tariff at US ports.  Our clients across the wine, spirits and hospitality industries are all feeling the effects, from the importers who source the products abroad, to the retailers, restaurateurs and ultimate US consumers.  There is widespread hope that a new administration in the White House will take a different path.  Both the US and EU have significant incentives to end their underlying disputes - - which are not over beverages, but instead pertain to government subsidies of domestic aircraft industries - - and remove the tariffs altogether.
     
    How Did We Get Here?
     
    In late 2019, after a trade dispute that began in 2004, the US won a significant arbitration against the EU before the World Trade Organization (WTO) over EU subsidies to the European aircraft company Airbus.  The US argued that the EU subsidies violated WTO rules and regulations and caused considerable harm to US domestic aircraft industry.  The WTO, in a 156-page decision, permitted the US to impose countermeasures in the form of up to $7.5 billion in tariffs against the EU, annually.
     
    Our firm previously wrote to the US Trade Representative to oppose the decision to impose tariffs on certain European goods, such as wine, cheese and olive oil, because of the negative effects of such tariffs on the US food, alcoholic beverage and hospitality industries.  Tariffs on imported wine, liqueurs, cheese, and other European items reduce the ability of many American businesses to source, import, market and sell these products, as they have done for decades.  The tariffs result in higher costs for importers, who pass on these costs to wholesalers and distributors, who pass on the costs to the hotels, restaurants, retailers and consumer end-users.  Consumers are either priced out of these products and look elsewhere for cheaper, lower grade goods, or else they pay higher prices because fine Burgundy and Chateauneuf du Pape are not obtainable elsewhere.  If the purpose of US tariffs is to punish the European economy, then the European producers of wine, cheese and olive oil can instead pivot away from the US market and sell to alternative markets, including the huge and lucrative Asian market.  Decades of relationships between producers in Europe and importers and consumers in the US are in jeopardy.
     
    There are also ripple effects across related industries: transportation (shipping products across the sea, trucking inland), storage and warehousing, insurance, real estate (the landlords who lease space to the struggling restaurants and wine shops), the marketers and other consultants (including lawyers) who service and promote the food, beverage and hospitality industries.  Now add the COVID pandemic, the fact that the hotel and hospitality industries are suffering profoundly, and the restaurant industry is barely hanging on.  The confluence of tariffs and COVID translates to lost jobs, lost tax revenues on the local, state and federal levels, and a need for governmental assistance.  Tariffs result in negative domestic economic consequences, lower tax revenue, and ironically, a greater need for assistance from the very government that imposed the tariffs in the first place.

     
    A Hodge-Podge of Tariffed Alcohol: Wine and Whisky, but Not Blended Whisky, and Not Champagne or Beer or Wine from Italy
     
    Despite the significant downside, effective October 18, 2019, the United States imposed tariffs on numerous items from different European countries.  The full list can be found here.  The list is heavily focused on alcohols, many types of cheese, olives and olive oil, and other foods.  Effective September 1, 2020, the list was modified to add and remove certain cheese, preserves and other products.  The tariffs are reviewed every 180 days, and like a carousel, individual items can be removed, and others added in their place by the United States Trade Representative (USTR), who is a Cabinet-level official and reports to the President of the United States.
     
    In convoluted government-speak, “Wine other than Tokay (not carbonated), not over 14% alcohol, in containers not over 2 liters,” imported from France, Germany, Spain or the United Kingdom, is subject to additional import duties of 25% ad valorem.  Interestingly, wine bottled in containers over 2 liters is not subject to the tariff.  However, wine is generally imported in 750 milliliter bottles, along with, in increasing sizes, magnums (1.5 liters) and double magnums (3 liters).  The 2-liter cut-off appears to be off-target and, while it conforms to the codes of the Harmonized Tariff System (HTS), it doesn’t relate to the norms of the current wine trade.
     
