Since the beginning, President Donald Trump has preached and promised to “make America great again” by reviving our dead and dying industries that thrived during a bygone Golden era.
One of those industries being America’s steel production…
However, some of Trump’s “America First” policies are actually indirectly killing other industries that are currently thriving.
And one of them being something you would have never guessed: America’s whiskey industry, bourbon to be exact.
Yeah, I would have never thought that reviving steel would ultimately mean killing bourbon, either.
So, let’s break it down…
Bourbon Background
If you didn’t already know, bourbon whiskey can only be produced in the U.S. — similar to how tequila is made only in Mexico or champagne in France.
About 95% of the world’s bourbon comes directly from Kentucky, including such brands as Jim Beam, Evan Williams, Wild Turkey, Maker’s Mark, Woodford Reserve, and Four Roses.
As of August 2016, there were 52 distilleries in 27 Kentucky counties, with 6.7 million barrels of bourbon maturing as the highest inventory since 1974. So, it’s safe to say that the industry is still in the midst of a $1.2 billion building boom.
The industry’s influence draws many from outside the Bourbon State, too. President of the Kentucky Senate Robert Stivers said the bourbon industry is “iconic” in tourism.
The Kentucky Bourbon Trail was created in 1999 to teach visitors about the art and science of bourbon creation.
More than 1 million visitors stopped at distilleries along the Kentucky Bourbon Trail and Kentucky Bourbon Trail Craft Tour last year.
If the bourbon industry continues its projected growth, more than 20,000 people will be employed within the industry come 2020.
That is if retaliatory tariffs aren’t set in place…
The U.S. faces retaliatory tariffs on agriculture products, including whiskey and other spirit exports, should the president follow through on his threats to put tariffs on foreign aluminum and steel imports.
Though bourbon lovers in foreign countries would pay the price, it could potentially cost distillers and other agriculture producers millions.
The “Why” Behind an Imported Steel Tariff
The president is still expected to impose steel and import tariffs on national security grounds despite the delay, industry and trade experts say.
U.S. steel stocks have fallen nearly 10% since Trump delayed the release of the Section 232 review of the industry last month — partly reinforcing fears that his promises to revive the industry might not happen.
But industry analysts still think there’s reason to believe that the import relief will still happen.
Trump ignited the discussion as to whether steel imports jeopardize national security but said in July that a final decision has been postponed until more top-priority issues are dealt with accordingly.
Despite the circulating doubts due to the 232 review being scheduled to be finished in late June, an administration official told Reuters:
The steel probe remains active and is still under final stages of review within the administration.
Trump’s planned steel restrictions are mostly aimed at persuading China, producer of more than half the world’s steel, to cut excess production capacity. But direct imports from China to the U.S. have already fallen dramatically due to previous antidumping and anti-subsidy duties.
Diplomats also say that 232 duties risk undermining the global trading system if national security becomes an accepted excuse for erecting trade barriers.
Instead, critics say that steel restrictions would also affect U.S. allies, such as South Korea, Japan, Germany, and Turkey, more than China, per say — prompting threats of retaliation against unrelated U.S. products… like bourbon.
The Steel Tariff’s Effect on the Bourbon Industry
If Trump decides to follow through on his threat to impose tariffs on steel imports, expect to see an immediate response from the European Union (EU) — including retaliatory tariffs on, of all things, bourbon.
This may seem an oddly disproportionate choice…
Everyone needs steel. But bourbon, on the other hand, is just a hipster fad and a good-ol’-boy mainstay, right?
Still, why bourbon? Trade officials aren’t stupid; when they retaliate, they hit where it hurts — which is not always obvious.
The bourbon industry was specifically called out with good reason: 20% of the $654 million spirit exports to the EU last year came from bourbon whiskey sales alone.
At the G20 summit earlier this month, President of the European Commission Jean-Claude Juncker hopes to avoid such retaliation but said: “We are in an elevated battle mood.”
The bourbon industry is largely based in Kentucky, but WEKU reports that such policies, such as a steel import tariff, could be felt on a much wider scale.
Kentucky Distillers Association President Eric Gregory illuminated this issue further:
Anything, not just trade, but anything that affects Kentucky bourbon affects a lot of different spin-off industries.
Nearly all bourbon produced in the U.S. — 95% — comes directly from Kentucky in an industry that employs over 17,000 people.
If in fact, should a punitive tariff on bourbon and other American whiskeys come to pass, it would be both a symbolic and substantive body blow — a strike at a uniquely American product that is enormously popular overseas.
Trump’s intention to pursue better trade deals for the American people is indeed praiseworthy and done right, it could add jobs to some of America’s long-suffering industries.
But very few industries are truly domestic — with no interests abroad — and when free trade suffers, they suffer, too.
Thanks to the $1.5 billion in all spirits that America now exports, over the next six years, Kentucky distilleries will invest more than $1 billion in expansions and new facilities.
In rural Lynchburg, TN, the Jack Daniels Distillery is undergoing a $140 million expansion — likewise made possible in part by its explosive growth overseas, where it sells 65% of its output.
Needless to say, a retaliatory tariff on whiskey would put those plans — and the many Lynchburg jobs that rely on them — at risk.
Take Vietnam for another example, a Trans-Pacific Partnership (TPP) member that increased American spirit imports by 174% from 2015 to 2016 to $46 million — making it the category’s fastest-growing importer.
Under the trade deal, the country is expected to drastically increase its American whiskey consumption.
Without American membership in the TPP — a 12-nation pact that created zero tariffs for American products — Vietnam’s 45% duty on bourbon and other distilled spirits will no longer be phased out, putting those expectations on ice.
And the TPP isn’t the president’s only target: He wishes to renegotiate the North American Free Trade Agreement and possibly impose a 20% tariff on Mexican goods.
Again, all of this largely affects the American spirit industry in a number of surprising ways.
The Bottom Line
It’s not just about tariffs.
When you’re selling “America” aboard, you need deals in place to make sure that no one else is copying the branding.
But absent trade agreements mean that other countries are free to sell their own versions of American products.
Like champagne and cognac, bourbon’s name protection relies largely on trade deals that set standards and definitions. Without them, foreign distillers are surely tempted to slap “bourbon” on anything they want.
Trade deals also create structures to combat counterfeiting, another big problem for exporters.
The liquor business is a relatively small part of the American economy.
But whiskey has an outsize role as a flagship export — a symbol of “America” overseas.
But threatening tariffs and pulling out of trade deals can quickly boomerang, hurting every sector of the economy that the president is trying to protect — even one as quintessentially American as bourbon.
Should the tariff dominoes fall, it will serve as a case study in the shortsightedness of a supposedly “America First” policy that actually, in the end, hurts America the most.
That’s all for now.
Until next time,
John Peterson
Pro Trader Today