Forget China, There’s Still a Big Trade Battle in Europe

Detente on trade relations between the U.S. and China continues to progress, with President Trump removing China from the list of currency manipulators.

Jan. 16, 2020

This article was originally written by Rich Duprey of The Motley Fool.

While China is obviously a strategic trading partner, and settling points of contention is crucial, the U.S. is apparently still fully engaged in a hot trade war with Europe.

After the U.S. imposed a 25% tariff on French, German, British, and Spanish wines last October, France is considering imposing a tax on U.S. tech giants like Facebook (NASDAQ:FB) and Alphabet‘s (NASDAQ: GOOGLE)(NASDAQ:GOOG) Google, Trump’s trade representative has proposed hiking the duties on all European wines and whiskeys to 100% and then extending it to other imported goods like olives, cheese, handbags, and cookware. 

The massive increase would cause prices to soar and would hit not only importers, but restaurants and retailers also. And, of course, it will be the consumer who actually pays the cost.

Falling dominoes

No one ever really wins in a trade war, consumers least of all, and the latest skirmish shows once again how these kinds of spats always ensnare industries and businesses completely unrelated to the original squabble.

Tariffs on European aluminum and steel, for example, resulted in retaliatory tariffs against Harley-Davidson motorcycles and Brown-Forman‘s Jack Daniels whiskey. U.S. producers of aluminum and steel used the opportunity to raise their own prices rather than continue supplying the goods at a discount.

The seeds for the current escalating tensions were planted after the World Trade Organization ruled that Airbus improperly received subsidies and therefore authorized the U.S. to impose $7.5 billion worth of tariffs on imported European goods. The U.S. imposed duties of 10% on civilian aircraft and 25% on wine and other agricultural products.

While Trump has used tariffs to bring China, Mexico, and Canada to the negotiating table and hammer out new trade agreements, they have created tumult and higher prices in the process. The U.S. and Europe have not seen such progress, and the tensions are growing.

The grapes of wrath

Small and independent wine importers would undoubtedly be hit hardest, though even some of the biggest would feel the impact. Although Diageo (NYSE:DEO) produces almost all of its wine outside of Europe, it is the world’s largest producer of Scotch whisky, which accounts for 25% of total revenue, and its Johnnie Walker brand is the top seller all around the globe. Similarly, Pernod Ricard‘s (OTC:PDRDY) Jameson is the leading brand of Irish whiskey, and would also be subject to the new tariffs.

On the other hand, U.S. wine and spirits producer Constellation Brands (NYSE:STZ) would likely benefit from the protection it received from the tariffs. Its portfolio of wines, which includes brands such as Meiomi, Robert Mondavi, and Ruffino, accounts for 27% of total revenue, but it has made a pointed effort to go after the premium and super premium market. 

It recently agreed to sell off a number of low-end brands to Gallo, and even at the elevated price point its remaining wines would sell at, the tariff hike could price the competition out of the market.

The high cost of eating

Upscale restaurants similarly come under pressure. Ruth’s Hospitality Group (NASDAQ:RUTH), the owner of the high-end eatery Ruth’s Chris Steak House, obviously derives most of its revenue from food and beverage sales, and though it doesn’t break out wine sales, it does highlight its world-class wine list as a selling point and notes that some bottles come with a tab of $1,000 or more.

No doubt people paying a grand for a bottle of wine won’t be bothered much if they have to pay up a little more for it because of tariffs, but the trade war could also hurt mid-tier chains like Darden Restaurants (NYSE:DRI) since its Olive Garden counts on a broad selection of Italian wines. 

Its own upscale chain, Capital Grille, boasts a list of over 350 different wines, and it notes that alcoholic beverages, primarily wine, represent over 29% of the average $83-per-person check at the chain.

The impact would also spread out into other segments of the economy. Even retailers like Walmart (NYSE:WMT) would feel the effects, though it would admittedly be a far smaller pain point. Recently the retail giant began adding premium alcoholic beverages to its shelves, and though there would be a large number of domestic beverages in the mix, including craft beer, spirits, and canned wine, adding the Champagne Veuve Clicquot was a point of distinction for Walmart.

The last battlefront

Although there might be a few winners from the trade war, many others will be harmed, some irreparably so. And while most people are focused on the U.S. settling its differences with China, the battle with Europe continues to rage, and we may see further fallout.

MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. The Motley Fool recommends Constellation Brands and Diageo. The Motley Fool has a disclosure policy.