But he runs the best winery, which makes only the best wine, in not just America, but anywhere, as everybody knows, except we hoity-toidy wine drinkers. This tariff is to make us better informed, to make only the best possible choice.
Short notice, I know, but here is my draft comment, focusing on the beverage segment. I will post it to the USTR in a few hours. I’d appreciate any thoughts in the meantime, especially if I have mis-stated anything, made any typos, etc. PMs welcome. I know it’s long and clinical, but I’m not likely to change that, as this is the approach that I think is best for me to take. YMMV, of course. Also, to the extent you like it or any portion of it, feel free to plagiarize.
January 5, 2020
Amb. Robert Lighthizer
Office of the U.S. Trade Representative
600 17th Street NW
Washington, DC 20508
Dear Ambassador Lighthizer:
I am opposed to the proposed tariffs, up to 100 percent, on European wines and liquors, as a retaliatory response to both France’s Digital Services Tax (docket # USTR-2019-0009-0038) and to the broader enforcement of WTO rights involving civil aircraft (docket # USTR-2019-0003-2518). As I understand the proposals, the specific products relevant to this letter include at least:
• Wine, other than Tokay (not carbonated), not over 14% alcohol in containers not over 2 Liters (HTS subheading 2204.21.50)
• Liqueurs and Cordials (HTS subheading 2208.70.00)
• Single malt Irish and Scotch whiskies (HTS subheading 2208.30.30)
• Sparkling Wine, made from grapes (HTS subheading 2204.10.00)
• Effervescent grape wine, in containers holding 2 liters or less (HTS subheading 2204.21.20)
• Grape wine, other than “Marsala”, not sparkling or effervescent, over 14% vol. alcohol, in containers holding 2 liters or less (HTS subheading 2204.21.80)
• Wine of fresh grapes of an alcoholic strength by volume <=14% in containers holding >10 liters (HTS subheadings 2204.22.60 and 2204.29.61)
• Wine of fresh grapes of an alcoholic strength by volume >14% in containers holding >10 liters (HTS subheadings 2204.22.80 and 2204.29.81)
• Grape brandy, excluding pisco and singani, in containers not over 4 liters, valued over $3.43/liter (HTS subheading 2208.20.40)
• Whiskies, other than Irish and Scotch whiskies (HTS subheading 2208.30.60)
You have asked for comments on several issues, and as a consumer I would like to focus on one of those issues – “whether maintaining or imposing additional duties on specific products of one or more specific EU member states would cause disproportionate economic harm to US interests, including small or medium-size businesses and consumers.”
The proposed tariffs on the listed products, from France or any other EU member state at issue, would most certainly cause such disproportionate harm, to consumers but most significantly to small and medium-size US businesses.
To understand and evaluate this harm, it is important to understand the likely result of these tariffs on short-term importation behavior in the industry, and also the structure of the beverage alcohol industry in the United States.
SHORT-TERM IMPACT ON IMPORTATION
Given that the proposed tariffs are extraordinarily high (100%) and that they are by their nature designed to be temporary, though of indefinite duration (given that they are intended to be reduced or eliminated once corresponding actions are taken by various EU governments with regard to the DST or the Airbus subsidies), the most likely result is that in the short-term importation of these beverages will either cease or drop precipitously. For the most part, a tariff which effectively doubles the cost to import these products will make them uncompetitive in the consumer marketplace and therefore uneconomical to import. In addition, knowing that they are designed to be temporary, large buyers such as distributors, wine collectors, restaurants with extensive wine cellars, etc. will opt to simply stop buying in the knowledge and hope that the tariffs will end and prices will then return to normal.
THE STRUCTURE OF THE INDUSTRY IN THE US
Under the terms of Amendment XXI to the US Constitution, which repealed prohibition, regulation of the distribution and sale of beverage alcohol was left to the States. As a result, the market for these beverages in the United States is unique in several respects compared to the markets for most consumer products. Most if not all States, for example, require that these products pass through a mandatory “three-tier” distribution system, and that companies in each tier be independent of one another. So, as a consumer, I can only buy these products from licensed retailers (whether for on-premise consumption, such as at a bar or restaurant, or for off-premise consumption, such as at a grocery or liquor store). Licensed retailers can only buy these products from licensed distributors (also referred to as wholesalers), and licensed distributors can only buy them from licensed manufacturers (for products of the USA) or importers. Moreover, a distributor (or the same owners) cannot own a retailer, and vice-versa, and neither can be owned by a manufacturer or importer or their owners. In addition, all of the licensing just described is conducted on a state-by-state basis.
As a result of this system of regulation, distribution costs add more to the final consumer price of beverage alcohol than to the final consumer price of any other major product category sold in the United States. This is important because these distribution costs are earned by American businesses. Put another way, revenues earned by American businesses in the distribution chain typically make up a larger percentage of the final consumer cost of a bottle of imported wine or liquor than of any other imported product. For example, a typical wine that costs an importer $10 to buy and import will sell for $25 at a liquor store or $50 at a restaurant.
