THE FOLLOWING STATEMENT WAS SUBMITTED BY THE NATIONAL ASSOCIATION OF WINE RETAILERS TO THE OFFICE OF THE U.S. TRADE REPRESENTATIVES ON JANUARY 6TH CONCERNING THE ISSUE OF TARIFFS ON EUROPEAN WINES
Re: Section 301 Investigation on France’s Digital Services Tax Docket No. USTR-
2019-0009: Written Comments the National Association of Wine Retailers
Dear Mr. Barloon:
On behalf of the National Association of Wine Retailers (“NAWR”), we hereby provide
NAWR’s written comments regarding the Section 301 investigation being conducted by the U.S.Trade Representative (“USTR”) of France’s Digital Services Tax (“DST”). As discussed in greater detail below, as part of any action taken with respect to the DST, the USTR should not impose any tariffs on imports of wine from France under HTS 2204.10.00 (sparkling wine made from grapes) for the following reasons:
• Tariffs on wine from France will have a disproportionate impact on U.S. wine retailers compared to other U.S. businesses because of: (i) the tariffs already imposed on wine from the European Union (“EU”); (ii) the three-tiered system through which wine must be sold in the United States; (iii) the small margins earned by retailers on sales of wine; and (iv) the lack of available substitutes for wine imported from France.
• The impact of imposing additional tariffs on wine from France will be
devastating. The tariffs already in place or proposed as a result of the WTO
Airbus dispute, together with the tariffs proposed as part of the France DST
dispute, are estimated to result in the loss of $10.6 billion in revenue for wine
retailers and, as a result, the loss of 78,000 American jobs in the wine industry.
• The tariffs on wine from France will not achieve their intended purpose because
they will more negatively impact the U.S. wine industry than they will impact the
French wine producers – who will most likely simply shift their exports from the
U.S. market to the growing market in China in the face of additional U.S. tariffs.
• A more effective approach to respond to France’s DST is for USTR to exercise its
authority to impose fees on large French service providers rather than imports of
wine from France.
I. Tariffs on Wine from France Will Cause a Disproportionate Impact on U.S. Wine
Retailers Compared to Tariffs on Other Imports from France
There are approximately 47,000 wine retailers across the United States with almost 200,000 employees in their businesses. These wine retailers are generally comprised of smaller family-owned businesses – with no single wine retailer holding a major share of the overall U.S. retail market. As part of its action in response to France’s DST, the USTR has proposed imposing tariffs of up to 100% on imports of wine from France under HTS 2204.10.00 (sparkling wine made from grapes). USTR should not impose such tariffs because—compared to other U.S. businesses that may be affected by the imposition of tariffs—imposing tariffs on
wine from France will have a vastly disproportionate impact on the tens of thousands of small family-owned wine retailers located across the country. This is true for at least four reasons.
First, imposing tariffs on wine from France as a response to the DST will have a disproportionate impact because wine from France is already subject to steep tariffs. In particular, as part of the World Trade Organization (“WTO”) dispute involving subsidies to Airbus, the United States has since October 18, 2019 already imposed 25% tariffs on wine from several EU countries. As part of the same Airbus dispute, USTR is considering expanding these tariffs to encompass virtually all wine from Europe and increasing the tariffs from 25% to 100%. These tariffs from the WTO Airbus dispute are already having a negative impact on
wine retailers across the country. Imposing additional tariffs on sparkling wine from France because of France’s DST will worsen the situation for U.S. wine retailers.
Second, the sale of wine is highly regulated through a three-tiered system imposed by the vast majority of U.S. states that excludes out-of-state wholesalers and retailers from participating in a state’s alcoholic beverage market. The three-tiered system encompasses producers or importers, wholesalers, and retailers, with mark-ups and taxes occurring at each of the three tiers. These multiple levels of mark-ups and taxes mean that a small price increase at the first tier results in a much larger price increase at the retail level. Thus, for example, the Beverage Trade Network advises that an importer that wants its wine to be priced at $12 per bottle at the retail level should start with a price at the first tier of $2.50 per bottle. Most importantly for purpose of these comments, because of the way the three-tiered system works, a 100% tariff on imports of wine from France can result in a staggering 150% increase in retail wine prices. For bottles of premium champagnes, this would be a huge increase in the price of wine. Even the cost of less expensive French sparkling wines from outside the Champagne region of France would be significantly increased for consumers to the point that they would not even consider purchasing the wine
Third, compared to many other industries, wine margins for wine retailers are extremely small. One industry report calculates that the profit for the wine industry, measured as earnings before interest and taxes, will be as low as 2.7% of revenue in 2019. This means that wine retailers are not able to absorb the duties imposed on wine imports. The additional costs due to these tariffs must be completely passed through to consumers, who will then buy less wine. As a result, wine retailers will make fewer overall sales of wine.
