Tariff fights with Europe weigh heavily on local wine importers

John Desteian has a law degree. But he can't figure out why the U.S. government has punished his wine import company with a 25% tariff to address a problem he neither caused nor can solve.

Desteian's St. Paul-based Lompian Wines employs 10 people. It is one of more than 60 Minnesota wine-importing businesses dragged into a trade war with the European Union over E.U. subsidies paid to aircraft maker Airbus. Most of these businesses are small to medium size.

"There is no correlation between Airbus and wine," Desteian said.

There has, however, been a correlation between wine tariffs imposed by the Trump administration and reduced profits for folks like Desteian and Annette Peters, an owner of Bourget Imports in Eagan. Each has been forced to negotiate with European suppliers, asking them to absorb a portion of the tariff. Both have suffered big hits to their bottom lines.

Desteian said his profits are down 25% from last year, even though he increased his prices to U.S. distributors. He doesn't know how much of the price increases were added to a glass of merlot in a restaurant or a bottle of chardonnay in a retail outlet. What he knows is that his company will not survive if the tariff remains in place for very long.

"If Trump is re-elected in November and we're looking at [25% tariffs] for another four years, I'll be out of business in six months," he said.

Peters' producers, mostly small family grape growers, agreed to absorb 7% to 15% of the tariff. But she still pays 10% to 18% more for certain French, Spanish, British and German wines. That strategy, she said, is unsustainable.

The three-month-old levy came with very short notice, according to Peters, whose business supports 18 workers. "There's no logic in wine being flung into this battle involving multibillion-dollar corporations," she said.

Jon Moramarco is CEO of bw166, a consulting and research firm focused on the alcoholic-beverage industry. Moramarco said most of the wines targeted by the tariff are imported by small U.S. companies. Nationwide, the tariff cost American wine importers $1.2 billion in lost revenue from November 2019 through January 2020, although importers recouped some of that loss by buying and distributing more nontaxed foreign wines, Moramarco said.

A spokesman for the United States Trade Representative (USTR) blamed the E.U. "The United States has stressed throughout this dispute that we seek a negotiated outcome," the spokesman said. "It is our hope and expectation that the additional duties will provide an incentive for the E.U., once and for all, to stop subsidizing Airbus in ways that have adverse effects on the United States. When the E.U. ends these harmful subsidies, the additional U.S. duties imposed in response can be lifted."

International trade specialist Robert Kudrle of the University of Minnesota said the World Trade Organization (WTO) allows taxing one economic sector to punish another if a country wins a WTO judgment for unfair-trade practices. That is what happened in the aircraft subsidy dispute, which Kudrle said has been going on for years. The U.S. won a WTO judgment against the E.U.

The U.S. wine importation and distribution industry became "collateral damage" in that fight, said Michael Bilello, senior vice president of communications for the Wine and Spirits Wholesalers of America (WSWA).

The trade group cited a report by economists at John Dunham & Associates which concluded that the 25% wine tariff, combined with similar tariffs on other alcoholic beverages, could cost the U.S. economy more than $5.3 billion in 2020.

"The Trump administration is trying to renegotiate trade deals going after one sector while using other sectors as bargaining chips," Bilello said. "Wine has nothing to do with Airbus subsidies."

On Valentine's Day, the U.S. backed off for six months on a threat to place a 100% tariff on most E.U. wines as punishment for a French tax on U.S. technology companies. If applied, wine trade groups contend, the larger tariff on more beverages will destroy much of the U.S. wine-import industry. Even California winemakers whose products would become attractive alternatives wrote letters opposing the 100% wine tariff.

U.S. jobs that create U.S. tax revenue will be lost, the wine industry argues. Most companies that survive a 100% tariff will not be able to expand because of eroding profits.

Bourget Import's Peters traveled to Washington to testify against the 100% tariff, calling it "a life-or-death decision for companies such as mine."

With a 100% tariff, Peters said, "I would have to lay off most of our staff and reorganize in a different direction."

A 100% tariff would hurt the entire hospitality industry, Peters predicted.

"It's an issue that involves the economy and jobs," she said, "the kind of things people get elected on."

To that end, several members of the wine-import and distribution industry, including Peters, banded together recently to form a lobbying group called the U.S. Wine Trade Alliance. The group has taken its case to Capitol Hill.

"Tariffs do disproportionate damage to U.S. businesses," argued Benjamin Aneff, the Wine Trade Alliance president and managing partner at Tribeca Wine Merchants in New York City. "They are also unlikely to bring behavior changes to targets in the E.U."

France is the world's leading exporter of wine. The U.S. is the world's largest importer of French wine. But the tariffs have not hurt the French wine industry as intended, Aneff said, citing French export records. While U.S. purchases of French wine fell by roughly half in November, the first full month the 25% tariff was in place, French wine exports increased worldwide.

The lesson, in Aneff's view, is that the wine tariff offers limited leverage in the trade war, because the French have other markets where they can sell their wine. Meanwhile, he said, U.S. importers are left with expanding costs and shrinking supplies of a product that is the backbone of many businesses.

Aneff believes the alliance has "had success educating members of Congress" to these facts.

Unfortunately, Peters noted, the most important decisions are being made 16 blocks west on Pennsylvania Avenue.

The U.S. Trade Representative's office "operates in a loophole that lets it create trade policy without an authorization from Congress," she said.

That is likely to continue, as the president's State of the Union speech reaffirmed his commitment to a tariff-based trade policy.

Meanwhile, Desteian and Peters said, Americans remain largely uninformed about how tariffs affect U.S. businesses.

The president has repeatedly said that nations whose products have been taxed pay those tariffs. Desteian has the import invoices that show the money coming out of his company's bank account.

"Before President Trump started talking about a wine tax, I was opposed to tariffs," Desteian said. "But I wasn't moved to do anything [about it] because it wasn't doing anything to me. I've certainly taken a broader view of this issue."

Jim Spencer • 202-662-7432