January 13, 2020 / 12:49 PM / 9 days ago

U.S. Champagne drinkers should expect costs to pop with new tariffs

WASHINGTON (Reuters) - Lovers of Champagne and other French sparkling wines should brace for big cost increases if the United States makes good on a threat to impose 100% tariffs on French goods in a dispute over the country’s planned digital services tax.

FILE PHOTO: Bottles of red wine are seen in the cellar of Chateau Le Puy in Saint Cibard, France, October 3, 2019. The U.S. decision to impose tariffs on French wines will penalize American consumers, the French wine exporters' federation said on Thursday. REUTERS/Regis Duvignau/File Photo

A $70 bottle of Moet & Chandon Grand Vintage could surge to $130, for example, said David Parker, chief executive of Benchmark Wine Group, the largest U.S. supplier of fine and rare wines for wine retailers.

The U.S. government said in December it may slap duties of up to 100% on $2.4 billion in imports from France of Champagne, handbags, cheese and other products over the tax, which it concluded would harm U.S. tech companies.

The Trump administration had already imposed 25% tariffs on many non-sparkling European wines in October in a dispute with the European Union over aircraft subsidies. It is separately reviewing whether to increase those duties and expand the list of products affected.

Washington did not specify an effective date for the proposed duties, but the two countries have given themselves two weeks to try to resolve the tax row before officials meet at the World Economic Forum in Davos, Switzerland, in late January.

While the industry has largely absorbed the cost of the 25% tariffs imposed in October, it won’t be able to do that if tariffs rise to 100%, industry executives say.

EU Trade Commissioner Phil Hogan will discuss these issues with U.S. Trade Representative Robert Lighthizer when he visits Washington this week.

If those efforts fail, the USTR’s office could announce a new list of goods facing tariffs by late January, said Warren Maruyama, a partner at Hogan Lovells and former USTR general counsel.

The looming tariffs pose the greatest threat to the wine industry since Prohibition, industry officials said in Washington last week, referring to the U.S. ban on the sale of alcoholic beverages from 1920 to 1933.

HOW U.S. WINE COSTS ADD UP

Thanks to post-Prohibition regulation, the non-domestic U.S. wine business is divided into hundreds of importers, wholesalers and retailers. The 21st Amendment allows states to control the sale, distribution, taxation and importation of alcohol.

“Because of the way Prohibition was repealed, essentially, every business in the wine business is a small business,” said Benjamin Aneff, managing partner with Tribeca Wine Merchants.

An importer pays about $30 for a bottle of Moet & Chandon, plus transport, said Parker, who is also a member of the board of the National Association of Wine Retailers, adding a 25% markup before handing off to a distributor.

Distributors generally add an additional 25% markup, he said, then retailers tack on 20%, for the current price of $70.

If the original import price doubles to $60, U.S. wine businesses would be forced to pass along the increase, wine industry experts say.

American consumers simply will not tolerate that kind of price hike, Aneff said.

“We believe that for a huge percentage of this category, we’re simply going to lose the revenue in the United States,” he said, and estimated the industry could lose 50,000 jobs.

HOW MUCH FRENCH BUBBLY DO AMERICANS DRINK?

The United States is the largest foreign market for French wine, importing nearly 700 million euros ($771.54 million) of French sparkling wine per year, according to the Fédération des Exportateurs de Vins & Spiritueux de France (FEVS) trade group.

If the U.S. market for Champagne weakens due to higher prices, French producers can easily sell their products in Asia and South America, where demand is growing rapidly, experts say.

By definition Champagne can only be produced in the northern French region of the same name.

U.S. vintners make sparkling wines that perform here well against Champagne in blind taste tests. But there is no current surplus of U.S. wine production, and it takes seven to 10 years before a new vineyard matures and can produce good wines, experts say.

AVERTING HIGHER TARIFFS?

The U.S. Trade Representative’s office is accepting public comments on the French tax issue through Tuesday, and an expanded list of European products that could face tariffs under the WTO aircraft subsidy issue through Monday.

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It is not expected to act on either issue before the upcoming meetings with EU and French officials.

But Robert Tobiassen, president of the National Association of Beverage Importers, said there was little hope of averting higher tariffs since the Trump administration continues to view them as a linchpin of its trade policies.

“I believe the existing tariffs will continue and there is a very strong likelihood that other tariffs will come on,” he said. “They have their strategy.”

Reporting by Andrea Shalal; Editing by Heather Timmons and Sonya Hepinstall

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