As another result of the decentralized, state-by-state regulation of this industry, there are very few large national companies in this distribution chain. Certainly, there are some at each tier (major wholesalers, national restaurant chains, etc.), but there are thousands and thousands of small and specialized importers, distributors, retailers, bars, and restaurants, many serving only a single state or even a single neighborhood. Many of these are also specialized in the products they carry – a small grocer who specializes in Italian foods, wines, and liquors; a restaurant that specializes in French cuisine and wine, an importer that specializes in Spanish wines, or Scotch whisky, etc.
Finally, one must understand that most foreign wineries have existing and exclusive relationships with a single importer for the United States or some exclusive sales territory within the US, and those importers typically have an exclusive distributor within each state (some of which is mandated by law in many states).
IMPACT ON AMERICAN BUSINESSES OF THE PROPOSED TARIFFS
Against this background, what is the likely result of a sudden increase in the tariff to the point that most of these products become uneconomical? Surely, some substitution will occur. The consumer that would otherwise buy a bottle of European wine might buy a bottle of Australian or Chilean or American wine instead. Likewise for the general grocer or steakhouse choosing what to sell. Others will choose not to buy at all until the tariffs are ended and their favorite European beverages are once more available. Of course, prices will rise given that a large portion of the global supply would suddenly vanish from the American market, causing one immediate and obvious form of harm to US consumers.
Where the result is a decrease in sales rather than substitution, the harm will be borne disproportionately by American businesses. At typical markups in the industry, and given the industry structure previously discussed, this tariff will thus cost the European winery perhaps $8 in lost revenue on the hypothetical bottle of wine I mentioned earlier, while costing the transport and logistics companies that deliver the wine to the importer’s warehouse perhaps $2. At the same time, it will cost the American businesses that import, distribute, and sell the wine at retail anywhere from $15 to $40 in lost gross margin. The harm to American businesses could hardly be more disproportional – costing American businesses $15 to $40 in lost margin for every $8 in lost sales to the European winery.
Most importantly, these lost sales will hurt numerous American businesses so significantly as to drive them out of business entirely. Because of the fractured nature of the market, many small, specialized importers, distributors, and restaurants have a limited focus, often on the wines of a single country or region. An importer which sells only French, Italian, or European wines (or even if such wines are “only” half of their sales) will, quite simply, be out of business almost immediately if their prices double and (predictably) orders cease. Likewise for a small specialty distributor. And these companies cannot simply substitute and start importing Australian or Chilean wines, because a) they don’t have the expertise or relationships to do so, and b) the Australian and Chilean wines with a US market already have exclusive relationships with other importers or distributors. Nor can they simply start carrying wines from more American wineries, for the same reasons.
A specialty importer or distributor which suddenly finds a major portion of its product line too costly to sell simply has no way to pay its rent and its employees, and folds. Each such incident represents not only a business failure, but it leaves salespeople, warehouse workers, truck drivers, and office staff unemployed, and leaves landlords, lenders, and other creditors unpaid. When this happens and the businesses are liquidated, they cannot simply “switch on” again in a few weeks, months, or years, when the trade disputes are settled and the tariffs are eliminated.
It is also important for you to understand that millions of dollars of fine wine, especially Bordeaux, is sold each vintage on a so-called “futures” basis, while the wine is still in barrels in France. The 2017 and 2018 Bordeaux vintages have been sold this way, but not yet imported. These sales were made, as they have been made for decades, on the basis of long-existing norms in the marketplace. Consumers have paid retailers, retailers have paid distributors, and so on back to the wineries in France. To suddenly inject a 100% price increase into these existing transactions, which await only the delivery of the product, would cause chaos. A likely result would be the bankruptcy of the importers forced to absorb the sudden doubling in cost, which would leave the consumers, stores, and restaurants awaiting delivery with no wine and nothing but an unsecured claim in the importer’s bankruptcy proceeding.
SECONDARY IMPACTS ON US WINERIES
I also want to mention some clear secondary effects these tariffs are likely to have. The most obvious of these will be on small American wineries. These small wineries do not produce enough wine to be distributed by the handful of large, national distributors – those distributors focus on the largest handful of producers. Instead, thousands of small American wineries rely on boutique specialty distributors in each state to which they choose to distribute their wine. So, for example, a specialty distributor in a given state might carry wines from several small importers (each of whom specializes in certain countries or regions), as well as some small American wineries. If distributors like these go out of business, as they will if European wines are suddenly uneconomical to sell, those American wineries will lose their distribution in that state.
