BAD ADVICE FOR SOMMELIERS ON HOW TO HANDLE WINE TARIFFS

by Andrew Chalk

The current tariff proposals from the administration are unprecedented in 90-years and complicated in their structure. Discussion of the effects in the news media has a lot of errors, plus the final level and structure of the tariffs is uncertain. 

The error rate was increased at a webinar for sommeliers on Monday hosted by the United Sommeliers Foundation (USF). Purportedly to increase sommelier understanding of the effect of the tariffs, the webinar was actually a platform for importers to lobby sommeliers for their support. There was no advice for sommeliers as to what changes they could make to their beverage programs in response to the tariffs. There was nobody from the domestic industry to describe the benefits tariffs bring to them (particularly in a market that is otherwise in its worst slump in memory). Overall, sommeliers were let down by the USF, which claims to be their organization. I wonder if the USF was unwittingly hijacked, or a collaborator in the charade? 

BAD ADVICE FROM BAD ANALYSIS

In the panelists’ so-called explanations of the effects of the tariffs there were errors of fact, errors of economics, anderrors of arithmetic freely strewn about because there was no way to correct them. The panel were all cheerleaders for the same narrative and audience correction of the errors was not permitted, either through unmuted Q&A or the text-based ‘chat’ feature in Zoom. When I started to correct the flow of errors, in reasoned arguments in the chat, the organizer sent me a private message saying, very politely, that any more contradictions of the narrative would be met by my being expelled. The USF did not want education, where error correction is at the heart of the learning process, they wanted a platform for one side only.

Among the errors, we were told that the three-tier system is enshrined in the twenty-first amendment to the Constitution. Here is the amendment, and it is silent on the matter. The three-tier system came about through legislation, which is perhaps why alcohol distribution differs so much across the states. 

We were told that domestic producers could not sell directly to restaurants. Not in Texas, where the three-tier system is effectively absent for wine. Distributors in Texas still exist but not because they are granted a legal monopoly. They provide the valuable economic function of efficient logistics.    

We were told that a percentage tariff on imported wine will result in every tier adding the same percentage markup. Now, we often talk about margins in percentage terms because it is useful to couch the discussion in relative terms, but if a distributor sees the price of a wine the firm carries go up by, say, 20% that does not cause a 20% increase in his cost of fuel, truck maintenance, warehouse rent, etc. They don’t change, so the increase in costs for that bottle, distributed, has gone up by less than 20%. Likewise for the retailer. They may want to keep their percentage margins the same, but there are no costs to support that price, so competition will force prices back down to the point where they cover costs. The percentage increase that started out at 20% gets lower with each tier the wine flows through as the cost of the bottle at the importer’s dock becomes a smaller part of the total cost of delivering the wine to the final consumer..

The point was made that some imported wine styles are ‘irreplaceable’ by domestic wines. If so, the importers have no worries. When they raise prices to cover their higher costs their unit sales will not go down -- these wines are irreplaceable, so consumers will just pony up more money and continue to buy the same quantity. 

I suspect the reverse is the case. Virtually all wines have close domestic substitutes, and they may not even be wine (beer is one known substitute). Ultimately, this is an empirical question and terms like irreplaceable emotional responses, not statements about how markets actually behave.  

A BETTER PANEL

The tariff on domestic wine is zero, so the webinar could have included someone who could speak about domestic sectors and their ability to increase supply to meet the increased demand from higher import prices. This would help sommeliers plan.

The seminar could also have included someone who could estimate the final price increase, given a specified tariff level. I have heard more than one person (including an MW) say in print that all the tariff is paid by consumers. Basic ECON 101 tells us that is false, with the classical analysis showing that who bears the cost of the tariff depends on the price elasticities of supply and demand for the tariffed product. If the panel had included an economist these things could have been explained in layman’s terms. 

It could also have been explained that the ECON 101 analysis applies to the base tariffs the Administration proposes, but not the reciprocal tariffs. The outcome of those is uncertain but could result in lower prices for consumers. 

As structured, the panel discussion had no framework for analyzing the effect of the tariffs, just importers talking their book - and that does not help sommeliers.

IMPORTERS

The hardest hit sector will likely be importers without domestic lines or other products. They will pivot as all businesses have to. For example, tariffs create the opportunity for them and small wineries to join up and solve the perennial problem for small wineries of finding representation. Some states have bad, typically protectionist, laws that make this difficult. A separate webinar could discuss alternatives for importers. 

WHAT THE USF COULD CAMPAIGN ON

The importers’ arguments ultimately came down to exaggeration of the negative effects to the point of creating a general ‘sky is falling’ story. While the costs will vary, and the best framework for wine is free trade, the USF should represent sommeliers, not importer interests. They can take care of themselves. To this end, the USF, if it wishes to campaign, should consider campaigning against (the remnants of) the three-tier system which has much more serious consequences for the domestic wine industry than any tariff ever will.