Kentucky Bourbon recorded its lowest production levels in recent history in 1999, distilling only 455,000 barrels in that year. From there, what started as a slow ascent turned into a wild ride of popularity for Bourbon. Kentucky alone produced 2.1 million barrels last year and growing. Several factors have contributed to this meteoric rise. A cocktail renaissance, shifting consumer trends, and even Don Draper, John Hamm’s character on the show Madmen, are all credited for sparking America’s sudden obsession with Bourbon. While there are various degrees of impact from these contributions, behind the scenes there are more significant factors at play.
The real reason behind Bourbon’s raging popularity that’s seldom talked about has less to do with Don Draper and more to do with massive, well-timed industry investments over the past two decades. The Bourbon community watched as Scotch producers captured the imagination of a new generation of drinkers who fell in love with single malt and Scotland’s rich whisky history. They were inspired by the hospitality scene in Northern California’s Napa Valley, where cars line-up on route 29 by the thousands to visit the region’s wineries and pay premium prices for the experience. Kentucky distillers became determined to raise the profile of their own rich whiskey culture. The industry doubled down educating consumers about Bourbon’s story, then spent another fortune building multi-million dollar visitor centers, urban visitor sites, and bars and restaurants to solidify Kentucky as a tourist destination. They also ramped up production capacity to meet the demand of the thirsty masses both domestically and abroad. The reason for a growing market of Bourbon overseas is tied directly to zero-for-zero tariffs.
Global demand for Bourbon resulted from decades of negotiating free-and-fair trade deals like NAFTA and the Transatlantic Trade and Investment, which have been in place since the 90s. This allowed the United States and its trading partners, including its most significant, the European Union, to cancel out tariffs on a myriad of goods, including whiskey. This meant American Whiskey producers pay no tariff on exports into the European Union. In-kind, European whiskey imports like Scotch and Irish are not taxed for entering the US. This allows American producers to compete with European whiskeys on price in trending markets such as England, France, and Spain. The impact of tariff relief was immediate and dramatic all around. According to the Distilled Spirits Council (DISCUS), Scotch imports grew by a half million cases between 2010 and 2017 in the States. Kentucky Bourbon exports grew an outrageous 98% in exports to $455 million in the same period, and industry forecasters agreed that Bourbon exports would continue to spike.
Distillers responded by investing billions in capital improvements and began cranking out record levels of whiskey to meet projected global demands. But this record-shattering international growth came to a grinding halt in 2018 when Kentucky distillers became pawns in a much higher stakes game: Trade wars. Two separate trade disputes between the US and its trading partners have devolved into a messy multinational tariff battle, including the European Union, our largest spirits importer. In 2018, the United States imposed tariffs on steel and aluminum. In response, the EU and Mexico slapped 25% tariffs on American whiskey, which predominantly affects Kentucky Bourbon. Canada piled on with a 10% tax.
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In October 2019, the World Trade Organization settled a long-running subsidy dispute over Boeing-Airbus Aerospace between the US and Europe. The WTO ruled in favor of the United States who was granted permission to apply $7.8 billion in retaliatory tariffs. These were imposed on a laundry list of European goods, including French Cognac, English cashmere, ham and Olive oil from Spain, and whiskey from Scotland and Ireland.
As tariffs entered year three in 2021, the impact on domestic exports has been stunning. The Scotch Whisky Association reports exports have fallen over 30%, over half a billion pounds. In Kentucky, Bourbon exports have already plummeted 50% since 2018, lowering market-share from 57% in 2018 to 40% in 2021. Considering these losses are in addition to canceling double-digit gains, the numbers are even worse than they seem.
“We have become collateral damage in a trade war, plain-and-simple,” Says Eric Gregory, President of the Kentucky Distillers’ Association. “It took decades to create a level playing field with European whiskey producers, and now we are losing that traction. There are no winners in trade wars. There are only consequences.”
