Between Trumpian taxes and hope with Biden, what can be expected for French wines’ export towards the US?
Donald Trump’s mandate has been full of surprises. After establishing a first wave of punitive taxes on European wines, he hardened these just 3 weeks before finishing his mandate. A last blow which is far from pleasing French winegrowers for whom this 25% tax is difficult to bear. Producers, importers, distributers alike – the whole sector has been deeply affected and destabilized.
A few days after Biden’s investiture, is it right to hope for a gesture in the direction of French wine?
Where does this tax come from?
When French president Emmanuel Macron took the decision in July 2019 to introduce a tax on the American tech giants, known as the GAFAM (acronym standing for Google, Amazon, Facebook and Apple, Microsoft) little did he know that this decision would bear serious consequences upon the French wine industry. Indeed, the American president, Donald Trump, responded directly by threatening to tax French wines exported to the United States. "I’ve always preferred American wines to French wines even though I don't drink wine. I like the way they look. American wines are great," he replied to justify his threat.
This discord’s origin goes far back in time. Before the World Trade Organization, it was the supposedly abusive subsidies granted to Airbus that Donald Trump invoked to justify a fiscal retaliation. Unfair competition vis-à-vis the American giant Boeing, which allowed him to obtain a credit of 7.5 billion dollars in tax per year on products imported from Europe. He then chose to apply this upon French, Spanish and German wines.
On October 18, 2019, the American President carried out his threat and the tax came into effect. French, German and Spanish still (non-sparkling) wines with an alcohol content of less than 14° alcohol were taxed with 25% additional customs duty on entry into the US.
On January 12, the tax was extended to all wines regardless of alcohol content, including wine-based spirits such as cognac or armagnac.
In the wine sector, France is the world's leading exporter in terms of turnover. In terms of global export volumes, it is in third place with 14 million hectoliters exported, behind Spain (21 million hectoliters) and Italy (20 million hectoliters). Donald Trump imagined a taxation on value and not on volume, which penalizes France first and foremost.
While the first tax in 2019 only concerned still wines with an alcohol content of less than 14 degrees, the new announcement from the beginning of 2021 extended the tax to all still wines in bulk as well as in bottles, and to wine-based spirits, such as cognac.
This first tax has already had significant economic consequences on the French wine market, the United States being the leading export market for French wines and spirits. According to the Federation of Exporters of Wines and Spirits, with the first tax coming into force at the start of the year, combined with Covid-19’s effects, wine exports have been divided by two and thus provoked a 600 million euros loss. With this in mind, what can be predicted for the French wine market with this new tax announcement starting on January 12th 2021? Still, according to the FEVS (Federation of Exporters of Wines and Spirits), “the second wave is even more powerful than the first".
In the short term, before that the tax announced in summer 2020 came into action, many sales were made to fill up stocks before the price change. The 2019 exports balance was positive. However, over this year’s last trimester, the tax led to a 17.5% drop in French exports according to the FEVS (Federation of Exporters of Wines and Spirits).
According to the Ministry of Economy and Finance, French wine exports to the United States fell by 44% in November 2019 compared to October 2019.
We have witnessed a rise in prices – to cope with the tax and cushion its effects. In the United States, a bottle of wine’s distribution circuit involves the participation of three intermediaries, each of whom must take his share and take into account the new tax, which makes the price vary greatly.
As a result, many winegrowers have had to try to adapt as of the 2019 harvest, in order to produce stronger alcoholic wines and exceed 14°, at the risk of changing wines’ traditional balance and unfortunately their aromas and “typicities”. A destabilizing tendency for the winemakers which ended at the beginning of 2021 with the extension of the tax to all wines whatever their alcoholic degrees.
Public aid and Democrat hope
The French government’s “particular effort”
"Sacrificed" for a dispute over aeronautics, the French government has decided to make a "special effort" for the wine and spirits industries, announced Bruno Le Maire, Minister of the Economy, on January 14, 2021. The latter will then be able to benefit from solidarity funds against coronavirus. This announcement does not reassure the wine growers, with a loss of 600 million euros in the first year, they estimate that the loss of turnover could exceed one billion euros with this second wave of taxes.
Discord over the financing of the aviation industry, debate on the taxation in France of the American GAFAM, Bruno Le Maire also declared that he plans to give himself "until the summer" to find a compromise with the new American government.
Joe Biden - the savior of a bruised industry?
Nothing is sure! Certainly more diplomatic than his predecessor, Joe Biden has not yet pronounced himself on the conservation of these taxes. While winegrowers are placing high hopes in this change in the American government, Bruno Le Maire is rather pessimistic and reminds us: "We must not be under any illusions, for many years the United States has no longer been a friendly partner of Europeans.” Joe Biden says he wants to focus on the internal market and promises his voters "we will buy American".
Green signals to be taken with caution
The French vineyard today fears that it will continue to pay the price for the diplomatic quarrels between the European Union and the United States.
Joe Biden announced that he wants "a return to normal" and to revive the United States in a more multilateral momentum than in the last 4 years, which gives hope for a reduction or even an abolition of taxes on French wine products. However, it will surely take a little while before they become part of the priorities of the new president.