Biden inauguration unlikely to ease Cognac producers’ tariff concerns

On Wednesday, Joe Biden is scheduled to become the 46th President of the United States. With the passing of power to a Democrat in the White House backed by a Congress controlled by that party, European wine and spirit producers are hopeful of an upturn in their fortunes.

What they want is an end to the 20-year transatlantic tariff war rooted in the dispute over subsidies to Airbus and Boeing. 

Both Brussels and Washington proclaim their innocence, the World Trade Organisation has unhelpfully found for both sides and the resulting friction has led to tit-for-tat duty penalties, especially under Donald Trump’s ‘Make America Great Again’ policies.   

In late 2019 the former president slapped 25% tariffs on European wines, cheeses and olive oils. Last November, the EU retaliated with extra duties on some US$4 billion worth of American products ranging from bourbon and orange juice to ketchup after gaining approval from the World Trade Organization.

A year earlier, the US had imposed tariffs — also authorised by the WTO — on about US$7.5 billion in imports from the EU and Britain including French wine and Scotch whisky.

Last Tuesday, in what will be one the final acts of his administration, Trump sanctioned the imposition of new 25% duties on Cognac and other grape brandies from France and Germany, plus wines of more than 14%. Those wines had been exempt from the 2019 tariffs, with sales jumping substantially as a result.

Since the October 2019 round of tariffs sales of Scotch in the US have fallen by almost a third, costing producers  about $480m while wine imports below 14% from France, Spain, Germany almost halved in value. Bourbon and American whiskey sales to Europe fell by 43% according to US trade bodies.

The latest US imposts will remain in force until the two sides eventually bury the hatchet. But that may take some time.

Britain severed ties with the EU on New Year’s Eve and there were hopes that the UK and America could remove the tariffs. International Trade Secretary Liz Truss announced in late December that Britain would unilaterally suspend the penalties initially imposed by Brussels on US goods.

In return it was hoped that Trump would drop the impost on Scotch as it is no longer an EU product. Britain, however, remains a member of the Airbus consortium and no reciprocity has been forthcoming.

Meanwhile, the Biden team have hinted that removing the tit-for-tat tariffs is not high on the incoming President’s ‘to do’ list.

Biden advisers have signalled their desire to repair trade relations with allies including the EU that have been strained by Trump’s ‘America First’ policies. But even with the Democrats in control in Washington and a francophile new secretary of state in Antony Blinken, other international priorities will take precedence.

That is not the news Cognac producers were hoping to hear. Since the 2008 global financial crisis ravaged their businesses, the Cognac houses have seen their sales to the US more than double, making their brandy one of France’s fastest-growing major exports.

And within that huge rise in volumes has also been significant premiumisation of product ranges, moving consumers up to finer, more expensive and profitable spirits. 

But that soaring growth has suddenly exposed the producers to a new problem – 50% of their global business (sales of more than 100 million bottles) is in America and that is now under an unquantified threat from Trump’s 25% tariffs.

Millionaire rappers such as Snoop Dogg and Jay-Z will still be able to afford their beloved “yak”, as they call Cognac, but many other Americans might find it priced out of their reach or turn to alternative spirits.

FEVS, a French exporters’ association, estimates that the wine and spirit sector could lose more than €1 billion a year in US sales due to the new tariffs. But nobody is entirely certain of the potential financial damage.

Producers, however, are sufficiently anxious that they have already lobbied President Macron, demanding he use his influence in Brussels to hasten a solution to the trade bickering and speed   removal of the US duties.

The US, “is a fast-developing and priority market for our industry, which is even showing growth this year despite the impact of Covid-19,” the director general of the Cognac industry inter-professional body, Raphael Delpech, told Agence France Presse last week.

“All French wines and spirits, not only Cognac, are now being affected by diplomatic tensions that have nothing to do with us.”

Delpech says the Cognac industry has built “a very strong link with American consumers stage by stage over decades, by investing enormously.” 

His members now fear much of that investment could be wrecked by tariffs, especially as US drinkers have shown a readiness to revise their repertoires in response to bar and restaurant closures during the coronavirus pandemic.

They look back with concern to 2013 and what happened to sales in China when the Beijing government clamped down on “gifting” (a euphemism for bribery between state officials).  Shipments of Cognac slumped by 12%, severely affecting the business models of the main players, especially Rémy Cointreau, the market leader in China.

Jean-Pierre Cointreau, the head of Frapin, told AFP last week that Cognac stocks in the US are sufficiently high for American consumers not to see an impact on prices, at least for the moment.

“I think that the French and American governments are committed to sorting out this problem,” he said.  “It [the new US tariff] is making this period very complicated,” he continued, adding that bar and restaurant closures due to Covid-19 shutdowns, plus the ravaging of duty-free and airline sales, were hurting the whole industry.

“There’s an accumulation of problems that are very regrettable.”

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