Retaliatory tariffs that cost U.S. distillers 42% of their exports to the United Kingdom, the fourth-largest U.S. market for American whiskeys, are going away.  And a new pattern for trade agreements involving critical industries has been set.

In a historic agreement, the U.S. and UK agreed to allow “historically based sustainable volumes of UK steel and aluminum products to enter the U.S. market without the application of” punishing section 232 tariffs.  In return, the UK has agreed to lift retaliatory tariffs on over $500 million worth of U.S. exports to the U.K., including distilled spirits, various agriculture products and consumer goods.

The UK tariffs have been “debilitating,” said Chris Swonger, president, Distilled Spirits Council of the U.S., and have resulted in a 42% decline in exports to the UK, the fourth largest market for American Whiskeys, to $88 million in 2021 from $150 million in 2018.

“Distillers throughout the United States are cheering the end of this long tariff nightmare. We toast the Biden administration for its resolve in bringing a stop to these punitive tariffs on American Whiskeys and securing the return to duty-free trade in spirits across the Atlantic.”

Brown-Forman Corp., the leading producer of American whiskey, in a statement by President/CEO Lawson Whiting, commended the Biden Administration for the agreement with the U.K., saying “American whiskey will again enjoy tariff-free trade between the U.S. and the UK as of June 1.”  The EU had removed its tariffs of American whiskey one Jan. 1. “As the leading producer of American whiskey,” Whiting said, “Brown-Forman appreciates the Administration’s unwavering commitment to rebuilding the Transatlantic alliance. The removal of tariffs on American whiskey and other U.S. exports creates more opportunities for the continued international growth of our American-made products.”

Beam Suntory also praised the agreement.  “This is great news for the hard-working men and women who produce Bourbon whiskey and for consumers in the UK. Tariff-free spirits trade benefited trading partners on both sides of the Atlantic for more than two decades prior to the imposition of the retaliatory tariffs, so the removal of these tariffs will enable Bourbon to resume a great American export success story. Beam Suntory appreciates the efforts of the Biden Administration, all in Congress who advocated for this outcome, and their counterparts in the UK who championed this agreement,” the producer of Jim Beam and other brands said..

In his statement, Swonger said that “from day one, the Biden administration made it a priority to reset the relationship with the EU and UK, two of our most important allies and trading partners.  The successful resolution of two separate and complicated trade disputes that saddled distilled spirits on both sides of the Atlantic with tariffs could not have been possible without the strong leadership of Commerce Secretary Gina Raimondo, Ambassador Katherine Tai and their teams at the Departments of Commerce and Office of the United States Trade Representative.”

Raimondo noted that in addition to novel smelt and cast requirements on aluminum, this deal also requires that any UK steel company owned by a Chinese entity must undertake an audit of their financial records to assess influence from the People’s Republic of China government. The results of these audits must shared with the United States.

Raimondo called the agreement “historic” and said it “will benefit America’s steel and aluminum industries and workers by protecting manufacturing, as well as consumers by easing inflationary pressures in the U.S.

“By allowing for a flow of duty-free steel and aluminum from the U.K., we further ease the gap between supply and demand for these products in the United States. And by removing the U.K.’s retaliatory tariffs, we reopen the British market to beloved American products.”

Tai, the U.S. Trade Representative, noted that “in addition to the UK eliminating the retaliatory tariffs against the U.S., we have also agreed to continue engaging on the threat posed by carbon intensive non-market excess capacity in the steel and aluminum industries.”

A New Pattern for Trade Deals

In our view, this agreement is historic because it sets a new pattern for trade agreements, focusing on the impact on workers.  Until now, for the last 40 years, trade agreements have largely been based on the 18th Century Scottish economist Adam Smith’s concept that people acting in their own self-interest would benefit society at large.  In practical terms, this means it benefits everyone to buy the least-expensive products possible.  But this view expressed by economists associated with the University of Chicago, led by Milton Friedman, ignores the impact on U.S. workers.  Friedman spearheaded opposition to minimum wage legislation.

