American distillers had reason to celebrate in late 2021, when the European Union agreed to drop a 25 percent tariff it levied on imported bourbon and other whiskies.
The EU levied the tariff in 2018 on a variety of products from the United States in retaliation for the 25 percent and 10 percent tariffs the U.S. levied on European steel and aluminum imports, respectively.
It was a prolonged trade war that especially impacted Kentucky’s bourbon industry and, by extension, the state’s economy.
Bourbon is an $8.6 billion industry in Kentucky, according to the Frankfort-based Kentucky Distillers’ Association, that generates more than 20,000 jobs annually with a $1 billion payroll. Visitors make nearly 2 million stops along the Kentucky Bourbon Trail each year, and Kentucky distillers have invested $5.1 billion in building projects to meet demands.
Amir Peay
Amir Peay, owner/ operator of James E. Pepper Distillery in Lexington, said he was alarmed when he first heard of the tariffs in mid-2018. European sales constituted about 10 percent of his business at that time, he said, and he was poised to take it to 20 percent with a new sales and support presence in Europe, as well as a distribution warehouse.
By late 2021, the distillery’s EU sales stood at about 5 percent of overall revenue, he said.
“It very much was a targeted tariff to cause political pain in this country and that’s why it was a complete shock and very concerning,” he said.
Peay said the effects weren’t immediate for his company, which he describes as a multimillion-dollar business that’s large for a craft distiller player but small compared to big-name brands. He likened the business impacts of the tariffs to the analogy of a frog in a gradually warming pot of water, unaware that it’s about to reach a boiling point.
Colleagues Peay spoke with assured him it was a political tit-for-tat that would get worked out quickly. Three years later, the tariff was poised to increase to 50 percent on December 1 had a resolution not been reached.
For Peay, however, it was not knowing that kept him on edge.
“Uncertainty in business is very problematic,” he said. “Without certainty, it’s very difficult to make plans.”
KDA Executive Director Eric Gregory recalls being caught off-guard when the tariffs were announced.
Eric Gregory
“I got a wakeup call from a reporter in the United Kingdom,” Gregory said. “It was 5 or 6 o’ clock in the morning, and he called and said, ‘Just wanted to get your take on the tariffs.’ [I said] ‘What tariffs?’
Gregory jokes that he was fleetingly proud that Kentucky’s whiskey industry is important enough to be front and center in an international trade war, but his feelings quickly turned to dismay.
“We all crossed our fingers and wished that it was a short-term issue, but three years later and we’ve lost hundreds of millions of dollars in exports,” he said.
Gregory said the announcement of the tariff’s lifting was a long time coming and a relief.
The bourbon industry is a waiting game in and of itself, as products are aged for years, he said. Distillers must gauge the market and plan for future demand. Most distillers factored an expanding global market into their production plans.
Between 2010 and 2017, exports of Kentucky-made whiskey increased by 98 percent, he said. With tariffs in place, exports decreased by 40 percent to the EU and by 50 percent to the United Kingdom.
When Gregory worked on a press release from his office describing the situation, he said he had a hard time coming up with new ways to say “nosedive,” “plummet” and “plunge.”
He said the KDA did everything a trade association can do in such times, including immediately alerting its congressional delegation and lobbying and advocating for the industry as much as it could, as did counterparts across the Atlantic.
Gregory said member distillers adjusted by absorbing as much of the financial impact as possible. The alternative is to pass increased costs along to consumers, which risks losing once-loyal customers to Scotch and other spirits. Another strategy is to decrease or eliminate exports.
Peay decided to keep his prices the same and adjusted his 12-month sales volume forecasts and materials buying accordingly.
One bright spot, Peay said, is that domestic sales grew 45 percent in 2020 and 45 percent as of late 2021, he said.
Still, over the past three years, overseas opportunities were missed. “Because we didn’t have enough inventory, we couldn’t forecast right and our partners couldn’t either,” he said.
Gregory said craft distillers suffered an outsized impact. The craft segment largely established itself in the early 2010s, and its products were just coming of age about when the tariffs hit.
“That’s what really hurt the small craft distillery community,” he said.
Gregory said one lingering issue — tari s in the United Kingdom — needs to be resolved, but insiders remain optimistic it will be.
Peay said he is thankful the EU tariff situation is resolved and is appreciative to trade groups on both sides of the pond, as well as Gov. Andy Beshear and the commonwealth’s congressional delegation and other top-level officials for bringing an end to the trade war. “Thank you,” he said. Distillers are “super appreciative and looking forward to doing what we do best — making and talking about American whiskey.”