During his recent presidential campaign, Donald Trump displayed a fierce protectionist orientation. It is no longer just China in his sights, but the whole world. As far as international trade is concerned, Trump’s second term is likely to be worse than his first. What does the French wine industry have to fear in this context?
Still traumatised by the 25% Trump tax in place from October 2019 to March 2021, the French wine industry is anticipating further difficulties in exporting to the United States. However, a comparison between the previous tax and what the president-elect has announced for his second term provides some hope. Two factors are likely to change the situation: the rate of the new tax and the countries that will be affected by it.
An uncertain rate
There is some vagueness about the rate of customs duties that will be imposed on wines imported into the United States. Trump’s most commonly announced figures are between 10 and 20% for all non-Chinese products (and 60% for Chinese products). Of course, 10% and 20% are not the same thing. If the rate is too high, the inflationary effect on the US economy would be too great. Economists find it hard to imagine how American consumers would accept the shock of a 20% rise in the price of imported goods, especially after the inflationary period they have just endured. Tariffs that are too high could therefore be highly unpopular, even if Trump is betting on increasing the income of American households by cutting levies and taxes – cuts financed by these tariffs – in order to maintain the purchasing power of his fellow citizens.
€600 million in losses
The scope of the 2019 Trump tax was limited to France, Spain and Germany, the three countries in the Airbus consortium. The introduction of the tax was part of a dispute on aviation between the United States and the EU. The customs duties planned for Trump’s second term will affect all countries, which represents a profound change. Part of the reason French wines suffered in 2019, with a 40% sales drop and an estimated loss of 600 million euros, was because American consumers shifted toward other imports, including Italian red wines and New Zealand white wines. This time, the winners can only be American wines, the sole bottles not to be taxed.
What would be the effect of a 10% tax on all wines imported into the US? Part of the tax would be absorbed in the chain of intermediaries from producer to consumer, each of whom will accept a marginal reduction in their price. As importers, wholesalers and retailers want to retain their market share, the final price increase will be non-existent or extremely limited. This reflects what is known as margin behaviour, which is classic in the case of changes in exchange rates or customs duties. A 10% tax would not, therefore, give rise to fears of a market collapse for French wines on the US market. The volume effect would be limited and the margin would be just slightly eroded.
The danger of a 20% rate
However, the equation changes with a tax set at 20%. This rate would be too high for margin behaviour to erase its effect on the final price for the consumer. A rise in final prices would be inevitable, its extent depending on the rate of absorption by the chain of intermediaries. The big winners will be US producers, to which local consumers will turn.
For French wines, the effect will depend on the sensibility of American consumers. The most expensive wines, which are also the most in-demand and “unique”, are always less sensitive to price variations. On the other hand, demand for entry-level and mid-range wines, which have the most competition, will drop significantly.
Drink Trump?
Trump himself, as a wine producer, is in competition with European wines. A tax of more than 10% on imported bottles cannot be ruled out. However, this is not the preferred scenario. US economic policy seems to be mainly geared toward industry. The idea of tariffs is in line with that of the Inflation Reduction Act, which became law midway through President Joe Biden’s term. The aim of these policies is to create a strong economic incentive for global industry to install itself on American soil. Wine should therefore be flying under the radar.
Nevertheless, despite its expected limited impact on the French wine industry, Trump’s new protectionist announcement is contributing to a latent feeling of de-globalisation. The Russian market has closed amid the war in Ukraine; the Chinese market imposes taxes of 35% on European brandies (mainly Cognac exports). Access to major markets therefore seems very precarious, and there is no sign of improvement in the short term.
Beyond the policies of a second Trump term, it’s high time to make deglobalisation a reality. We need to understand that export flows must be redirected to countries where the tax system is more favourable to trade. Many countries in Asia, Africa and Latin America have potential reservoirs of consumers. Europeans also need to be won over, but with different wines. Marketing must therefore adapt to this new international situation.
Jean-Marie Cardebat is the president of the European Association of Wine Economists.
This article was originally published on The Conversation. Read the original article.
