What’s Bourbon Got to do With It?

A few months ago, the European Union agreed to remove its tariffs on Kentucky bourbon. This comes with a sigh of relief from US alcohol producers, who saw a 25% tariff imposed on Kentucky bourbon and American whiskey in 2018. According to the Kentucky Distillers’ Association, this represented a 50% decrease in bourbon exports to the EU and the UK. Earlier this year, the US paused its own 25% tariff on most European wines, too.

It seems that whenever a trade war occurs, alcohol suddenly becomes everyone’s favourite punching bag. In this case, the US bourbon industry suffered the blow despite being completely unrelated to the dispute at hand. In fact, the tax was levied by the EU as a retaliatory measure following the complex Airbus/Boeing dispute, whereby the WTO ruled that both the EU and the US were illegally subsidizing their respective domestic aircraft industries.

According to Article 22.2 of the Dispute Settlement Understanding (“DSU”), the WTO’s Dispute Settlement Body (“DSB”) can authorize a country to retaliate against another if the latter does not comply with the DSB’s recommendations and rulings. Such measures allow a country to act in a way that would otherwise be inconsistent with the WTO Agreement. However, the approved retaliation is meant to be temporary – even though this one lasted for over three years.

Why does a dispute over aircrafts lead to a proxy war in the agricultural and alcohol industries? The reason is purely political. Targeting products in the constituency of high-profile politicians such as Senate Republican Leader Mitch McConnell is a highly effective measure. Tariffs on bourbon in the US or wine in the EU can have devastating impacts along supply chains, such as higher prices for French wines in US restaurants. Unfortunately, these higher prices are often passed on to consumers and possibly even lower wages for waitstaff. While retaliatory measures are supposed to be limited to the same industry under Article 22.3(a) of the DSU, this rarely occurs in practice.

As a result, we now have a world with a great deal of trade diversions in the food and beverage sector. A recent study determined that the US lost $15.6 billion in trade in 2018 due to the US-China trade war, when China imposed heavy tariffs on US pork and soybean imports. In contrast, non-retaliatory countries filled this gap and gained $13.5 billion in additional trade. Creating such distortions creates an unpredictable and instable redistribution of agriculture and food products. In my opinion, the WTO should be stricter when it comes to approving retaliatory measures in sectors other than the one relating to the dispute at hand.

Moral of the story? Enjoy that Old Fashioned before it gets any more expensive.