This week, the U.S. Trade Representative (USTR) will make another decision regarding the 25% tariffs it imposed on certain European Union (E.U.) wines and goods last year. It might opt to maintain them, reduce them, levy a 100% tax on all E.U. wines or any combination thereof. The outcome will have major consequences for both U.S. small businesses and global economies.
The initial round of 25% tariffs were imposed in October 2019 and intended to punish the E.U. for its subsidies to Airbus, a France-based aerospace and defense corporation. They are already having unintended consequences on the domestic wine industry.
“The only thing the tariffs are hurting are American businesses,” says Harry Root, president of Grassroots Wine, a wine importer and one of the founders of the United States Wine Trade Alliance, formed to educate about and lobby against the tariffs.
Last November, the first full month the tariffs were in place, U.S. imports of EU wine decreased by 48%. Meanwhile, Chinese imports of those same wines during that same time period rose by 35%.
“You can see the direct transfer of the European-American wine trade going straight to our trade adversary and building a new commerce platform for them,” Root says.
Small and medium-sized, U.S.-based wine importers and distributors are among the businesses immediately affected.
“Many distributors keep their lights on through their European portfolios,” explains Erik Segelbaum, founder of Somlyay, a wine service and hospitality consulting company. “I know people who have been laid off. I know people who have laid people off. I know two businesses that have decided to close because, even with the 25% tariffs, they were facing bankruptcy.”
Washington, D.C.-based importer Kevin Rapp of Rapp Wine says there is a misconception that the tariffs will hurt the E.U. more than U.S. businesses.
“For a bottle of [imported] wine that’s $10 on the shelf, $8.50 of that is staying within the American economy,” Rapp says.
Rapp’s company solely imports Italian wines, which are not currently subject to the tariffs. If the USTR decides to levy additional tariffs this week, it will radically alter his business.
“I can’t absorb a 25% tariff, let alone a 100%,” Rapp says. “Our competitive advantage as a small operation is that we’re able to operate off lower margins.”
Some have already seen impacts on French rosé orders.
“Typically right around now, we see rosé pre-sales,” says Denver-based retailer Dustin Chiappetta, owner of Pearl Wine Company. “There have been zero.”
Given the seasonality of these wines and the long lead required for imports, Chiappetta says time is running out for a course correction.
“We all know how long shipping takes. Even if this gets straightened out within the next month or in April, we’re going to miss rosé season. That is a huge impact on sales for us.” Chiappetta expects to lay off employees if tariffs increase.
Rapp meanwhile plans to pause all orders for 180 days if new tariffs are announced.
“I’ll have to find all new accounts and create a whole new business. It’s the only way that I can survive. I don’t know if I can survive really. I’m going to try my hardest,” he says.
Dayton, Ohio-based importer Nola Palomar owns JNJ International. She grows grapes and makes wine in Spain before importing the latter into the U.S. She says just the threat of the 100% tariffs has crippled her business.
“I can’t run the risk of importing a container of wine. I could end up with a $100,000 tariff in the port. I couldn’t afford to pay a tariff like that,” Palomar says.
One of her largest U.S. distributors is walking away due to discontinuity of product. The olive oil she imports is also subject to the tariffs.
“I’ve lost several months of income from the olive oil production,” says Palomar. “It’s not fair. It’s not right. I don’t deserve this. Other small businesses and medium-sized importers don’t deserve this.”
Importers and retailers are not the only ones affected, either. Segelbaum says any additional tariffs would dramatically impact the restaurant industry given its notoriously thin margins.
“If European wines double in cost, their profits evaporate. Restaurants are going to start closing,” he says.
Segelbaum says a common notion that American wineries might in some way benefit from the tariffs is fantasy.
“There’s no way that we can make up for those products in terms of price point, value and quantity needed. America doesn’t have the capacity to fill that void.”
He also notes that retaliatory tariffs on U.S. wines are expected. “Any way you slice this, it is rotten on the inside. It punishes American businesses.”
Unfortunately, due to long lead times in the supply chain for imported wines and overall confusion about what is currently subject to the tariffs and what might be in the future and when, consumer and even industry awareness remains exceedingly low.
“I’ve been contacted by people in the industry who have said, ‘The tariffs are over right?’” says Rapp. “No they are not.”
As a result of this confusion, Congress has been hearing little concern about the issue.
“I can’t even count how many times I’ve walked into a congressional office, and they said, ‘Yeah, we haven’t heard anything at home about this,’” Rapp says.
With a decision on additional tariffs expected February 14, time to express concern and limit the damage is quickly running out.
“It could be a bloody Valentine’s Day,” Palomar says.
Published: February 12, 2020