    Also covered by these tariffs are single-malt Scotch Whiskies and Irish Whiskeys (those from Northern Ireland, not the Republic of Ireland), and liqueurs and cordials from Germany, Ireland, Italy, Spain and the United Kingdom.  While single-malt whiskies are covered by the tariffs, blended whiskies are not.  Italian wines are not tariffed, but Amaro and Grappa from Italy are.  Champagne and all sparkling wines, due to their carbonation, along with beer, are also excepted.
     
    The entire world of Italian wines (with its 350 officially recognized grape varietals and hundreds more), is an exception from the tariffs.  Italy doesn’t manufacture Airbus planes, but the other targeted countries do.  In response to a suggestion that US retailers do not appear to have pivoted towards Italian wines and large format bottles, Josh Cohen, an owner of Flatiron Wines in San Francisco, explained: 
     
    “I’m not sure I agree that retailers aren’t promoting Italian wines or large formats.  We promote lots of Italian wines.  When we do it, we often talk about how well priced the wines are, maybe compared to Burgundy.  What we don't do is dwell on the incremental cost imposed on those other wines by the tariffs, because there just doesn't feel like much upside to it.  Who wants to think about Trump's trade policy when they're buying wine?  Worse, repeating the message that, e.g., Burgundy is subject to tariffs, doesn't seem likely to help with Burgundy sales going forward.”
     
    According to Michel Abood, owner of Vinotas Selections, importer of small-farmer organic, biodynamic and natural wines, “we’ve tried shifting to Portuguese wines and adding more Italians, as well as more sparkling wines (which aren't tariffed no matter where they come from).  Finding quality wines, however, is not easy.  This is still an old-fashioned business (especially on the higher-quality side), so it's all about personal relationships, which take time.  And it's not easy finding these wineries since we can't go travel for winery visits or trade shows.  It all has to be done virtually now.  If you don't already have a network in Italy or non-tariffed countries, then it takes time to develop.  So, something that usually takes two to three months takes four to six months now (if not longer).  Lastly, on the demand side, if you're not known for bringing in wines from those nations, then you have to develop a whole new market for them.”
     
    Importers have been unable to achieve many lasting workarounds to the tariffs.  Initially, some importers accelerated bringing their product to US shores to beat the tariff imposition date of October 18, 2019.  Importers also chose to keep products warehoused in Europe, hoping that the tariffs would be short-lived.  However, US importers are not in the business of long-term storage in Europe rather than delivery of product to the US market, and most importers have since shipped to the US.  At the high-end, there are European brokers and businesses which purchase, in Europe, fine wines for US consumers, and, for a fee, will warehouse these wines in Europe for an extended period, temperature controlled, until the tariffs are reduced.  Such transactions are typically multi-case purchases of blue-chip wines.  At the other extreme, there have been reports of importers bringing in rosé and bulk wines into the US in bladders and then bottling in the US, but this would not be a long-term workaround, given the logistical challenges and costs.
     
    Michel Abood, owner of Vinotas, further reported: “I have heard of some folks changing the alcohol percentages, but I have also heard that Customs is aware of that and doesn't find it amusing.  Luckily, the last two vintages have been warm in Europe, so many wines are over the 14% threshold.  We have lab paperwork added to any shipment with high alcohol to prove we're not lying.  I am sure there are other things going on, just not sure they'd want these things publicized.”  The Wall Street Journal recently reported US Commerce Department data that showed that prior to the tariffs, the US imported $150 million a year of wine from Europe that exceeded 14% alcohol, while after the tariffs, the number is now $434 million.  Meanwhile, imports of wine 14% and under fell $840 million, down 48%, in the year after the tariffs.
     
    While France and Spain can offer wines that straddle both sides of the 14% demarcation, Germany, which is known for low-alcohol Riesling (typically, 7 to 11% alcohol by volume), does not.  German wines have been particularly hard hit by the US tariffs.  As a result, in the past year, German wine producers have pivoted from the US toward Scandinavian markets.
     
