A century ago, new restrictions on selling alcohol left US wine merchants
reeling. Now President Donald Trump’s decision to raise taxes on European wine imports to 100% presents a similar threat, the industry says. Wine sellers are warning that their businesses will not survive if the tariffs go ahead.
They want Washington to drop the proposal, which is in retaliation over European subsidies for Airbus. The industry says raising the tariffs, on top of an earlier increase, will lead to job losses and price increases in the US.
The US imports about $5bn (£3.8bn) in wine from Europe a year. But since October 2019, the industry has been grappling with a 25% tax on European wines, which the US imposed after winning approval from the World Trade Organization to retaliate in the dispute overs subsidies to plane maker Airbus.
“It is without hyperbole that I tell you that the proposed tariffs would be the greatest threat to the wine and spirits industry since Prohibition, in 1919”
Benjamin Aneff (managing partner of Tribeca Wine Merchants)
You have been hired as a consultant to evaluate the impact of such a tax on supply and demand. You have estimated the supply and demand curves of wine as following:
Qd = 50 – P
Qs = 3P – 10
A. What are the pre-tax market equilibrium price and quantity? Illustrate with a graph (the graph does not need to be numerically accurate but should qualitatively reflect the market).
B. What are the after-tax prices for consumers and suppliers (Pc and Ps) if the tax imposed by the government is $4 per unit?
C. What are the tax revenues for the government?
D. Taking your calculations into account, what insights can you share with the Senator? Think about what will happen to price, quantity consumed, tax revenue and deadweight loss.
E. Who bears a larger share of the tax burden, producers or consumers? On what does this generally depend? (no calculation needed)
F. If you run a winery in Europe, what do you think the short-run impact on your business is? Do you think the long run is different?
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