Foreign Tariffs Made U.S. Whiskey Cheaper (Depending On Where You Live)
For Immediate Release
A new study finds that one side effect of Trump-era trade wars has been cheaper whiskey in much of the United States. But if you live in whiskey hubs Kentucky or Tennessee? Your prices actually went up.
In 2018, the Trump administration imposed a series of tariffs, kicking off a trade war with many prominent trade partners. In response, Mexico, the European Union, Canada and China imposed substantial tariffs on whiskey produced in the U.S.
“Distilled spirits are an interesting sector because consumers have significant preferences, which can influence pricing on a market-to-market basis,” says Carly Burd, co-author of a paper on the work and an assistant professor of accounting at North Carolina State University’s Poole College of Management. “Whiskey constituted the vast majority of U.S. liquor exports prior to 2018, and we wanted to examine how U.S. whiskey producers responded to a sudden decrease in foreign sales.”
For this study, the researchers collected sales data on 8,674 stores over the course of the 2018 calendar year. The researchers looked at the cost of 2,514 unique whiskey products – all of which measured 750 milliliters in volume. Ultimately, the researchers had data on 11.4 million sales of whiskey products.
The researchers looked at how much the cost of U.S. whiskeys changed before and after the introduction of export tariffs and compared it to the cost of imported whiskeys over the same time period. The imported whiskeys served as a control group, since they were not subject to U.S. tariffs in 2018.
“Overall, U.S. whiskey producers responded to export tariffs by decreasing the cost of whiskey in order to increase domestic sales,” says Burd. “However, there were significant exceptions.
“For example, producers actually increased the price of locally-produced whiskeys in Kentucky and Tennessee. Those two states produce the vast majority of whiskey sold in the U.S., and our theory is that consumers purchasing whiskey in those states were willing to pay a premium for locally-produced products.”
On average, whiskey prices either didn’t change or went up slightly in states where there was already significant demand for whiskey products, and went down everywhere else.
“One important factor here is that whiskey has to be aged, so producers are unable to rapidly increase or decrease supply,” says Burd.
That means whiskey producers couldn’t respond to decreased exports in 2018 by quickly scaling back production. This is likely a big reason producers opted to pursue a dynamic pricing model. And continued trade policy uncertainty has likely played a role in continuing to discourage supply chain responses; pricing responses are faster and more flexible.
“Whiskey is a good case study for understanding the ways in which political tensions, trade disputes, and tax changes can pose significant challenges for domestic producers – and how producers adapt those challenges,” says Burd. “It also illustrates how the impact of trade policy on consumers can vary significantly in different parts of the country.”
The paper, “Domestic Product Market Impacts of Politically Motivated Foreign Tariffs,” is published in the journal The Accounting Review. The paper was co-authored by Duke Ferguson, an assistant professor of business and economics at the University of Kentucky.
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Note to Editors: The study abstract follows.
“Domestic Product Market Impacts of Politically Motivated Foreign Tariffs”
Authors: Carlyle S. Burd, North Carolina State University; Victor (Duke) Ferguson, University of Kentucky
Published: Aug. 17, The Accounting Review
DOI: 10.2308/TAR-2024-0708
Abstract: We examine how foreign non-income tax shocks affect US product markets. Our setting is the politically motivated tariffs on US whiskey exports levied during the 2018 trade war, which created an exogenous negative foreign demand shock for domestic producers. Using a difference-in-differences design we show that, on average, US whiskey producers decrease US product prices and thus increase domestic sales volume following the export tariffs. However, we find evidence of strategic pricing, as producers increase prices of locally produced products in primary production states (Kentucky and Tennessee) and more significantly decrease prices in states where whiskey consumption is less popular. Further, we show that US whiskey producers implement smaller product price decreases in states with greater tariff-related media exposure and reduce advertising spending nationwide but not in Kentucky and Tennessee. Taken together, these findings provide timely evidence regarding how foreign trade restrictions impact the US product market and consumer outcomes.