US WINERIES INCREASING PRODUCTION TO OFFSET THE DECREASE IN EUROPEAN IMPORTS
Finally, I should make clear that it is not feasible for US wineries to simply increase production enough to replace European wines in the market, allowing consumers to simply buy US wines instead. First, of course, the wines, while neither “better” or “worse” than the other, are not the same. Just as consumers with a clear preference for Napa Valley wines would not be happy being forced to switch to Bordeaux or Chianti, those who prefer the latter will not necessarily be satisfied with the option of switching to American wines. More importantly, though, wine production is a long-term investment. Vineyard land is expensive to acquire, develop, and plant; and vines take three years to produce a commercial crop. Even if they were to start today, US wineries could not supply enough wine to replace the lost European wine for three years, and doing that would require enormous risk, given the intended temporary nature of the tariffs. Few winery owners (or lenders or investors) are likely to gamble their capital on increased demand which is by design temporary.
CONCLUSION
As you can see, the market for European wines and liquors in the United States is unique, as a result of the aftermath of our national experiment in prohibition. The unique aspects of this industry make American consumers and especially small and medium-size businesses – importers, distributors, retailers, bars, restaurants, and even American wineries – distinctly vulnerable to disproportionate harm from the proposed tariffs. Focusing our tariff response to the DST and Airbus issues on other European products will allow the US to achieve its trade goals while avoiding this disproportionate and often permanent harm to the many small American businesses in this industry, and their employees, creditors, and customers. Therefore, I ask that the USTR remove the product categories listed at the beginning of this letter, and any other beverage alcohol categories, from the tariffs under consideration as these cases move forward. I thank you for your time taken to read this letter, and for your consideration of the issues I have raised.
Very truly yours,
Perfect. Thank you.
Looks good Dave.
Nice letter Dave.
Great work, Dave.
Thanks, all. I think my markup math was off a bit, though. I will go back and edit to reflect a 30% markup by the importer and then another 30% by the distributor, and then 1.5 times that for the store and 3 times that for the restaurant.
Thus, $10 cost to the importer means importer sells it to the distributor for $13, and the distributor sells it for $17, resulting in a $25 price at the store or $50 at the restaurant.
Let me know if that’s not right.
That sounds closer to the mark.
Great letter. PM sent.
Looks like a very good letter. I don’t know how these things work, is it assumed that it would go to a staff member to Read the whole letter summarise and flag key issues? What I’m getting at is whether a point form executive summary Of the reasons for the disproportionate harm at the very front would improve the chances the letter gets the attention it deserves.
I’ve worked as a legislative aide and covered constituent work when I began. The key to getting something up the food chain is an individual letter that bears no resemblance to a form letter (hand written is best), following up with a phone call, and (if possible) asking for a follow-up meeting and/or phone call from the official you are trying to lobby. Form letters would get a generic response back and I would keep a tally of how many we received for/against an issue. Just FYI
My comment was not nearly so impressive but at least I got it in under the wire. Good luck everyone!
Good, I wrote my comment, very personal from me. Then called and spoke to Director for Europe at Office of the USTR. Looks like a follow up call is in order.
I’ve also been interviewed by the Wall Street Journal (I doubt it will be a big article) and have spoken to the Exec Director of the North America Olive Oil Assoc. Who has a lobbying firm trying to convince Trump and his minions not to go through with these tariffs.
Let’s hope that what I’ve shipped get in otherwise… ugh I don’t want to think about it.
Hand-written, unless by a doctor, you mean? 
After world fame, would you still admit to knowing us?
Thanks for all the feedback. I moved the cumbersome list of products to the end and added a quick bullet point summary of the harms to the beginning, made a few other tweaks, and submitted my comment in both cases. Hopefully good sense will prevail. Thanks to all others who have commented (and it’s not too late!) and good luck to all whose livelihoods are on the line!
I should add that it appears that many people are only commenting in one case and not both - the count currently showing on the website is 10,231 comments in the “aircraft” case and only 1,491 comments received in the “DST” case. Please submit your comment in both cases!
Links:
https://www.regulations.gov/document?D=USTR-2019-0003-2518
https://www.regulations.gov/document?D=USTR-2019-0009-0038
Just hit “Comment Now!” and off you go…
Dave is correct, submit for both if you can. The DST comment section ends today. The only wine that is included in this one is Sparkling from France although cheeses, handbags and other items are of course there too. Hearings are scheduled for tomorrow, then you will be able to submit Post-Hearing comments until the 14 of Jan.
https://www.regulations.gov/document?D=USTR-2019-0009-0038
The Retaliatory Tariffs for Airbus the number of 10,231 above is for ALL submitted comments including as long ago as last April. The majority though are from the latest go around and the cut off is Jan 13th.
Regulations.gov … -0003-2518
Write away, and please mention Olive Oil. To date only 212 people have mentioned Olive Oil in their comments.
It is important because it will disappear from your capacity to buy or it will double in price. Small importers like me will not be able to pay these prices.
To support your comments on Olive Oil. Please read the letter of the Executive Director of the North America Olive Oil Association sent to the USTR and subsequently testified at the hearing last Spring. Regulations.gov
I know it is a lot to ask, but it is important to the producers and the importers some of them really small, like me.
Asimov adds public focus to industry disaster if tariffs hold.
Is today the deadline to submit? Wonder when we will hear. My weekly sales meeting, we briefly spoke about it.