Scottish Town Lands on Front Line of U.S. Trade Dispute

Date : 01/19/2020 @ 4:29PM
Source : Dow Jones News

Scottish Town Lands on Front Line of U.S. Trade Dispute

By Alistair MacDonald 

ABERLOUR, Scotland -- As Washington's trade dispute with China cools, Europe is still skirmishing with the U.S. on a number of tariff fronts, and this Scottish town of about 1,000 people is getting caught in the crossfire.

For decades, Aberlour and the surrounding area in the Scottish Highlands has exported single malt whisky, cashmere and cookies to the U.S. In October, the Trump administration hit all three with a 25% tariff to punish the European Union over subsidies to Airbus SE, the aircraft manufacturer.

The move was introduced with tariffs on $7.5 billion in European goods -- including aircraft, food products, luxury goods and other sectors. Washington is now threatening to increase some of those tariffs to 100% and introduce new ones on other products.

The U.S. is also threatening levies on $2.4 billion of French goods in response to a digital tax by Paris, and hasn't ruled out imposing duties on some $60 billion in annual European car and auto-parts exports.

Washington's tariffs on European goods are aimed at some of the EU's most politically sensitive and iconic businesses -- national symbols such as whisky, champagne, cheese and cashmere.

Across the region, companies are raising prices or absorbing additional costs of tariffs while fearing an extension on duties, and wondering why a U.S. tariff drive they had mainly associated with China is landing on their doorsteps.

"This has got nothing to do with us, sat in the Highlands," said John McDonough, chief executive of Speyside Distillers Co.

The local single-malt whisky producer has about $131,000 of the spirit sitting in its warehouse that its U.S. distributor no longer wants. Mr. McDonough said he is waiting to see if the tariff on single malts is extended to 100%. That decision could come at any point.

"It would be a disaster for us," Mr. McDonough said.

This week, the U.S. agreed to a cease-fire in its two-year trade war with China, cutting tariffs on $120 billion in Chinese goods by half and pausing further planned tariffs.

President Trump has said Europe is worse than China on trade issues.

"I am very afraid that now President Trump will focus more on Europe," said Matilde Poggi, a winegrower in northern Italy who sells half the 150,000 bottles she produces each year to the U.S.

Italian wine wasn't levied in October but appeared on a December list from the office of the U.S. Trade Representative as a potential target for further Airbus-related tariffs.

Italian winemakers are already suffering. Ms. Poggi typically sells about $222,680 in rosé wine to the U.S. around this time. But she has yet to sell a single bottle, as U.S. importers fear it could be subject to tariffs by the time it is shipped for summer consumption, she said.

Producers in the EU sell more than $3.34 billion in wine each year to the U.S., its biggest market. French winemakers already bear a 25% tariff. The European Confederation of Independent Winegrowers reports that its French members who export to America lost 10% of last year's revenues because of the October U.S. tariff.

Food and drink is the EU's largest manufacturing industry, generating revenue of $1.34 trillion. The tariffs are causing companies to choose between raising prices or eating the loss to protect market share.

Scotland's largest food exporter, Walkers Shortbread Ltd., chose to raise U.S. prices of its high-end cookies, all but ensuring loss of sales.

"Company profits could be almost wiped out," said James Walker, a managing director.

Mr. Walker spent 40 years building up the U.S. business. It is the family-owned company's biggest export market and generated about 15% of its sales last year.

Any hit to the Walkers factory -- whose smell of butter and sugar drifts into the town -- threatens all of Aberlour. Sean Cattanach, who runs a small general store with his wife, described a trickle-down effect in spending at his and other local businesses if employees of Walkers and the whisky industry stop spending as much.

Nearby, Johnstons of Elgin Ltd. has left U.S. prices on its cashmere clothing unchanged, taking the loss on sales. While the U.S. accounts for around 10% of the company's sales, its U.S. market grew by 40% last year.

"You lose market share in an instant, and it takes years to get it back, " said Simon Cotton, the company's chief executive, as clattering looms worked on a factory site that has been weaving cloth for 222 years.

Almost half of Scotland's 120 whisky distillers are within a roughly 15-mile radius of Aberlour, including one in the town itself. The industry expects the 25% tariff on single-malt exports will reduce sales by 20% in the U.S. over the next year. If the tariff is increased to 100% and extended to blended whiskys, then large drink makers -- such as Diageo PLC and Pernod Ricard SA -- will take a hit.

Ewen Mackintosh, managing director of Gordon & MacPhail, a whisky distiller and exporter, said any loss in U.S. market share could be difficult to overcome even when tariffs are removed.

"We live in a competitive category to other whiskies," he said.

Locals here wonder why it is Scottish biscuits, not French ones; Scotch whisky, not Irish; and local cashmere, rather than Italian. They talk of Mr. Trump's ties to Scotland; his mother was Scottish. But governments typically use tariffs to target high-profile goods that also won't hurt domestic jobs or industry. French cheese and wine were hit in the Airbus tariffs, as aircraft parts manufacturers were left untouched because European manufacturers supply U.S. planes.

Brussels has itself gone after high-profile U.S. targets, hitting bourbon and Harley-Davidsons last year in retaliation against Washington's steel tariffs.

Write to Alistair MacDonald at alistair.macdonald@wsj.com

 

(END) Dow Jones Newswires

January 19, 2020 11:14 ET (16:14 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.


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