When U.S. Was Victim of Steep Tariffs, U.S. Retail Prices Fell

When China, Mexico, the European Union, and Canada imposed steep tariffs on U.S. whiskey during the 2018 trade war, American producers didn’t absorb the losses quietly. Instead, according to a new study in The Accounting Review, U.S. whiskey producers decreased U.S. product prices and thus increased domestic sales volume following the export tariffs.

However, U.S. producers practiced strategic pricing, increasing prices of locally produced products in primary production states (Kentucky and Tennessee) and more significantly decreasing prices in states where whiskey consumption is less popular. U.S. whiskey producers also implemented smaller product price decreases in states with greater tariff-related media exposure and reduced advertising spending nationwide but not in Kentucky and Tennessee.

As is the case this year, the 1028 trade war was begun by the Trump Administration when it imposed tariffs on steel and aluminum imports. By mid-2018, the EU, Canada, Mexico and China all retaliated with tariffs targeting American whiskey and bourbon, both recognized as distinctively American products.

Whiskey was chosen at leasst in part because Republican Seen. Mitch McConnell of Kentucky was then Senate Majority Leader. Together, Kentucky and Tennesseproduce more than 86% of whiskey sold in U.S., and Kentucky produces 95% of the world's bourbon.

Brown-Forman Corp. estimated the tariffs would impact its finances by $125 million as U.S. whiskey exports to the thr EU eclined nearly 30% almost immediately. Smaller distillers said their lost half their export business.

The price reductions weren't huge – an average of 44 cents a bottle in states where whiskey isn't particularly popular. But in states such as Kentucky and Tennessee, where whiskey and bourbon are heavily consumed, didn't require such a heavy discount.

Producers cut advertising nationwide, except in Kentucky and Tennessee.

Kentuckians were exposed to more to more than 600 news stories about tariffs in 2018 and Tennessee saw over 200. Heavy coverage may have reinforced loyalty for local industries, the research specculate.

Together, these findings provide timely evidence regarding how foreign trade restrictions impact the U.S. product market and consumer outcomes.