    According to multiple retailers, those importers who had tried to hold the line on tariffs early on are now passing on the full cost.  Whereas during the first six months after the tariffs, the tariffs were mostly absorbed by the importers and distributors, now US consumers are paying more for these wines.
     
    In the year since the tariffs were imposed, wine importers have paid $200 million in tariffs to the US Government, on wine alone.  Harmon Skurnik, President of Skurnik Wines & Spirits, an importer and distributor of a portfolio of five hundred wineries and distilleries around the world, states it clearly: prices are up and sales are down because of the tariffs.  According to one report, US imports of wines from the four targeted countries (France, Spain, Germany and UK) fell 54% ($672 million) as a result of the tariffs.  US imports of Scotch are down 34%, representing a decline worth $500 million.  US imports of liqueurs and cordials from the tariffed EU countries are down 28% ($143 million).  The monies paid in import tariffs flow into the US Treasury and are not assigned to specific purposes.  There are no indications that the US aircraft industry has been aided by the tariffs.
     
    Could the Tariffs Be Personal?
     
    There have been suggestions that Donald Trump, who does not drink alcohol, chose to tariff wines and spirits out of indifference, despite the negative effect on American importers, retailers, restaurateurs and consumers.  Mark Fornatale, Italian Portfolio Manager at Skurnik, goes one step further, suggesting that the tariffs were retributory, imposed as retaliation against “wine states” (consumers, producers or both) that voted against Trump: California, New York, Illinois.  This charge echoes the accusations that the Trump tax law changes in 2017 (whereby the federal deduction for payment of state income taxes was capped at $10,000, having previously been an unlimited deduction) was deliberately directed against high-tax states like California, New York, New Jersey and Connecticut, which also happen to be Blue states that voted against Trump in 2016.
     
    The Wider Tariff Wars
     
    Recently, the tariff wars continued, this time with the EU obtaining a victory from the WTO against the US in November 2020, also regarding aircraft.  The EU alleged that the US provided improper subsidies to US aircraft maker Boeing, allegations very similar to those made by the US against the EU in the Airbus case.  The WTO granted the EU the right to impose up to $4 billion in tariffs annually against imports from the US.  The EU imposed 25% tariffs on rum, vodka, brandy and vermouth from the US, but the EU did not impose tariffs on US wine or beer.
     
    American whiskey imported into the EU has, since 2018, already been subject to a 25% tariff, an EU retaliation in yet another international trade dispute, this one over metals.  In 2018, President Trump, citing national security, imposed a 25% import duty on steel and a 10% duty on aluminum from Europe.  The EU responded with 25% tariffs on American whiskey, which resulted in a significant decline in US whiskey exports to the EU, traditionally the largest foreign market for American whiskey.  The October 2019 US tariffs following the WTO’s Airbus ruling included Scotch whiskies and Irish whiskeys imported to the US, at the same 25% rate as the tariffs imposed by the EU in 2018 against American whiskey.  Tit-for-tat tariffs, again.  As a result of the EU tariffs, US whiskey exports to the EU have fallen by 41%, costing US producers some $300 million.  As a result of US tariffs, US imports of Scotch are down 34%, a value of $500 million. 
     
    In addition to the parallel disputes between the US and EU over Airbus and Boeing, there is an additional US-EU dispute, over the Digital Services Tax (DST) that some EU countries, including France and Italy, seek to apply against US digital companies like Google, Apple, Facebook and Amazon working in the EU.  This tax has been called the “GAFA tax”, an acronym for these four US companies, and the US Trade Representative has called this European tax discriminatory against US tech companies.  In 2019, after France threatened to impose this tax, the USTR threatened 100% tariffs against luxury goods from France, including Champagne.  As a result of lobbying by the US Wine Trade Alliance, an industry group formed for the purpose of opposing such tariffs, wine was left off the list of tariffed items.  However, individual EU states such as Italy, Spain and Austria still threaten to impose the Digital Services Tax unilaterally, which would give the US a reason to retaliate yet again.  In July 2020, the US announced a 25% tariff on $1.3 billion worth of French handbags, cosmetics and soaps in retaliation for the Digital Services Tax, but the US suspended imposing these tariffs up to the end of 2020.  Wine, Champagne and European cheese were not included in these tariffs, but can always be added.
     
