October 3, 2019 / 7:01 PM / 20 days ago

Breakingviews - Trump’s booze tariffs may cause extended hangover

U.S. President Donald Trump sips Diet Coke from his wine glass after a toast during a luncheon for world leaders at the 73rd session of the United Nations General Assembly in New York, U.S., September 25, 2018. REUTERS/Carlos Barria

LONDON (Reuters Breakingviews) - Donald Trump’s booze tariffs could have been worse for Europe’s distillers. Makers of Scotch whisky and French wine were among the victims when the famously teetotal U.S. president slapped tariffs on European imports worth $7.5 billion on Wednesday. Investors could find solace in French cognac and champagne, which were spared, at least for now.

Diageo was arguably the worst hit. The $93 billion giant’s products including Lagavulin single malt whisky and Baileys liquor are exposed to the levies. Analysts at Jefferies reckon annual revenue worth $440 million will be affected – almost 5% of total U.S. sales. In the short term the company led by Ivan Menezes can probably afford to swallow the extra cost, rather than raising prices, in the hope of protecting loyal American customers until the trade dispute blows over.

Even so, it’s too soon for a celebratory snifter. If Washington’s broader trade war with China is anything to go by, this could be just the aperitif. The Trump administration has demonstrated its willingness to target industries totally unrelated to the original dispute, which in this case involved European Union subsidies for aircraft maker Airbus. True, these sanctions were authorised by the World Trade Organization. But earlier this year Trump ordered a probe into France’s planned tax on companies such as Alphabet-owned Google and Facebook. A retaliatory attack on champagne or cognac may be hard for him to resist.

If the menu of sanctioned drinks persists, the likes of Diageo will have little choice but to pass on the cost to American drinkers. Unlike, say, German carmakers, there’s no way for makers of Scotch whisky to shift their supply chains stateside. European booze brands have avoided the worst, but they can’t rule out a delayed hangover.

Breakingviews

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