Who Pays for Tariffs? The Impact on European Wine in the US

The question of who ultimately bears the cost of tariffs – producers, consumers, or intermediaries – is a central debate in international economics. Recent research focusing on the 2019-2021 U.S. Tariffs on European wines provides valuable insights into how these costs propagate through the supply chain. A study by Aaron B. Flaaen, Ali Hortaçsu, Felix Tintelnot, Nicolás Urdaneta, and Daniel Xu, published as an NBER Working Paper #34392, meticulously traces the impact of these tariffs from foreign producers to U.S. Consumers.

The Airbus-Boeing Dispute and Wine Tariffs

In October 2019, the U.S. Imposed a 25 percent tariff on still wines with 14 percent alcohol content or less, packaged in containers of two liters or less, originating from France, Germany, Spain, and the United Kingdom. This action stemmed from the ongoing Airbus-Boeing subsidy dispute and remained in effect until March 2021. The research team leveraged unique transaction-level data to analyze the effects of these tariffs.

Data and Methodology

The study utilized confidential data from a large U.S. Wine importer, covering the period from October 2018 through March 2022. This data included detailed purchase invoices from foreign suppliers and sales invoices to U.S. Distributors. Researchers supplemented this with distributor-to-retailer price data from Connecticut and retail price data from the e-commerce platform Wine-Searcher. They compared price changes for tariffed wines against a control group consisting of sparkling wines and still wines exceeding 14 percent ABV from non-tariffed producers.

How the Costs Were Distributed

The analysis revealed a complex distribution of tariff costs. Foreign producers initially absorbed approximately 20 percent of the tariff by lowering their prices by 5.2 percent relative to the control group. However, the remaining 80 percent was passed on to U.S. Importers.

Importers, who typically apply an 80 percent markup, increased their prices to distributors by 5.4 percent. However, this increase didn’t fully offset the increased costs, leading to a $0.44 decline in the importer’s dollar margins per bottle. Distributors and retailers further added their markups (approximately 75 percent and 50 percent, respectively), ultimately resulting in a 6.9 percent increase in retail prices for consumers.

Consumer Impact and Tariff Avoidance

Surprisingly, the final increase in retail price – approximately $1.59 on a $23 bottle – exceeded the tariff revenue collected by the government. This indicates that the overall economic cost of the tariffs was greater than the revenue generated.

The study similarly documented instances of “tariff engineering,” where wine producers strategically altered their products to avoid the tariffs. This included a noticeable shift towards producing wines with alcohol content exceeding 14 percent ABV, which were exempt from the tariffs. In France, label approvals for wines exceeding 14 percent ABV increased by nearly 10 percentage points following the tariff implementation. This compositional shift introduced biases into aggregate trade statistics, potentially understating the true pass-through rates.

Timing of Price Adjustments

Price adjustments didn’t happen immediately. Import prices changed within three months of the tariff implementation, but it took approximately 12 months for retail prices to fully reflect the impact. Price increases persisted even after the tariffs expired, highlighting the lasting effects on the market.

Key Takeaways

• Foreign producers absorbed a portion of the tariff costs, but the majority was passed on to consumers.
• The total cost to consumers exceeded the tariff revenue collected by the government.
• Wine producers engaged in “tariff engineering” to avoid the tariffs by altering product characteristics.
• Price adjustments occurred gradually along the supply chain, with a significant lag at the retail level.

This research provides a detailed look at the complex dynamics of tariff pass-through and highlights the unintended consequences of trade policies. The findings underscore that tariffs don’t simply represent a cost to the importing country, but can have far-reaching effects throughout the entire supply chain.