Bourbon Is the Latest Victim of Trump’s Trade War

Bourbon Is the Latest Victim of Trump’s Trade War

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LONDON—It’s becoming a bourbon-soaked world out there. For about a decade now, more and more whiskey drinkers internationally, far beyond the drink’s home state of Kentucky, have been developing a taste for the American spirit. And Europe, which was the single largest destination for U.S. spirit exports in 2016, has been at the center of the world’s bourbon renaissance.

“Bourbon has witnessed spectacular growth rates across the world, especially in Western Europe,” Spiros Malandrakis, the head analyst of alcoholic drinks at market-research company Euromonitor International, told me. Mad Men had something to do with it, he said (the AMC show features an Old Fashioned-clutching protagonist in the person of Don Draper), and so has the rise of cocktail culture around the world.

But bourbon’s fortunes may be changing, and the uncertain fate of one liquor distills many of the bigger forces unleashed by Trump’s burgeoning global trade war. But what does happy hour have to do with metal tariffs? When Trump decided to slap import taxes on steel and aluminum from Europe and other U.S. allies, Europe opted among other things to hit the booze—with taxes, that is. The EU put bourbon on a list of more than 100 American products that now face increased tariffs by the European Union, meaning importing them to Europe will be more expensive. As of Friday, American whiskey exports to the EU will face a 25-percent levy; assuming that sellers in Europe make consumers absorb all these costs, that could mean that, say, a bottle of Maker’s Mark that usually costs 35 euros at the grocery store would now cost as much as 44 euros. To the extent this drives consumers to opt for the Glenlivet instead, the tax threatens to hinder the bourbon industry’s growing export market, of which the EU claims nearly half. It also hurts Europe’s bourbon drinkers, for whom smaller bourbon brands could become more expensive—or simply disappear from the continent’s shelves entirely.

The EU decided to target bourbon for the same reason it chose to levy tariffs on motorcycles and denim: Bourbon and Harley-Davidson are produced in Kentucky and Wisconsin, respectively, which are not coincidentally the home states of the Republican leaders of both houses of Congress. Blue jeans, which are also on the EU’s list of targeted goods, are produced in House Minority Leader Nancy Pelosi’s home state of California.

When I asked bourbon sellers in London if the retaliatory tariffs have made an impact on their prices, all of them told me it’s still too soon to tell, as the new tariffs haven’t impacted their current stock. But other American products on the EU’s list are already feeling the repercussions. Just days after the European tariffs were imposed, the iconic American motorcycle brand Harley-Davidson announced it was considering moving its production of EU-bound motorcycles to plants outside the United States. The Milwaukee-based manufacturer said it was necessary to avoid paying import taxes nearly five times higher than it was used to (the EU previously had a 6-percent tariff Harley imports, now ratcheted up to 31 percent). The brand sold nearly 40,000 motorcycles in Europe last year, making the continent its second-biggest market.

Trump responded to Harley’s decision by accusing the brand of using the new tariffs as a pretext for moving production overseas. “A Harley-Davidson should never be built in another country — never!” the American president said in a tweet Tuesday. He elsewhere expressed surprise that “Harley-Davidson, of all companies, would be the first to wave the White Flag.” After all, the white flag signals surrender in a war, and Trump had boasted that trade wars are not only good, but “easy to win.”

Unlike Harley-Davidson, bourbon distilleries won’t have the option of moving their production overseas. The reason: Bourbon simply isn’t bourbon if it’s produced anywhere else. Just as scotch can only be produced in Scotland and cognac can only be produced in France, Congress passed a 1964 resolution declaring bourbon a “distinctive product” that can only be produced in the United States. The overwhelming majority of that production happens in Kentucky.

It’s perhaps because of bourbon’s distinctiveness that some have downplayed the impact EU tariffs will have on the industry. Matt Bevin, the Republican governor of Kentucky, dismissed the tariffs as a “money grab” by the EU and claimed they would not change Europeans’ drinking habits. “Europeans are still going to drink more bourbon this year than they did last year,” he said last week. “They’re just going to pay more for it because their government is going to take some of it.”

But actual bourbon distillers in Kentucky aren’t as optimistic. “[Europeans] are still relatively new bourbon drinkers and people’s tastes in alcohol tend to be fairly fickle,” Susan Reigler, an expert on Kentucky bourbon and past president of the Louisville-based Bourbon Women Association, told me. “They have a lot of choices, they don’t have to drink bourbon. People in the industry are worried that after their couple of decades really cultivating overseas markets that this could be something that certainly slows that momentum.”

Higher export costs aren’t the only concern. “The American whiskey industry is in a bit of a bind because unlike other industries, it can’t just turn on a dime if demand changes,” Reid Mitenbuler, the author of Bourbon Empire: The Past and Future of America’s Whiskey, told me, noting that most bourbons need between four to eight years to age—a factor that requires distillers to forecast their demand several years in advance. As a result, Mitenbuler says, “it’s a little more vulnerable than other industries to impulsive, unexpected changes in demand. If all of the sudden an export market dries up, they’re going to have this surplus, which is going to cause them to slash prices to keep it moving.”

If demand for bourbon suddenly drops, then bourbon distillers have to address the costs associated with storing a big surplus. They also need to take into consideration something well beyond their control: evaporation. It’s estimated that a barrel of whiskey can lose as much as 2 percent of its total volume per year due to evaporation—a loss known as the “angels’ share.” “The bourbon evaporates the longer it ages,” Mitenbuler said. “So a lot of times after several years if you have a 52-gallon barrel, you might only have half that barrel.”

It’s these sort of irregularities that big drink-industry conglomerates like Brown-Forman (which owns bourbon brands Old Forester and Woodford Reserve) and the Campari Group (which owns Wild Turkey) can probably weather. Brown-Forman said in a statement that though it would raise prices for its American whiskey brands sold to the EU in order to offset the tariff costs, it noted that European consumers should only “expect an increase of about 10 percent in a bottle of 700ml American Whiskey.” The Campari Group, in its own statement, said the new duties would not affect the growth plans of its bourbon brand.

But smaller-scale bourbon distillers may not be as lucky. “A lot of the smaller craft distilleries have seen increased profits by shipping overseas,” Bill Thomas, a whiskey expert and the proprietor of Washington D.C.’s Jack Rose Dining Saloon, told me. “The little guys who are putting out young whiskey and are counting on those international dollars because people are thirsting for anything new and want to try stuff—they can be negatively affected.”

In Europe, meanwhile, Malandrakis told me most bourbon sellers are treating this as a short-term issue—a negotiating tactic that will inevitably be resolved. But if it isn’t? “I don’t have any doubts bourbon would actually start feeling the effects,” he said. “There are actual options out there that could be ready to take bourbon’s place.”

Source: technology

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