U.S. distillers had reason to rejoice in late 2021, when the European Union agreed to remove a 25 percent tariff it levied on bourbon and other imported whiskeys.
The EU imposed tariffs in 2018 on a variety of products from the United States in retaliation for the 25% and 10% tariffs the United States levied on European imports of steel and aluminum, respectively.
It was a protracted trade war that particularly affected the Kentucky bourbon industry and, by extension, the state economy.
Bourbon is an $ 8.6 billion industry in Kentucky, according to the Frankfort-based Kentucky Distillers’ Association, which generates more than 20,000 jobs per year with a payroll of $ 1 billion. Visitors make nearly 2 million stops along the Kentucky Bourbon Trail each year, and Kentucky distillers have invested $ 5.1 billion in construction projects to meet demand.
Amir Peay, owner / operator of the James E. Pepper Distillery in Lexington, said he was alarmed when he first heard about the tariffs in mid-2018. European sales were about 10 percent of his business at the time, he said, and he was set to take them to 20 percent with a new sales and support presence in Europe, as well. than a distribution warehouse.
At the end of 2021, the distillery’s sales in the EU represented around 5% of overall turnover, he said.
“It was really a targeted tariff to cause political pain in this country and that is why it was a complete shock and very concerning,” he said.
Peay said the effects weren’t immediate for his business, which he describes as a multi-million dollar business that is large to a craft distillery player but small compared to the big brands. He compared the trade impacts of tariffs to the analogy of a frog in a pot of water gradually heating up, unaware that it is about to boil.
Colleagues Peay spoke to assured him that this was a political coup that would be settled quickly. Three years later, the tariff was set to increase to 50% on December 1 if no resolution was found.
For Peay, however, it wasn’t knowledge that held him on edge.
âUncertainty in business is very problematic,â he said. âWithout certainty, it’s very difficult to make plans.
KDA executive director Eric Gregory remembers being caught off guard when the rates were announced.
âI got a wake-up call from a reporter in the UK,â Gregory said. âIt was 5 or 6 in the morning, and he called and said, ‘I just wanted to get your opinion on the rates.’ [I said] “What rates? “
Gregory jokes that he was fleetingly proud that the Kentucky whiskey industry was big enough to be at the center of an international trade war, but his feelings quickly turned to dismay.
âWe’ve all crossed our fingers and wished it was a short-term problem, but three years later we’ve lost hundreds of millions of dollars in exports,â he said.
Gregory said the announcement of the tariff lifting was long and a relief.
The bourbon industry is a waiting game in itself, as products age for years, he said. Distillers need to assess the market and plan for future demand. Most distillers have factored an expanding global market into their production plans.
Between 2010 and 2017, Kentucky whiskey exports increased 98%, he said. With the tariffs in place, exports fell 40 percent to the EU and 50 percent to the UK.
When Gregory worked on a press release from his office describing the situation, he said he was struggling to find new ways of saying “stung”, “plumb” and “dive”.
He said the KDA has done everything a trade association can do at such times, including immediately alerting its delegation to Congress and lobbying and defending the industry as much as it can, like the have made its counterparts across the Atlantic.
Gregory said member distillers have adjusted by absorbing as much of the financial impact as possible. The alternative is to pass the increased costs on to consumers, which risks losing once-loyal customers to scotch and other spirits. Another strategy is to reduce or eliminate exports.
Peay decided to keep its prices unchanged and adjusted its 12-month sales volume forecast and material purchases accordingly.
One bright spot, Peay said, is that domestic sales have grown 45% in 2020 and 45% at the end of 2021, he said.
Yet in the past three years overseas opportunities have been missed. âBecause we didn’t have enough inventory, we couldn’t forecast correctly and neither could our partners,â he said.
Gregory said artisanal stills had taken a disproportionate impact. The craft segment was largely established in the early 2010s, and its products were only just maturing when tariffs hit.
âThis is what has really hurt the community of small craft distilleries,â he said.
Gregory said a lingering issue – UK tariffs – needs to be addressed, but insiders remain optimistic.
Peay said he was grateful that the EU tariff situation was resolved and that he appreciated trade groups on both sides of the pond, as well as Governor Andy Beshear and the Commonwealth Congress delegation and other high-level officials for ending the trade war. . âThanks,â he said. The distillers are “super grateful and eager to do what we do best: make and talk about American whiskey.”