Nate Klatt, his wife and a college friend had built up a small but good business selling imported wine to Colorado restaurants and wine stores. And then the troubles began.
First, in October, a 25% federal tariff was imposed on imports of French, German and Spanish wines as part of a dispute over European airplane sales. Klatt called it “crippling,” as those vintages are the heart of the business at his Denver-based Harvest Wine Co.
Then the novel coronavirus pandemic closed all restaurants – 60% of Harvest Wine’s customers. “That was a body blow,” 46-year-old Klatt said.
Now, the U.S. Trade Representative is considering raising the wine tariff to 100% and extending it to all European Union countries.
“That would be the final nail in the coffin,” Klatt said.
These travails are being visited on Klatt and 6,500 other wine importers and wholesalers, 43,000 independent wine stores and thousands of restaurants in the U.S.
“The wine business is basically small business,” said Ben Aneff, 39, a New York City wine merchant and president of the U.S. Wine Trade Alliance, a hastily formed lobbying group.
To be sure there are large distributors and high-volume wines, like Yellow Tail and FishEye, but many of the interesting labels on the store shelf or restaurant wine list come from small importers and wholesalers, like Harvest Wine, working with small, often family-owned, wineries.
And because of archaic rules dating to the end of Prohibition in 1933 it isn’t easy for wholesalers and importers to change things up, switch to new brands, or offer other products.
Klatt entered this world after a stint in corporate public relations. He had graduated from the University of Colorado with a degree in creative writing, dreaming of becoming a novelist. In 2013, he started Harvest Wine with two of his college classmates, Rose Manzo and Erin Singrin, who had become his wife. (The couple have a 10-year-old son and a daughter who is 13.)
The company started with the three owners and a catalogue of 70 wines. “We were working 60-hour weeks,” Klatt said.
Today, Harvest employs 13 people and sells 600 different wines to 450 stores and restaurants all over Colorado, posting about $3.6 million in revenue in 2019.
Klatt fears all that may fall apart.
This is a fight that started 15 years ago
This, however, is a complicated tale involving those remnants of Prohibition and the Alice-in-Wonderland world of international trade policy where French wine, crocheted Scottish sweaters, German waffles and $400 million jetliners all end up in the same tariff basket.
Klatt’s woes initially came from the Trump administration, though the trade fight that begat the wine tariff stretches back 15 years.
In 2005, the U.S. filed a complaint with the World Trade Organization (WTO) charging that the European countries in the Airbus consortium – France, the United Kingdom, Germany and Spain – were providing unfair subsidies to the aircraft maker resulting in American competitor Boeing losing sales.
The WTO ruled in October that Airbus had indeed received illegal subsidies and granted the U.S. $7.5 billion in compensatory tariffs, the largest award the organization has ever made. The Europeans have a longstanding counterclaim contending that the U.S. has given subsidies to Boeing – a decision in that case is expected soon.
The U.S. moved quickly, imposing a 10% tariff on civil aircraft, a 25% tariff on French, German and Spanish wines, and a similar tariff on Irish and Scotch single-malt whisky. It also added tariffs on agricultural products – Italian pecorino cheese and powdered Greek yogurt – from countries across the EU, as well as on those sweaters and waffles.
The effect on Harvest Wine was almost immediate. There was a shipment of French wine in transit when the tariff hit and Klatt had to pay an extra $24,000 out of pocket to bring the cases into the country.
This was happening all over. In Chattanooga, Tennessee, wine wholesaler Harry Root had a shipment of pre-sold wine that got caught in the tariff leaving him with thousands of dollars in losses.
Since then the tariffs have cost him $150,000, all of which have been passed along in higher prices to stores and restaurants. “We realized this was an existential threat to our business,” said Root, who has become the wine alliance’s congressional liaison.
The tariffs also hit the essence of Harvest Wine’s business for while selling wines from around the world, Klatt said, “in our passion and philosophy we are a European wine house.”
About 60% of the wine Harvest Wine sells comes from Europe, led by French vintages. Harvest Wine also carries wines from California and Oregon, and in both the U.S. and Europe focuses on smaller winemakers.
“One reason you have small farmers in Europe that have been on the land for generations is that governments support them,” Klatt said. “There is a distinctly different feeling in Europe because many small farmers with 5 hectares [about 12 acres] or less have been making wine for generations.”
