Bourbon, Collateral Damage in Trump’s Trade War
In the early summer of 2018, the Louisville Courier-Journal, Kentucky’s largest newspaper, put out an emergency distress call to Mitch McConnell. It was about bourbon.
The editorial laid out how tariffs on whiskey—imposed by the E.U. and U.K. on Kentucky’s most famous export following President Donald Trump’s ill-advised tariffs on imported steel and aluminum—was a trade war the Bluegrass State would end up on the losing side of.
“Sen. McConnell, rally our congressional delegation, take off the kid gloves and do whatever it takes to resolve this conflict,” the editorial ended. “Bourbon is our legacy. Kentucky needs you to protect it.”
Three years have passed and the tariff issue has not been resolved—indeed, it is in danger of getting worse. Senators McConnell and Rand Paul have largely been silent despite pleas from the industry to fix it and despite a looming deadline: The E.U. and U.K. will raise the tariff to 50 percent by June 1 if other trade disputes between the United States and Europe aren’t resolved.
“Our industry is collateral damage in trade disputes have nothing to do with Bourbon,” Eric Gregory, President of the Kentucky Distillers’ Association said last October. “The long-term impact of tariffs will jeopardize our industry, our partners and our farm families. It’s been two years. World leaders need to solve these disputes now.”
The situation for the bourbon business is so dire that two of the state’s U.S. House members, John Yarmuth and Andy Barr, Democrat and Republican, fired off a letter on April 5 to Katherine Tai, the new United States trade representative for the Biden Administration. They asked the White House to protect American business interests by removing the tariffs:
[The tariffs] have increased prices on American consumers and hurt American businesses and employees. . . . Permanently lifting the tariff burden will also support the recovery of restaurants, bars and small craft distilleries across that country that were forced to shut down their businesses during the pandemic.
Doubling the tariff on bourbon would be a disaster for the state, which has been hit hard over the last year.
The bourbon and bluegrass trails—where tourists can view race horses grazing behind classic white fencing in the rolling hills east of Lexington and then sample bourbon in old distilleries—have largely been knocked out of commission because of the COVID-19 pandemic. Kentucky’s $8 billion distilling industry is smarting heavily from the reduced tourism, which fell by two-thirds last year during the coronavirus pandemic when tours were stopped.
And then there is the liquor itself. The damage done to the Kentucky-made whiskey by tariffs in Europe has been devastating, with export values dropping by double digits since the tariffs took effect. Total exports of Kentucky Bourbon and other whiskies were valued at $455 million in 2018. That number plunged to $319 million in 2020, a 35 percent decrease. Export values to the EU have nosedived 48 percent since the tariffs took effect, from $257 million in 2018 to $135 million last year.
Brian Hackett, a history professor at Northern Kentucky University, calls the last year in Kentucky the “Trifecta Tragedy” because of the economic and public distress to basketball, bourbon, and bluegrass entities in the state.
“Because all this is piling on now at once, the public is moving from an ‘oh, well’ attitude to this being a sure sign of the apocalypse,” Hackett said. “It’s like bourbon prices are going up and no one can sample Wild Turkey at their distillery in Lawrenceburg, and then Oral Roberts University makes it into the basketball tournament and University of Kentucky doesn’t? This is a heavily religious state and people are wondering if we are getting paid back for something bad they have done in the past.”
The dispute is difficult to fix because the tariffs on Kentucky bourbon really have nothing to do with Kentucky bourbon.
These retaliatory duties on alcohol started when the U.S. announced new tariffs on European steel and aluminum in 2018. Alcoholic beverages got involved when the E.U. imposed a new 25 percent duty on bourbon in response, perhaps hoping it would get the attention of McConnell, the Senate majority leader at the time.
In retaliation, the U.S. added a new 25 percent duty on single-malt Scotch and other European spirits in 2019, linking them to an ongoing trade dispute about European subsidies for the airline manufacturer Airbus, which was similar to the complaints from Europe about U.S. support for Boeing.
Because the tariffs against American whiskies are tied to worldwide steel and aluminum trade, the Biden Administration finds itself in an odd position politically. Unions and manufacturing companies would see cutting a deal with the E.U. and U.K. on steel to get rid of the bourbon tariffs as being weak on trade enforcement. Bluer blue-collar states like Michigan and Pennsylvania have the edge over solid-red whiskey-producing states like Kentucky and Tennessee.
Newly confirmed Commerce Secretary Gina Raimondo said in a recent interview that it made sense to maintain Trump’s steel tariffs even though the bourbon industry would suffer. “Let me say those tariffs have been effective,” she said. “The data show that those tariffs have been effective. And I think what President Biden has said is we’re going to have a whole of government review of all of these policies and decide what it makes sense to maintain.”
No one has ever fully explained why Kentucky bourbon and Scotch whiskies were chosen as retaliation for airline parts and aluminum trade imbroglios. But think of it this way: It’s an example of how trade wars devolve from targeted measures to an economic version of TEGWAR (the baseball locker room card game “The Exciting Game Without Any Rules”), featured in the 1973 classic film, Bang the Drum Slowly.
The Biden administration and their E.U. counterparts have indicated they will try to avoid the June 1st tariff doubling move. While an increase can likely be avoided, it’s unlikely the current 25 percent tariff will be rolled back.
McConnell and Paul are unlikely to face any consequences for failing to get these tariffs eliminated, but that could change if the situation worsens.
“Tariffs and trade are fairly dry subjects to most people, and it is always hard to make political headway in campaigns on this subject, as the people most threatened by traffics work in this industry,” said D. Stephen Voss, the political science professor at the University of Kentucky.
However, there are 20,000 people employed directly in the Kentucky bourbon industry, and the public sees the bottles in front of their faces in retail establishments. “When a party’s policies start to threaten a state’s way of life, people do start paying attention,” Voss continued. “Take the war on coal. It has been played up as not just an attack on coal industry but an attack on Kentucky. As this bourbon tariff issue continues, and more money is lost, you could see the same thing happening to the bourbon industry.”
While larger distilleries can weather the storm, it’s the smaller Kentucky bourbon distilleries that have popped up in the past decades that have been hit hardest. They counted on marketing their status as craft, Kentucky-bred outfits, labels that are gold to export markets.
“We are literally frozen,” Amir Peay, owner of James E. Pepper Distillery in Lexington, Ky., told the Wall Street Journal. He said the tariffs deployed just as they started investing heavily to take advantage of what had been rising sales in Europe. The distillery closed its Lexington facility in 1958, but began producing barrels of bourbon again in 2017.
“Twenty-five percent has decimated us,” he told the Journal. “Fifty percent will literally take us out of the European market.”