Are We Headed for a Bourbon Trade War? by Bryson Lew

Econ 2

Current Event Journal 2

Noah Laflin

4/9/2018

A recent article in the Daily Beast titled “Are We Headed for a Bourbon Trade War?” by Bryson Lew, explores the possible effects President Trump’s proposed tariffs on steel (25%) and aluminum (10%) imports could have on American craft beer brewers and bourbon producers.  The article states that the proposed tariffs could set off a chain reaction of retaliatory tariffs, otherwise known as a trade war, with other countries, including the European Union.  

Jean-Claude Juncker, the head of the European Commission, warns in the article that the EU might have to respond to steel and aluminum tariffs with tariffs of their own in regards to various American goods, including Kentucky bourbon.  The duty-free trade the US and the EU have enjoyed for over the past 20 years might soon be threatened. The Kentucky Distillers Association is quoted as saying “Any efforts to impose retaliatory tariffs on U.S. spirits exports to the EU will jeopardize this long-standing partnership, harm consumers through higher prices and more limited product availability, and significantly threaten industry jobs and billions in capital investment."  Bourbon accounted for close to 25% of US liquor exported to the EU last year.  According to the article, bourbon is not the only alcoholic beverage negatively affected by the tariffs.  The craft beer industry uses both aluminum and steel in the production of beer.  Aluminum is used to make cans, and steel is used in kegs, tanks and other beer making equipment.  Changes in the prices of these metals affect the ultimate cost going into producing beer. And the ultimate price consumers pay.   According to the article, the price of aluminum has risen from 9 cents to 19 cents a pound since the announcement of the tariffs.  This increase of over 100% in the price of aluminum has raised concerns within the industry about the possibility of price-gauging.  While the tariffs might raise the cost of craft beer for consumers, they could lower the cost for bourbon drinkers, as there will be less bourbon travelling to European markets.  The article also points out the irony of some of the unintended consequences of the tariffs. American manufacturers of a quintessentially American product, bourbon, will be hurt economically from a policy that the Trump administration contends it is enacting to protect American industries.  

This article explores the idea of tariffs.  A tariff is a tax or duty to be paid on a particular import or export.  In a world economy with free trade, the domestic price of a good is equal to the world price.  Tariffs raise the price of imported goods above the world price by the amount of the tariff. Because the tariff raises the domestic price, domestic sellers are better off, and domestic buyers are worse off.  This change in price affects the behavior of domestic buyers and sellers.  A tariff improves the welfare of domestic producers and raises revenue for the government, but these gains are more than offset by the losses suffered by consumers. The best policy, in terms of economic efficiency, would be to allow trade without a tariff.