For example, Harvest Wine imports from the Domaine Michel Lafarge in Volnay, France. The Lafarge family has been making high-priced Burgundy from its 30 acres for four generations and was an early adopter of organic farming techniques.
“You aren’t just selling the wine, you are also selling the story,” Klatt said.
Another winemaker with whom Klatt does business is Jérémy Onde, who after his family had grown grapes for generations started making and bottling wine on their land in 2008, using organic farming principles.
“Domaine les Ondines has a Côte du Rhone that can reasonably retail for $12 to $13,” Klatt said. “There isn’t anything comparable domestically I can get.” At that price his competition is large industrial production distributed by large companies.
It is for these reasons – the relationships with small wineries, the stories, the price points – that make it difficult to just switch to some other wine from someplace else, Klatt said.
There is also something else, the ghost of Prohibition. “Our business is very different from other businesses because of the way Prohibition was repealed,” Aneff said.
The federal ban on the sale of alcoholic beverages – “the great social and economic experiment” – was replaced in 1933 with a three-tier system overseen by the states, a sop to temperance advocates in that it was supposed to control alcohol by increasing its price.
Tier one is producers, such as wineries, tier two importers and wholesalers, such as Klatt, and tier three retailers, like Aneff. Each tier adds to the cost of a bottle of wine.
“The three-tier system, regulates who we can buy from and sell to and if someone is selling one brand of wine, I can’t sell that brand,” Klatt said. Colorado, in its 70 pages of rules governing the sale of alcoholic beverages, has a “sole source” rule saying that if some wholesaler has filed to sell a particular wine or whiskey no one else can.
“We are highly regulated,” Klatt said, “and we are restricted in our ability to pivot.”
Add a tax on Amazon to the wine tariff problem
In December, the U.S. Trade Representative said France’s tax on U.S. digital services – a 3% charge on companies like Amazon, Facebook and Google – was discriminatory and held out the specter of a 100% tariff on many French goods, even while it was pressing on with the Airbus tariffs.
At a Jan. 7 USTR hearing, representatives of the wine industry warned that they could not find easy replacements for many of the French wines, and risked losing all access if they stopped importing. France and European winemakers, they said, would turn their attention to Asian markets.
“To think you can get the Europeans to come to the table on aircraft or digital services using wine is crazy,” Klatt said.
Crazy? Perhaps. Standard operating procedure? Absolutely.
“One of the anomalies of the trade business is when you are trying to get even with someone you don’t always do it with the things you are fighting about,” said William Reinsch, 74, senior adviser and Scholl Chair of International Businesses at the Center for Strategic and International Studies, a think tank.
As an example, Reinsch, offered the story of the U.S. slapping tariffs on European trucks because American poultry farmers couldn’t gain access to continental markets. “I guess they wanted to hurt Mercedes-Benz and Peugeot,” he said. “That was 55 years ago and the tariffs are still there.”
“Whenever we have a fight the Europeans wine and cheese are on the table,” Reinsch said.
We are, however, only in the fourth act of a five-act play, Reinsch said. The Europeans are still waiting for their WTO ruling on U.S. subsidies to Boeing and on June 23, the USTR began another review on the Airbus tariffs, potentially raising the levies on products already tagged and adding new ones like gin, olives, salmon, beer and helicopters.
These recurring reviews with expanding tariffs or switching goods is an established technique known as “carousel retaliation.”
“USTR selected products for which it considered that increased tariffs would be most likely to convince the EU to end its WTO-inconsistent subsidies and reach a resolution in this long-running dispute,” a USTR spokesman said in an email. “The tariffs will provide an incentive for the EU to come to a settlement, as well as counter the immense negative effects of the EU’s subsidies until we reach a settlement.”
If the damages in the European’s counterclaim are as big as those awarded to the U.S., the EU will have leverage to reduce the U.S. tariffs. If the award is smaller, as Reinsch said he thought likely, then the Europeans may resort to a suite of their own tariffs.
“They are very good at targeting their tariffs,” Reinsch said. “You can be sure bourbon will be on the list because that’s Kentucky and Mitch McConnell,” the Republican Senate Majority Leader.
Tit for tat, however, won’t solve the problem. “If they get resolved they get resolved through negotiations not mutual pain,” Reinsch said.
In the meantime, Italian wine imports to the U.S. have surpassed French and the big winner looks to be New Zealand wines.