    The wine tariff wars are not limited to the US and EU.  In November 2020, China announced that it would impose tariffs between one hundred and two hundred per cent on wine imported into China from Australia.  The domestic Chinese wine industry had alleged that the Australian government unfairly subsidized the Australian wine industry, causing harm to the Chinese wine industry.  Some 39% of Australian wine exports are to China, which has become a huge market for foreign wine.
     
     Alcohols have also been caught up in the trade war between the US and China.  The Trump administration has accused China of unfair subsidies and stealing US technology, and in response, has imposed tariffs on more than $360 billion worth of Chinese goods.  China countered with more tariffs on US goods, including a 93% tariff on American wines, an increase from the 48% tariffs before the current dispute, which could soon be increased to 106%.  China also tariffs American whiskey at 25%.  As Chinese consumers have become more affluent over the past decades, their tastes for luxury products, including high-end wines from the Napa Valley, have increased.  The fifth largest foreign importer of US wines, China is now a major market.  Because of the Chinese tariffs on US wines, US wine exports to China have declined significantly in each of the past few years, and US winemakers are forced to look for alternative markets.
     
    What Next?
     
     A new US administration will begin in January 2021 and many in the industry are hopeful that the US and EU will put an end to the punishing tariffs that are currently in place.  However, with a worsening COVID pandemic and rising death tolls, President-Elect Biden and his administration understandably may have other priorities in their first few months in office.  The next tariff review comes in February 2021 and it is unlikely that Biden will have a new United States Trade Representative in office by then, leaving Robert Lighthizer, the current USTR, in place, who is in favor of tariffs.  A new USTR would also need Congressional approval, and a Republican controlled Senate could pose additional hurdles.  Even if the new administration favors reversing the tariffs, it is likely that no action will be taken until the next tariff review, in August 2021.
     
    Dan Posner, owner of Grapes The Wine Company, a retailer in White Plains, New York, suggests that the opposite could happen, that tariffs could increase.  The WTO allowed the US to collect over $7 billion in annual tariffs, and the US has collected $3 billion thus far.  To make up the differential, additional products could be added to the list of tariffed products, “or there is dangerous room for the tariffs to double”, warns Posner. 
     
    In fact, Trump still has almost two months to impose additional tariffs, for two reasons.  First, if the EU tariffs US products as a result of the recent EU victory regarding US subsidies to Boeing, then Trump can retaliate, even adding other countries to the tariff list.  To avoid another tariff tit-for-tat, there have been calls for the EU to defer any decision on such tariffs until after the new US administration comes to power in January 2021.  Second, if EU countries begin to impose the Digital Service Tax, the USTR can impose tariffs on luxury goods from the EU, including Champagne and wine.  Either or both moves would appear to be a possible “parting shot” by the Trump administration.  It should be noted that the EU can impose tariffs and individual EU countries can impose the DST before or after the Biden administration comes to power.  If the US retaliates, warns Harmon Skurnik, “the biggest risk is on Italian wine, as there are currently no tariffs on wine from Italy, and it is obviously hugely important.”
     
    Resolution of the tariff issue is not clearly along a US political party divide.  While noting that a Biden administration is thought of as one that will move away from the nationalism of Trump, toward a better relationship with our traditional and historic EU allies, Harmon Skurnik also notes that “there are plenty of Democrats who believe in protectionism, too.”  Google, Facebook and Apple are headquartered in California, a Democrat state, and are major donors to the Democratic Party.  Skurnik theorizes that “if Europe implements the Digital Services Tax, it will be difficult for the Biden Administration to do nothing.”
     
