Written by Kate Dingwall, Featuring Asher Rubinstein, Partner at Gallet Dreyer & Berkey, LLP.

The tariff chaos of 2018 has come back with a vengeance.

Soon after taking office in January, President Trump squared up against Mexico and Canada, instating a 25% tariff on our North American Free Trade Agreement (NAFTA) neighbors.

Mexican President Claudia Sheinbaum offered a measured response. Canadians, however, did not take the attack lightly. Government-run liquor stores immediately started pulling American-made products off the shelves, including bourbon and wine.

This month, Europe reentered Trump’s crosshairs, when the administration announced a 25% tariff on steel and aluminum products. Like Canada, E.U. officials fought back, declaring a 50% excise on American whiskey and other products. Reacting to the reaction, Trump’s team proposed a 200% levy on European wine and other spirits.

These tariffs are supposed to buoy the domestic economy, U.S. manufacturing and protect jobs, the administration claims. But will these alcohol-related taxes actually achieve the desired results?

To answer that question, we decided to look back at the history of liquor tariffs and taxes in the United States to see how they turned out.

The Deadly Ghost of Tariffs Past

The recent tariff war came about from round one of the Trump administration. In 2018, selective tariffs on European wine and spirits ignited retaliatory measures by the E.U.

For American whiskey producers, especially, the effects were devastating. Exports of American whiskey to the European Union tumbled by 27% percent from 2018 to 2019.

While it was happening, Distilled Spirits Council of the United States (DISCUS) President and CEO Chris Swonger said,“If this trade dispute is not resolved soon, we will more than likely be reporting a similar drag on the U.S. spirits sector, jeopardizing American jobs and our record of solid growth in the U.S. market.”

Looking further back, the consequences of liquor-related levies were even more dire. In fact, 18th-century excise taxes on distilled spirits resulted in violent riots and multiple deaths.

“There are lots of examples of alcohol tariffs in American history,” says Abigail Hall Blanco, an associate professor of economics at the University of Tampa. “Even the U.S. Tariff Act of 1789 included a tax on imported alcohol, among other goods.”

In 1791, to help pay off the national debt accumulated during the Revolutionary War, a levy on all distilled spirits was passed including not just imported booze but also American-made whiskey.

Cash-poor farmers saw this as a tax on their main crop; their frustration ultimately fueled the infamous Whiskey Rebellion in 1794. After nearly a decade of fighting, the excise tax was repealed in 1802.

Decades later, in 1828, to protect manufacturing in the North, Congress passed a tariff that increased the rates on imports to the United States by as much as 50%—including an additional 15 cents per gallon on foreign-made distilled spirits like rum.

Southerners were outraged. The so-called “Tariff of Abominations” contributed to the Nullification Crisis and ultimately the Civil War.

During the Civil War new taxes on American-made booze, in addition to taxes on imported liquor, were reinstated and became a crucial source of revenue for the Union. As the country rebuilt from war, up to 40% of the government’s income came from alcohol taxes.

Taxes, Tariffs and Prohibition

This changed in 1913 with the 16th Amendment, which granted Congress the power to tax income regardless of source. This major shift in government funding, from excise taxes, like liquor, to income, paved the way for prohibition in 1920.

However, as the Great Depression took hold and income tax revenues dropped off a cliff, anti-Prohibition activists drove home the point that legal alcohol sales would provide much-needed jobs and tax dollars for the government.

In 1933, the 21st Amendment ended Prohibition. Soon after “the American government implemented tariffs on foreign alcohol again,” says Blanco. “Tariffs were adjusted in the 1930s and 1940s during the Great Depression and World War II, then remained relatively stable in the 1950s before trade liberalization led to the decrease in tariff rates.”

From Free-Flowing Booze to Gridlock

The first elimination of liquor tariffs came with the 1994 North American Free Trade Agreement between the United States, Canada and Mexico. With it, bourbon, Canadian whisky, tequila, wine and any other alcoholic beverages could crisscross the borders tax free.

A few years later, in 1997, a similar deal was put in place between the U.S. and E.U. As a result American whiskey exports to the European Community quintupled between January 1997 and June 2018 to $757 million annually, according to a DISCUS impact report.

A steady stream of bourbon and Bordeaux flowed freely until 2018, when the Trump administration implemented 25% tariffs on European alcohols as a result of an aerospace manufacturing dispute.

“The word tariff didn’t even enter our lexicon until 2019,” says Harmon Skurnik, president of Skurnik Wine & Spirits. He represents over 800 global wineries and distilleries and employs over 270 Americans. “We were collateral damage.”

Those tariffs were limited, but still hit American businesses hard.

“In 2018, American whiskey exports to the E.U.—the largest American whiskey export market—plunged 20%,” says Lisa Hawkins, the Distilled Spirits Council’s chief of communications and public affairs. “These retaliatory tariffs forced many small U.S. distillers out of the E.U. market, which curtailed their growth and upended many years of hard work, investment and relationship building.”