But how did Kentucky Bourbon become a target? The answer boils down to politics, of course. In the case of the EU’s response to US tariffs on steel and aluminum, Jean-Claude Juncker, the head of the European Union Commission, targeted exports that would hit home for the United States’ highest-ranking officials. This included Congressman and House Speaker Paul Ryan, whose home state’s Wisconsin cheese was explicitly taxed, and former Senate Majority Leader Mitch McConnell from Kentucky, home to 95% of America’s Bourbon. Juncker’s tariffs were parried by the Trump administration, who responded by taxing other European spirits and wine, and the whole mess became a tit-for-tat battle that’s affected virtually every spirits category. Massive companies like Diageo, Pernod Ricard, and Beam-Suntory with spirits in multiple categories like Cognac, tequila, and vodka are taking a hit every possible way. And while few shed tears when “the big guys” feel the pinch, small producers are also hurt in the crossfire. In June 2021, the EU imposed tariffs are scheduled to double to 50% if things are not resolved.
Whiskey Glut: How Big Politics Hurt Small Producers
According to Gregory, capital and investment projects in Kentucky currently sit around $5 billion, money that’s funding things like new or expanded distilleries, aging warehouses, and bottling lines. This expansion is directly tied to meeting projected demand in the global market. But regardless of the tariffs and the resulting losses, distillers will likely keep pumping out whiskey. The reason for this is simple: producers remain hopeful that these tariffs will go away. Bourbon requires years to mature before bottling, while clear spirits like vodka or gin, which does not require aging, are produced in just a few days. Whiskey producers are willing to gamble that these trade wars will have subsided in several years when the whiskey they made today is ready for release. If the tariff-war continues to escalate, there will inevitably be a whiskey surplus domestically. A whiskey glut means these large distillers will be forced to lower domestic market prices to move products. While the American consumer might save a few bucks, those who will be harmed the most are the 3,000-plus United States craft distilleries that already struggle to stay competitive on price with large companies.
Bourbon producers have little recourse in controlling the tariff situation, but the Kentucky Distillers’ Association and other trade groups have worked every angle to end this tariff war. Tthe KDA appealed to Vice President Pence directly, an advocate for free-and-fair trade when he was in congress. Letters were written, meetings with legislators scheduled, and press releases to the media were released to spread the word of the injustices done to the industry. Kentucky House Representative from Louisville John Yarmuth, Founder, and Co-Chair of the bipartisan Congressional Bourbon Caucus, spearheaded a bi-partisan effort with Republican Congressman Andy Barr from Lexington to press the Biden administration to immediately resume negotiations with the EU.
“This is about standing up for an industry that’s vital to our Commonwealth and promoting American spirits around the world,” Rep. Yarmuth said in a statement to the Kentucky Distillers’ Association. “Bourbon supports thousands of good jobs, and I will be doing all I can to work with the new Biden-Harris Administration to deescalate this unnecessary and unwanted trade dispute and bring stability to the US distilled spirits export market.”
Help on the Way?
Everybody hopes so, and there are good reasons to be optimistic. On March 4th, the United States and the UK (who broke with the EU) issued a joint statement announcing they will begin negotiations to resolve the Boeing-Airbus dispute. To show good faith, the United States applied a four-month suspension on tariffs which includes Scotch Whiskey. But this does not affect American whiskey. To resolve the steel and aluminum dispute, and by extension, American whiskey, the KDA, and other United States trade groups await the confirmation of newly appointed United States Trade Representative Katherine Tai. Tai has signaled the Biden administration is eager to resolve these Trump-era tariff wars. Gregory and the industry-at-large remain optimistic the steel and aluminum dispute will be settled. But until that happens, tariffs on American Whiskey in the EU are scheduled to double to 50% in June, which Gregory fears would be a death blow to an already hobbled export market.
“With a focused settlement to help the aerospace industry now underway, the KDA reiterates its call for an immediate suspension of disastrous tariffs in the steel and aluminum dispute that have ensnared unrelated American whiskey and key agricultural exports,” Gregory said in a press release. “This is a good first step and a hopeful signal that the administration is committed to resolving trade wars that have inflicted so much damage on global markets, including Kentucky’s signature Bourbon industry and our broader American Whiskey family. We look forward to a return to open trade with all industries involved as we seek to bring stability back to our Kentucky Bourbon and American Whiskey export markets during these challenging and unprecedented times.”