Opinion: A warning against the weaponising of trade tariffs

Opinion: A warning against the weaponising of trade tariffs

Tariffs are once again being weaponised

Mythbusters | 05 Oct 2021 | Issue 178 | By Chris Middleton

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Tariff and trade barriers are still present today, seven decades since the World Trade Organisation began dismantling them after World War Two. The planet’s two most powerful countries recently ‘weaponised’ tariffs against whisky and wine, seeking concessions on unrelated trade disputes and punishment for political grievances.

The Communist Party of China hit Australian wine exports with tariffs up to 218 per cent in December 2020. In October 2019, the Trump administration executed a 25 per cent tariff on classes of EU liquor over airline subsidies. In retaliation, the EU put tariffs on categories of American spirits, notably bourbon. The impact to both parties after 18 months has been a fall in whisky sales of around 33 per cent, costing the Scotch industry more than half a billion pounds.

On the other side of the tariff ledger, India maintains its long-standing 150 per cent tariff barrier to protect its cane spirit industry, which manufactures Indian Made Foreign Liquor, blended into Indian whisky. According to the IWSR, around 200 million nine-litre cases of Indian whisky (including spirits labelled as such which contain cane spirit) are sold domestically each year.

In the second half of the 19th century, international trade in whisky became an economic lever for governments to encourage productivity and protect their domestic industries under the guise of tariffs, ad valorem taxes, bounties, levies and customs duties. America cultivated prodigious amounts of corn from the 1870s, efficiently processing copious volumes of spirits that by 1884 allowed it to ship 75 million gallons to Europe. Less than a third of the distilled spirit was ‘straight whiskey’; the bulk classified as high wines for industrial use in the arts, patent medicine, lighting, heating and compounding into blended liquors.

For blending, the destruction of Europe’s vineyards by phylloxera saw Marseilles import American grain spirit in 1878 to blend with shrinking French brandy stocks. Two years later, Spain began importing large volumes of American spirit for blending into fortified wines. When America had years of over-production, exporting surplus proved a safety valve, mainly to Germany, where it was used in industry and offered ‘unlimited bond’ for maturing straight whiskey.

By re-importing straight whiskey back to America, dealers exploited the cost differential between their higher domestic excise taxes and lower import customs duties, enabling them to minimise tax and age stock longer. A barrel of whiskey could boomerang back from Europe for $7.15 after five years of storage; if kept in Kentucky, after three years it faced taxes and overheads of $26.06.

Germany had been a free trade market until 1879; however, in 1881, it introduced bounties to undercut American imports. Germany was rapidly ascending as a global spirits powerhouse, distilling beet, potato and grain, forming trade treaties with other European countries while raising warehousing fees and port charges to discourage American importers. By 1902, Germany distilled 222 million gallons to America’s 135 million.

As North America and the Continent contended with prohibitions, restrictions and protectionism after World War One, Britain’s largest export market for Scotch and gin, Australia, introduced protectionist policies against British goods. Australia increased whisky and gin tariffs by more than 50 per cent through the 1920s to protect local distilleries from the vast volume of imports harming domestic production.

In the aftermath of World War Two, protectionism came to a cathartic head. International free trade was deliberated as a long-term economic panacea to world peace, ratified under the 1947 Global Agreement on Tariffs & Trade plan. Over the proceeding decades, many tariffs and trade barriers were dismantled and free trade advocates came of age. Global trade bloomed into a golden period until the recent political grievances saw them deployed again.

Listen now: can you hear it? The tariff war drums of trade beat again, as history itself fears repeat.
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