Summer is coming, and it’s shaping up to be a bad one for U.S. whiskey and wine exporters.
In June, the European Union (EU) is set to boost its retaliatory tariff on U.S. whiskey, from 25 percent to 50 percent, if President BidenJoe BidenJill Biden campaigns for McAuliffe in Virginia Fill the Eastern District of Virginia Biden: Those who defy Jan. 6 subpoenas should be prosecuted MORE doesn’t end the steel and aluminum tariffs he inherited from President TrumpDonald TrumpTrump criticizes Justice for restoring McCabe's benefits Biden: Those who defy Jan. 6 subpoenas should be prosecuted Hillicon Valley — Presented by LookingGlass — Hackers are making big money MORE. Then, in July, if the Boeing-Airbus dispute isn’t resolved, the four-month cease fire agreed on in March will end, meaning the renewal of wine tariffs.
Hoping to inoculate whiskey and wine from this risk, 50 members of Congress wrote to U.S. Trade Representative Katherine TaiKatherine TaiUS, Chinese trade officials hold virtual meeting, discuss 'Phase 1' deal Biden and big business: It's complicated Biden, Xi to hold virtual summit by end of this year MORE, asking her to get these two sectors out of the line of fire. This is crunch time. A tariff hike would shut Europe to many U.S. exporters. But what exactly is the ask?
Here’s what the letter says: Biden should “secure the immediate suspension of tariffs on American Whiskey and secure agreements that result in the removal of all tariffs on US, EU, and UK distilled spirits and wine.” Straightforward, right? Not really.
In normal times, U.S., UK and EU whiskey and wine tariffs are zero. This means the letter is looking to rein in retaliatory tariffs. But how?
One interpretation is that the letter simply wants a continuation of the tariff suspension in aircraft but expanded to cover for the retaliatory strikes over steel and aluminum. Sure, but there is reason to suspect that there’s more to it. That’s because the letter takes its cues from a “statement of principle” penned last January by the EU’s Comité Européen des Enterprises Vins and the U.S.’s Wine Institute. This statement starts by making the case for a “zero for zero” tariff deal, and then gets creative, calling on the U.S. and Europe to avoid “targeting wine in unrelated trade disputes.” That would be a game changer.
Petitioning for tariff exclusions is not new. The first two rounds of Trump’s China tariffs triggered nearly 14,000 exclusion requests, of which about a third were approved. But the two wine organizations want an ex ante exclusion, not an ex post one. This would keep wine off the retaliation “hit list” in future non-wine disputes. The letter to Tai doesn’t ask for this, but if “all tariffs” in whiskey and wine are really to be zeroed out, is the statement’s ex ante exclusion on the table?
The problem is that this pledge wouldn’t be credible. The point to retaliatory tariffs is to inflict economic harm on foreign industries that have the political clout to get their government to change a policy. Whiskey and wine check all the boxes: good-paying jobs across all 50 states, along with a strong reliance on sales to Europe. That’s why the EU puts whiskey and wine on its hit list when it gears up to retaliate. It’s also why a pledge of this sort isn’t credible.
The good news is that tariff retaliation is a rare event. For example, at the World Trade Organization (WTO), there have been only nine cases of retaliation, out of more than 500 disputes completed to date. In other words, even if an ex ante exclusion was credible, it wouldn’t get much of a work-out.
But there’s a bigger picture. U.S. whiskey and wine are very complex supply chains. Take whiskey, for example. EU retaliatory tariffs on U.S. steel have forced up the cost of German stills, which is hurting American distillers. To really do the trick, then, a tariff exclusion would need to cover the whole supply chain.
If those who signed the letter to Tai want immediate relief for U.S. whiskey and wine, let them press the Biden administration to drop the steel and aluminum tariffs. The lesson here is that free trade is the only credible ex ante tariff exclusion.
Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service at Georgetown University, a nonresident senior fellow at the Atlantic Council and host of the podcast TradeCraft.