On Oct. 2, 2019, it was announced the United States had won $7.5 billion, the largest arbitration award in World Trade Organization (WTO) history, against the European Union in its dispute over illegal subsidies to Airbus, a European airline manufacturer. This decision allowed the U.S. to set duties on that $7.5 billion, and allowed the Trump administration to set increased tariffs (25%) on EU goods, including wines, cheeses and men’s apparel, which went into effect Oct. 18, 2019.
At the time, little to nothing was known about COVID-19. But now, around five months into the pandemic, the U.S. is in a recession, the National Bureau of Economic Research announced in early June — the recession, usually described as consecutive quarters of declining gross domestic product, actually started back in February, NBER stated, when the U.S. economy was at peak activity for 2020.
The result: millions out of work and businesses working feverishly to stay afloat, with some even permanently closing.
Businesses have been in the crosshairs of the pandemic, and with the tariffs still a factor months later, it’s “destroying the alcohol industry,” said Nate Klatt, owner of The Harvest Wine Company in Denver.
Klatt spearheaded an effort of around 30-50 Colorado based food and wine business owners who are asking for relief from Congress to abolish the tariffs. On July 14, the group sent a letter, signed by the businesses, to Sen. Cory Gardner. Klatt said the group is working to communicate directly with government officials, and with their support, can urge the United States Trade Representative and the decision on whether to expand — the tariffs could increase to 100% — or lift the tariffs on or around Aug. 12.
“It’s something that can kill our business,” Klatt said.
Klatt has been in the industry since 2002, and has spent the last eight years of his life building the family business. He’s made a point of emphasis to keep his employees, despite a drop in revenue and the tax payments.
Klatt estimates he’s paid about $50,000 in tariffs due to the increase back in October. Compound the payments with a business that’s seeing drastically different crowds during a pandemic, the result could be devastating for several businesses, including Harvest Wine. The tariff, essentially, works as a double tax, Klatt said, since import companies are already paying taxes on goods that are coming into the U.S.
“If we have to continue to pay the 25% tariffs, it’s going to make it more and more difficult, and cause us to let people go,” Klatt said. “Worst case scenario, six months from now, we will close the business.”
Sophano Kan, owner of Pour House Wine and Spirits in Montrose, said sales have increased the past few months. However, Kan said consumer traffic in Denver compared to Montrose was likely vast due to the difference in population and case count, and also added whiskey from Europe has increased in price.
A closer look at the dispute
The dispute between Airbus and Boeing, an American airline manufacturer, has had rippling effects among small mom and pop businesses in the food and wine industry, the group states in its letter. Boeing, in a legal case, said that Airbus benefited from the EU providing billions of dollars in illegal subsidized financing. In 2011, the WTO ruled this to be true, and after 15 years of back and forth litigation, the U.S. was authorized to retaliate with the $7.5 billion on EU exports — the majority of the tariffs are applied to Germany, France, Spain and the United Kingdom, the four countries responsible for the illegal action.
But for the businesses trying to import goods, such as beverage products, the tariffs have meant trouble.
According to performance indicators from Trade Map, Boeing and Airbus have dominated the aircraft market for decades. The control of the market has proved pivotal for America and Europe’s trade balance.
But the tariffs, aimed to help the U.S. and Boeing, are forcing businesses in the alcohol industry to pay extreme taxes, which was already a problem before a pandemic came into the picture, Klatt said.
“Our government is harming U.S. businesses to try and benefit one of the biggest companies in the world,” Klatt said.
“These are mom and pop businesses that are being destroyed,” said Dustin Chiappetta, owner of Pearl Wine Company, a retail store, in Denver.
Chiappetta said the dispute, between two large companies, shouldn’t be affecting small, family-built businesses trying to run operations, especially during a pandemic where revenue has slumped — Klatt said Harvest Wine was down 35% in revenue from April through July.
The three-tier system
The three-tier system, designed to channel alcohol products from wholesaler to distributor, distributor to retailer and retailer to consumer, has its share of complexities. According to the National Alcohol Beverage Control Association, the system has its benefits, like streamlining the tax revenue process, but Klatt and Chiappetta say the system is detrimental to the pricing market. By the time a wine bottle reaches a consumer, the price on specific bottles is inflated, and more so with tariffs in play.
For examples, bottles that are able to sell close to $10 can increase to $15, which Klatt said is “no longer viable in that marketplace.” With a fluctuating pricing market, and a customer base affected by the pandemic, “it’s tough to keep the lights on,” Klatt said.
The price inflation is one of Chiappetta’s outstanding issues with the process since the quality of wine the consumer receives is much less.
“Consumers have a price point in their minds. We have margins that we’re going to make. When you put that tariff on in a three tier system, by the time it gets added, to the consumer, the bottle you’re buying at $20 is now at $30,” Chiappetta said.
Restaurants who carry, for example, Italian sparkling wine, are susceptible to decreases in revenue if the product is no longer viable, Klatt said. The wine presents a possible lifeline and consistent revenue stream for restaurants clinging to life during the pandemic.
Also, the system guarantees that tariffs impact three U.S. businesses for every single EU business, Klatt mentioned.
“That is pretty crazy when you think about it in a time when we also have a pandemic and a massive recession,” Klatt said.
A way forward
For businesses that have had to pay the tariffs during the pandemic, there’s a way to make it right, Klatt said.
The Fair Tariff Act of 2019 asks Congress to consider a number of relief efforts. In the group’s letter, it’s stated the federal government could return the money, either in full or in part, and refund small businesses who have paid the tariffs so far, which could be used on payroll, hiring and expanding the business. Or, Congress could require USTR to apply the tariffs to other products and away from food and drink when the decision is made in mid-August.
Congress could also pause application of the tariffs until the recession passes, improving the outlook for several businesses while lowering retail prices.
“By returning that money, we can give a capitalism infusion, and ultimately save hundreds of thousands of American jobs,” said Klatt, who’s adamant that wine and food are taken off the tariff list.
“If they do some refunds, that will help the building,” Chiappetta said. “That purse that distributors hold is going to be a bit looser, and it’s going to be able to be more impactful for restaurants along the way.
“It provides a little more relief, and businesses can squeeze more to pay a bill,” he added.
“Still time to make a difference”
Klatt said he and others have followed up consistently with the letter, communicating with government officials. The group is urging Gardner to support the Fair Tariff Act, and has already received support from Ed Perlmutter, a U.S. House Rep. for Colorado’s 7th congressional district.
Perlmutter and Diana DeGette, U.S. House Rep. for Colorado's 1st congressional district, signed on to a Dear Colleague Letter that the House sent to the USTR. Nationwide, 164 members of Congress are asking USTR to remove tariffs on food and beverage products.
“Our hope is that when we have 164 congressmen urging the USTR to take action, that he’ll listen,” said Klatt of U.S. Trade Representative Robert Lighthizer.
The public still has time to help local and statewide businesses in the fight to get rid of tariffs.
“I would just say that anybody who believes that U.S. small businesses shouldn't be unfairly harmed in a dispute between two of the largest companies on the planet, they should call their congressperson and ask to take tariffs off,” Klatt said.
“We’re not done fighting. Our senators and congressmen can still make a difference,” he added.
Chiappetta shared a similar sentiment, and offered a damning sight if tariffs aren’t removed.
“If tariffs stay, it’s going to burn the building down.”
The U.S. Wine Trade Alliance, through its website, has links at uswinetradealliance.org/endwinetariffs where consumers and those inside the industry can join the fight against wine tariffs.