Diageo escapes broad tariffs for now but risks remain
Thursday 10 Oct 2019 Author: Ian Conway

Last week the World Trade Organisation (WTO) gave the US the green light to impose billions of dollars of tariffs on European companies in retaliation for more than a decade of EU subsidies on large aircraft.

Specifically the WTO found ‘that certain subsidies provided by the European Union and certain member States to the European large commercial aircraft manufacturer Airbus caused displacement and significant lost sales (to the US)’.

The EU tried to argue that the US had subsidised its own large commercial aircraft manufacturers but it was fighting a lost cause and the US walked away with the biggest arbitration award in WTO history.

Immediately the Office of the US Trade Representative (USTRO) announced that it would apply $7.5bn of tariffs on a range of EU goods beginning on 18 October, ‘with the bulk of the tariffs being applied to imports from France, Germany, Spain and the UK – the four countries responsible for the illegal subsidies’.

The USTRO said it would ‘continually re-evaluate these tariffs based on our discussions with the EU’ but that it reserved the right ‘to increase the tariffs at any time or change the products affected’.

Tariffs on large new non-military aircraft have been set at 10% while the UK has been singled out for 25% tariffs on most types of clothing including swimwear and nightwear, bed linen, sweet biscuits, books, pictures and prints, building machinery such as diggers, sausages, bacon, cheddar cheese, certain fruits, liqueurs and cordials.

However, in terms of export sales single-malt Scotch whisky is easily the biggest casualty with sales to the US worth $460m or over half the value of British products targeted according to the Scotch Whisky Association.

Fortunately for Diageo (DGE), the biggest maker of Scotch whisky, large spirit categories such as blended whiskies, gin and vodka are exempt from the tariffs for now so its shares have been on a run alongside those of European spirit-makers Pernod-Ricard and Remy Cointreau.

However it’s worth reiterating that the US could introduce new tariffs on large spirit categories, as it has done with French wines, at any time.

The US makes up a third of Diageo’s group sales and in the year to June sales of all types of Scotch were up 7% so a blanket tariff on imports of blended whiskies would be a blow.

Brewers look to be unaffected as exports of UK-brewed beer to the US are minimal. Over 80% of UK-brewed beer is consumed domestically according to the British Beer & Pub Association.

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