But the practical effect of Friedman’s reading of Smith in the 20th Century was the destruction of many American industries that simply could not compete against cheap labor in Asian countries, notably China, a point noted by California vintner Charlie Barra in a 2015 interview with us.  It’s really tough, Barra said, to compete against wineries paying workers 10 cents an hour when you are paying $7.50 an hour or more.

The laissez faire attitude of Friedman and his associates has come under attack by Bruce Kaufman,  an economist at Georgia State University, who has argued that “a more inclusive, balanced and neutral review” of Smith’s Wealth of Nations “reveals that while Smith definitely favored free trade and opposed protection as general principles, his noncompetitive model of labor markets, dynamic theory of production and humanistic social welfare criteria suggest that on both positive and normative grounds he might have favored a minimum wage set at the poverty level.”  Tariffs are a way of leveling the playing field between U.S. workers and those of other nations.

The world is vastly different now than it was in Smith’s time, a point driven home first by World War II and more recently by the Covid pandemic.  World War II demonstrated that countries must be able to produce essential products themselves with minimal reliance on other nations.  That was the gist of the Trump Administration’s argument in favor of imposing Section 232 tariffs on imported steel and aluminum, which resulted in the British retaliating with punitive tariffs on American whiskey and some other products.  In addition, the Trump Administration’s position probably was driven by an awareness of the impact on American workers of cheap steel from China flooding the U.S. market.  As Charlie Barra said, it’s tough for an economy in which workers are paid at the level U.S. workers are paid to compete with economies in which workers are paid 10 cents an hour.

As for Covid, the benefits of domestic production of everything from personal protective equipment to vaccines was amply demonstrated during the pandemic.  The U.S. could not quickly produce PPE because we had outsourced it to China, which (1) gave priority to fulfilling its own needs and (2) shut down production as it implemented its “no-Covid” policy.  Meanwhile, the U.S. and other advanced economies were able to produce vaccines against Covid while low-wage economies even today largely lack those vaccines.

If it’s unwise for a country to allow unfettered imports of critical products, such as steel, aluminum and vaccines, it is equally unwise to prevent a reasonable level of imports of any product.  The best example of this is, ironically, the steel industry, and also the automobile industry.

As a result of World War II, Japan’s steel industry, which like all steel producers prior to 1940 had used the open-hearth production method, was destroyed.  When Japan set out to rebuild its steel industry in the 1950s, it turned to the modern basic oxygen furnace (BOF), which was more efficient and produced steel at lesser expense.  U.S. steel producers — essentiallyjust  two companies, U.S. Steel and Bethlehem Steel — did not convert to the BOF with the result that over time their products became uncompetitive economically, users came to rely upon foreign steel production, the U.S. steel industry was largely destroyed and hundreds of thousands of workers lost their jobs.

As for the auto industry, in the 1960s the U.S. auto market was dominated by the “Big Three” automakers — General Motors, Ford and Chrysler, which had a combined U.S. market share of 85% or more through the 1960s.  They became fat, happy and lazy.  Meanwhile, the Japanese automakers began exporting small cars that were better quality and were less expensive to the U.S. market, and they began to capture market share from the Big Three.

At a press briefing introducing the Ford Mustang, Henry Ford II said Ford would continue to produce big cars, leaving the small car market to the Japanese, because “big cards equal big profits while small cars equal small profits.”  By 2018, the U.S. market share fell to an all-time low of 44.2%. Unlike the steel industry, the Japanese automakers, once they reached a critical level of U.S. sales, built factories here, employing U.S. autoworkers.

In our view, this agreement represents a balancing of free trade vs. protecting U.S. workers and industrial capacity, setting a level that will assure U.S. production of steel and aluminum while also allowing for imports.  The unfortunate thing is that U.S. distillers paid the price for politicians to reach that agreement.  Nonetheless, we suspect this agreement will set the pattern for future trade deals that will adopt the principle of free trade, but with limits that will prevent the wholesale destruction of U.S. industries.