Carney: New York Times Claims Tariffs Will Double Wine Prices

If President Donald Trump tends to bring out derangement in his critics, then his tariffs bring out nothing short of mania.

Tariffs, which were the primary source of tax revenue for much of the history of the United States, bring out a kind of fact-free fanaticism that normally would attract at least a bit of skepticism from the editors of established newspapers. But time and again we find that things such as fact-checking or normal restrictions against editorializing in news articles vanish when the subject is trade tariffs.

A recent example of the mania comes from New York Times wine critic Eric Asimov.

Most years, January is a time for the wine trade to pause and congratulate itself.

It has weathered the lucrative deluge of the holidays, and should be well into the planning for the next six months, having placed orders for the summer’s supply of rosé and whatever else it expects will be in demand.

Instead, the last month has passed in a blur of fear and dread as the industry contemplates the Trump administration’s threat to impose 100 percent tariffs on all wines imported from the European Union, along with a variety of other goods including foods, spirits and clothing.

Make no mistake, a tariff of that size, or any number close to that, would be catastrophic for Americans in the beverage and hospitality industry. A 100 percent tariff would double the price of wines in shops and restaurants, with disastrous ripple effects.

Consumers may be furious if confronted with a $25 bottle of Fleurie that has doubled in price to $50.

Notice that Asimov does not say that a 100 percent tariff could double the price of wines in shops and restaurants. Nor that a doubling of the price of wine in restaurants and shops is a possibility.

Instead, he states it as a pure factual matter: “a 100 percent tariff would double the price of wines in shops and restaurants.”

This would normally attract at least some attention from fact-checkers and editors. How on earth could Asimov know this would be the effect of a 100 percent tariff? On what authority or historical experience is this assertion of fact based? None are cited. The New York Times itself is the authority for this assertion.

And it is certainly wrong. It was so clearly an error that I decided to wait three days before commenting on it in order to give the New York Times enough time to run a correction.

How do I know Asimov is wrong? Let me explain. Tariffs are paid by importers based on the prices they pay for products. A tariff on European wine is paid on the wholesale price, so a 100 percent tariff would at most double the wholesale price of wine. But since wine is sold at a markup in shops and restaurants, it is very unlikely that a doubling of the wholesale price would double the retail price.

First, it is worth trying to understand how Asimov got to his numbers. Let’s take a wine shop selling that $25 dollar bottle of Fleurie. About a third of the price of most bottles of wines in retail stores is the mark-up, so it is likely paying a little less $17. If the wholesale price doubles to $33 to $34 because of 100 percent tariff, that gives us a retail price of around $50. That’s Asimov’s doubling.

The same math works for restaurants. Here the mark-ups are much higher, from 250 percent to 400 percent. So a bottle that wholesales for $16 will sell at a restaurant for between $40 and $64. Double the wholesale price to $32, and the restaurant tab could rise to between $80 and $128.

But that is unlikely. Asimov’s math assumes that customers would be willing to pay up for the tariffed wine when less expensive non-tariffed wines, both domestic wines and imports from outside of Europe, would be a better value. That is just implausible. The customer at a restaurant is likely to buy the $50 bottle of higher quality Australian wine than the $80 bottle of what would otherwise be $40 French wine.

It is also likely that the European producers would attempt to maintain sales by absorbing some of the tariff, offering U.S. importers lower wholesale prices. And restaurants would likely decrease their own margins, rather than attempting to pass on 100 percent of the tariff. Shops, with lower margins, might be hard-pressed by the margin squeeze and attempt to raise prices, in which case many of their customers would choose non-tariffed alternatives.

Wouldn’t U.S. producers raise their prices if their imported European competitors’ prices were rising? Maybe. But they would be faced with a trade-off between raising their market share and raising their profits. Since the tariffs Trump has threatened to impose on Europe are not meant to be permanent but to push Europe into a more reciprocal trade relationship with the U.S., many U.S. producers would likely decide to use the opportunity to capture market share.

What’s more, the U.S. winemakers are in competition not just with imported wine but with each other, which gives them far less ability to raise prices in reaction to tariffs. If California winemakers attempted to double their prices, Oregon wines could keep prices low and take market share.

That is what we’ve seen with tariffs on goods from China as well as tariffs on steel and aluminum. Rather than pass on all of the tariffs, importers and U.S. retailers have absorbed their increased costs. We know this because prices have not jumped higher on consumer goods subject to tariffs. That’s not really extraordinary. Whether it is higher labor costs or lower taxes or cuts in interest rates, changes in business costs rarely directly filter through to changes in consumer prices. Competition among domestic producers prevents tariffs from translating into higher prices.

In other words, wine seller’s reaction to tariffs is subject to limits that economists refer to as elasticity and substitutability.  Elasticity measures how much a change in price will result in change in the quantity demanded. Substitutability measures how well consumers can use a different product instead of one whose price increases. Asimov’s assertion that wine sellers will double the price of European wine in reaction to tariffs assumes the totally unsupportable idea that wine demand is both perfectly elastic and completely not substitutable: people will just pay higher prices without reducing consumption and will not turn to competitors’ products.

Tariffs on wine imported from Europe may raise wine prices generally and would likely raise prices of European wines sold in the U.S. But the Times is wrong to claim prices will necessarily double in reaction to tariffs.

The weirdest thing about this is that it was an unforced error. Most of Asimov’s story is about wine sellers fearing the impact of the tariffs. It could have been written without the claim that prices at shops and restaurants will double. But anti-tariff mania leads writers and editors to announce improbable outcomes as certainties.