U.S. importers also felt the tariff crunch. Charleston-based importer and distributor Grassroots Wine was forced to restructure the business. More capital was tied up in existing stock. So, the company was left with no money to invest in new products, hiring, business growth or shareholder dividends.

“The price of carrying European wine increased by 25%,” says Grassroots Wine President and Owner Harry Root. “The 25% tariffs in 2019 meant the cost of us to hold adequate inventory to support our sales increased 25%. To afford this, we eliminated adding new products—including American wines.”

An Already Struggling Industry

While tariff threats are never welcome, the beverage industry is already in a precarious position.

“I believe that if tariffs are imposed, it could be a tipping point,” says Brett Dunne, managing director U.S. and Canada of Dutch spirits giant Lucas Bols. “The industry is facing tremendous headwinds from declining consumption habits, the emergence of recreational cannabis use, GLP-1 drugs and the overall economy.”

Some industry insiders have already started batoning down the hatches in preparation of an all-out trade war. “We have been increasing our stock and slowing down nationwide events and activations, " says Dale Ott, whose Nossa Imports specializes in small-batch Mexican and Portuguese wines.

Outside the country, retaliatory tariffs have dried up major American markets. Ontario alone sells over $965 million worth of California wine per year.

“Tariffs reduce access to the Ontario market, which is a key source of revenue for many wineries,” says Lauren Power of Toronto-based importer Tre Amici Wines. “As a result, American wineries may be forced to reduce their exports, look for alternative markets or even pivot to other product lines.”

Nicole Campbell runs Grape Witches, a collective of Toronto wine shops-slash-educational hubs with an importing arm that represents boutique producers in Vermont, New York and California. Last year, she sold around 425 cases of American wine to the tune of $54,000.

She currently has over 100 cases of U.S. wine trapped in the Liquor Control Board of Ontario (LCBO) that she is unable to access or sell. “As our producers aren't paid until the last case is sold, this means that payments are also completely suspended, with no end in sight,” Campbell says.

Unlike many stores, she is trying to sell the American wine she has in stock. Yet, doing so has been controversial—some customers see it as unpatriotic.

“People are upset at us for keeping these wines on the shelf,” she says. “They ask why we would want to carry them as anti-American and pro-Canadian sentiments have risen. But the product was purchased before the trade wars began and we are proud to continue to support these small farmers as long as we're able.”

Stress Is Setting In

Importers, producers, retailers and restaurants around the globe are feeling immense stress.

The U.S. Wine Trade Alliance estimates that for every $1 lost by Europe, American businesses lose $4.52. It claims that the 350,000 restaurants, 50,000 wine shops and over 6,000 importers and distributors in the U.S. that rely on these wines could shut down overnight if the tariffs are implemented.

On Wednesday, the alliance sent out a notice strongly advising American companies to halt all shipments of wine, spirits and beer from the European Union. “The current risk of tariffs is too high,” it says.

This is already wreaking havoc for independent distributors, most of whom have built a business by balancing the books between domestic and foreign producers. “60% of our wine sales are European, which produce 75% of our gross profit,” says Root. “If tariffs eliminate European wine sales, our business won’t be able to make up these lost profits with American wine, and we will likely shut down.”

If that happens, the 80 US wineries his company represents will lose their distribution in our states.

This sense of unease is difficult to steady, especially as these threats fluctuate on a daily—even hourly—basis. History considered, what conclusions can we draw?

Primarily, prices will jump. “Chateau Latour 2016 was just released, and one American retailer advertised $700 per bottle,” says Asher Rubinstein, a law partner at Gallet Dreyer & Berkey who consults across the hospitality industry. “After tariffs were announced, the offer jumped to $2,000.”

Lawmakers hope tariffs would promote home-grown wine. But it’s not as simple as swapping out European wine for American, Latour for Lokoya, Champagne for Schramsberg—wine is a delicate ecosystem, and the extreme stress of tariffs will throw everything out of whack.

“Rather than substituting Chianti with Pinotage, I predict most consumers will forgo ordering wine and may even choose to eat at home,” Rubinstein continues. “This will affect not only restaurant wine sales—which many rely on to offset the thin margins—but have consequences on the restaurant labor industry (more unemployment) and food suppliers.”

Overall industry insiders believe these tariffs will prove to be a net loss, increasing the price of wine and spirits—taking a toll on small businesses and consumers.

“The big takeaway from alcohol tariffs, historical or contemporary, is that they make goods more expensive,” Blanco continues. “Drowning your sorrows may mean draining your disposable income. Whether we're talking about my grandfather wanting German beer in 1935, or my glass of Chablis, tariffs make alcohol more expensive and reduce consumers' buying power.”