Fourth, wine retailers cannot simply sell more wine from California or wine imported from other countries instead of sparkling wine imported from France. That is because, for many wine consumers, there is no substitute for sparkling wines from France. They are different from domestic wines and wines from other countries as a matter of consumer taste. This is especially true for champagne, which for centuries has been consumed to mark important celebrations such as weddings. When consumers want champagne – they want real champagne – and will not settle for sparkling white wine from Australia. Even for consumers who may consider
substituting wine from France with other sources, these others sources cannot replace all of the wine that the United States currently imports from France. It takes many years to plant new vineyards and allow the vineyards to produce mature fruit that can be harvested to make wine. It will thus take at least a decade before the U.S. domestic wine industry or other sources would have the capacity to replace wine imported from France.
II. The Impact of Imposing Tariffs on Wine from France Will Be Devastating
For all of the reasons discussed above, the proposed tariffs on imports of wine from France will result in devastating revenue losses to U.S. wine retailers. Indeed, an economic analysis conducted by the NAWR estimates that the total loss of revenue to wine retailers due to all of USTR’s proposed 100% tariffs on wine will reach $10.6 billion. Many members of the NAWR anticipate that they will have to lay off up to 25% of their workforce due to declines in sales revenue that are anticipated from tariffs on sparkling wine from France and the tariffs already in place, leading to the loss of thousands of jobs. The Distilled Spirits Council of America has estimated that all of the proposed wine tariffs of 100% could result in job losses in the industry as high as 78,000 employees. The bottom line is that – with U.S. wine retailers already reeling from the 25% tariffs imposed by USTR on most wines from the EU – imposing new 100% tariffs on sparkling wine from France would be a devastating blow to U.S. wine retailers.
III. Imposing Tariffs on Wine from France Will Hurt the U.S. Wine Industry More
Than French Wine Producers
If the point of the retaliatory tariffs is to prompt French wine producers to urge their policymakers to withdraw the DST, it must be emphasized that tariffs on French wine will hurt U.S. wine retailers much more than they hurt French wine producers. With the U.S. market closed to them, French producers will further increase their exports of wine to other countries, especially China. Industry analysts estimate that China has already increased its consumption of European wine by 88% over the last five years. The U.S. wine industry has long been the leading trader of wine in the world – holding significant caches of wine from important regions across France that are sold at retail and auction around the world. The proposed tariffs on wine from France place this status at risk. In fact, the tariffs could even result in China displacing the United States as the leading trader of wine. This is certainly not an outcome that USTR should allow to happen.
IV. USTR Should Impose Fees and Restrictions on French Service Providers Instead of Tariffs on Wine from France
In recent years, USTR has shown increased willingness and creativity in relying on statutory authority that had been essentially abandoned by prior administrations. Indeed, USTR’s willingness to use Section 301 to investigate France’s DST is a leading example of this initiative. USTR should continue to be creative in crafting action to address France’s DST. In particular, as USTR has recognized, in addition to imposing tariffs on imported goods, Section 301(c)(1 (B) of the Trade Act of 1974 also authorizes USTR to impose fees or restrictions on the services or the goods of the foreign country subject to a Section 301 investigation. Instead of imposing tariffs on wine imports – which will result in many small family-owned wine retailers laying off employees or even closing up their shops for good – NAWR proposes that USTR impose fees and restrictions on French service providers operating here in the United States.
NAWR understands the concerns underlying USTR’s investigation of France’s Digital Services Tax. However, retaliation against France should target French digital services companies or other French services industries instead of imports of wine that will have a disproportionate impact on U.S. wine retailers. Imposing additional tariffs on wine from France will make small businesses across the United States collateral damage to a war involving large multinational companies.
One obvious target involves French providers of financial services with revenue generated in the United States. In this regard, it should be noted that France specifically excluded financial service providers from application of the DST, including banking and investment advisory services. Yet some of the largest French service providers are financial service companies. The French-based AXA Group – which provides investment advisory services and asset management services that are exempted from the DST – reports that in 2018 it earned €102.8 billion, with its revenues earned in the United States contributing 16% or roughly €16.4 billion of its total revenues. Imposing a 3% fee on all revenue earned by AXA in the United States would generate €492 million in revenue.
Another potential target for retaliation is BNP Paribas – a French bank with operations around the world. According to recent paid advertisements by BNP Paribas, the bank has recently invested in a major upgrade of its information technology so that virtually of the banking operations have been digitized and placed in the cloud. In other words, BNP Paribas is essentially a provider of digital banking services. BNP Paribas has significant operations in the United States – including operations through its U.S. subsidiary Bank of the West. USTR could impose a 3% fee on all revenue earned by BNP Paribas in the United States.
It makes far more sense to target large French service companies as retaliation for France’s DST rather than imports of wine from France – especially when imposing tariffs on French wine will have a disproportionate impact on U.S. wine retailers and more negatively impact the U.S. wine industry than it will the French wine producers. Furthermore, unlike French wine producers who can easily shift their exports to other export markets, these large French service providers will not as easily be able to find new customers outside of the United States. Thus, they will be more incentivized to bring assert strong pressure on French lawmakers to revoke the DST. If the ultimate objective of the 301 investigation is to convince French lawmakers to revoke the DST, charging fees on large French service providers is a much more effective manner of achieving this objective compared to imposing tariffs on French wine.
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