Tariffs, however, can cut both ways. A 25% tariff, on top of existing tariffs, on American wines by China – part of the retaliation for American tariffs on Chinese steel, aluminum, washing machines and solar panels – has led to a collapse of sales.
In 2016, the U.S. shipped $76 billion worth of wine to China. In 2019, it had dropped to $44.5 billion, and through April this year, only $5.4 billion had been sold to China. “Our wine people are suffering and it is pure retaliation,” Reinsch said.
And the American wine industry sees no balm in the European tariffs with organizations like the Wine Institute, a California trade group, and winemakers, such Tablas Creek Vineyards, opposing them.
On the other side of the Atlantic the reaction is one of exasperation. “From the very beginning the tariffs situation has felt like we are just a pawn played in an economic and political game of chess we have absolutely nothing to do with,” Laurent Noblet, sales manager for Domaine Laporte, which provides Harvest Wine with Loire Valley Sancerre and Touraine, said in an email.
“Meanwhile, Airbus had a record sales year in 2019 with about 1,000 planes ordered,” Noblet said. “So why is the U.S. government not asking Airbus to pay the fine since they were found guilty by the WTO court? It is hurting your American wine companies much more than it is hurting the EU, and Airbus seems happy.”
“I guess your guy is collateral damage”
It may seem odd that when the fight was over Airbus that wine would be hit with a 25% tariff and civil aircraft get only 10% tariff. Airbus has a large factory in Alabama and training centers in Miami and Denver. “They go too hard after Airbus and it hurts American jobs,” Reinsch said.
As for the fate of a small wine merchant like Klatt, Reinsch said, “I guess your guy is collateral damage.”
At the moment the more pressing problem for Klatt has been the COVID-19 disease that has shackled the economy, particularly restaurants, the bulk of Harvest Wine’s customers.
Some of the first big losses came from the Vail and Aspen restaurants Klatt provisions with Domaine Lafarge and other high-end wines. All the other restaurants quickly followed. “For about four weeks all our sales were in retail stores,” he said. Overall sales were down 48% in April and May compared to the same period in 2019. “June has been better as restaurants have begun to reopen,” he said.
As the restaurant trade is slowly reviving, the menace of the tariffs loom once more with the risk of these small European wines, which had been a good deal for restaurants, being priced out of the market.
“I look for price points on my wine list and then find the wine to go there,” said Beth Gruitch, the proprietor of some of Denver’s best-known restaurants – Rioja, Stoic & Genuine, Ultreia and Bistro Vendôme – and a Harvest Wine customer
“I believe people have certain limitations on how much they will pay for a burger, how much they will pay for a steak and it’s the same for wine,” she said.
The fun in putting together a wine list, Gruitch said, comes in finding those “funky little wines” – often from the small, European wineries — that “provide a great bottle of wine without sticker shock.”
The tariffs may move these wines out of their price points. “We are going to end up turning these European labels into designer labels,” Gruitch said. “None of us can afford to have the wines sitting.”
Bistro Vendome offers classic French bistro fare and has had an all-French wine list, but not anymore. “It won’t be all French,” Gruitch said.
Colorado restaurants got the green light to reopen on May 25 and initially, even with limited seating, there wasn’t much demand, Gruitch said. “It is slowly coming back,” she said, “and the people we are seeing are excited and spending money, which is great.”
The fate of the European wines on Gruitch’s wine lists may depend upon the next review of the Airbus tariffs which will come this summer.
“At this point threatening to increase the tariffs to 100% and extend it to every EU country is cruel and appalling,” said Root, the Tennessee wine wholesaler. “It will destroy the supply chains and hurt the restaurant industry reeling from COVID-19.”
Klatt said that his costs have risen an average of 22% and that he has had “no choice” but to pass that along to customers. “Some products have slowed down and will be phased out, others are holding their own.”
Harvest Wine received $165,000 from the federal Paycheck Protection Program, which enabled Klatt to pay his staff for two-and-a-half months, and a $150,000 Economic Injury Disaster Loan from the U.S. Small Business Administration.
“We’ve hung on the loan to weather the storm because nobody knows how long this is going to last,” Klatt said. “On the COVID front the best we can do is monitor it on a week-by-week basis and do the best we can.”
The big fear is that a second wave of the disease in the fall will force restaurants to close again. “That would be an existential threat,” Klatt said. A 100% tariff on all European wines would be a business-ending menace.
“It is very trying, I am exhausted,” Klatt said. “Luckily, I have a lot of wine.”