    The international tariff wars have been going on for two decades (the US first filed the Airbus trade dispute in 2004), and Joe Biden, in the White House already for two terms during the intervening years, is not new to the underlying issues.  However, Biden has not publicly revealed his position on eliminating the tariffs on wines and other alcohols from the EU. 
     
    If the next tariff review is in February 2021, too short a period of time after Inauguration Day on January 20, 2021, and the following tariff review is not until August 2021, what can happen in the interim?  Industry leaders have no solid answers, but are pressing for an audience with Biden transition officials in the short term.  The power to tariff, and to determine which products to tariff, rests with the Executive Branch alone.  Congressional approval over tariffs is not required.  If a Republican Senate blocks Biden on other matters, he would be free to show progress by acting on tariffs on his own.  As Harmon Skurnik puts it, the current initiative is “to make these tariffs a priority of the early days of the Biden administration . . . and convince them to act even before a new USTR is in place.”
     
    In response to the question of whether an Executive Order by President Biden might be an option, Benjamin Aneff, Managing Partner at Tribeca Wine Merchants in New York and President of the US Wine Trade Alliance, agrees:
     
    “Exactly.  The same powers that allowed Trump to unilaterally enact tariffs without Congressional approval would allow Biden to end them if he so chooses.  Typically, the US Trade Representative, a Cabinet position, would give and enact these orders, but Biden could instruct the office itself to do so, even if his USTR had not been confirmed [by the Senate].  But it isn’t a likely scenario on its own, any more than major changes at Defense would be made before a new Defense Secretary.  It’s a big lift, which is why we need to make our case to [Biden’s] team as directly as possible.  They have it in their power.  We just need to give them a strong reason to use that power quickly.” 

    As Josh Cohen, owner of Flatiron Wines, puts it: “Obviously I hope that trading Biden for Trump will engender some goodwill among Europeans and bring down the temperature enough to make a resolution possible.  But, I'm a little worried that on the Airbus dispute, at least, the two sides are really pretty far apart.  All the Americans I talk with think that the US is in the right.  Meanwhile, I've asked French winemakers and exporters about it and they all seem to believe that they're in the right and will ultimately prevail at the WTO.  I don't know if the October news [the EU victory over the US in the Boeing matter] will change things on either side.  The European view of the Airbus subsidy dispute is that ‘everyone does it’, and they told me again and again that ‘Europe has a parallel claim against America on which Europe would prevail.  And then America will have no choice but to come to the table.’"
     
    The tariffs have turned the alcoholic beverage industry, on multiple continents, into turmoil and caused harm to many American businesses, for no good reason other than to punish non-related foreign industries in an unrelated dispute.  A decrease in the heavy 25% tariff would be a good stepping-stone to a removal altogether.  But US importers, distributors, retailers and consumers may have to be patient, even while US Customs continues to collect the tariffs at the border, money that could have been spent on payroll and business development.  Unfortunately, for many in the business, especially restaurateurs, under the confluence of tariffs and COVID, time is running out.

    Author

    Asher Rubinstein is a partner at Gallet Dreyer & Berkey, LLP in New York, where he is a Chair of the firm’s Food, Wine, Restaurant and Hospitality Law practice group.  Mr. Rubinstein is a founding member of the Wine, Beer and Spirits Law Committee of the Business Law Section of the New York State Bar Association, and a member of the Chaînes des Rôtisseurs, Société Mondiale du Vin USA, and the New York Wine and Food Society.  Mr. Rubinstein represents and advises wine and spirits producers, importers, restaurant owners and others in the food, wine and hospitality industries.  He is also a national-level blind wine tasting finalist.  Craig S. Tarasoff, an associate attorney at Gallet Dreyer & Berkey, assisted in the research and drafting of this article.
     
    ATTORNEY: Asher Rubinstein