A historic cognac region in the south-west part of France is met now with challenges that are unprecedented, coupled with intensifying trade wars. The top-of-the-line spirit distillers are pulling out the vines of the vineyards that have been through the thick and thin for many generations with wars and financial crises, a visible symbol of the distressing nature of the industry.
This week’s 20% tariffs on all European imports to the United States have also taken another big chunk out of the $3 billion cognac sector in France, and delivered another blow. The blow, as a matter of fact, is that the relevant area had not recovered yet from the dismay the industry experienced last October due to the imposition of tariffs by Beijing right after the European Union put duties on electric vehicles from China.
The combination of the two impacts definitely spelled the end of the drought for cognac manufacturers. Over 50% of the developed Chinese market that used to hold the second place in terms of volume has gone down in losing since the tariffs from China have taken their toll. With U.S., worst hit and home to the most of their consumers, representing 50% of the sales of their entire industry, cognac-makers are now at the edge of extinction.
In such a desperate situation, a number of wine producers have, together with industry players, launched a campaign aimed at financially assisting winegrowers amid the crisis. Others have started uprooting old vineyards, which is a drastic action that indicates the market’s depression.
Besides doing so, the President of the United States, Donald Trump, pledge for the imposition of a 200-percent tax on European wine and spirits if Europe decides to raise duties on American bourbon. Wine and spirits that have the potential to be included in an even more serious conflict have thus created a wave of panic through the French luxury sector.
Fashion houses and cosmetics companies are also brainstorming about the potential effects of the tariffs on their revenue. A considerable chunk of sales of some of the enterprises comes from American consumers, therefore, they get most of their revenue from the American market.
The French administration has urged the European Union (EU) and has been speaking about the need for unity and strategic patience. The officials have highlighted the importance of a coherent EU reaction instead of immediate actions taken by the individual member states, which might provoke even more differences.
The Economy Minister has been calling on companies in France to exhibit economic patriotism by rethinking their investment projects in the US. This message is a reaction to the increasing worry of French companies intending to move their production to America to avoid the tariffs.
The whole luxury industry in Europe is affected as well. The major luxury conglomerates’ stock prices have been not only hit by the general drop in the market but also tumbled severely, with some of them even facing a double-digit percentage decrease this week alone.
According to industry analysts, the tariff costs may be shared by companies in the name of a reduction in profit. This will enable them to continue to be competitive in the United States market but they may see their profits diminish. The tariff imposition was not favoring many companies whose profit margins were already under pressure due to high inflation rates and supply chain challenges.
The current state of the French economy is the worst, considering the fact that the country has all along been making remarkable recovery efforts after years of problems. The luxury sector, for a long time the flagship of France, has greatly helped the country secure substantial revenues from exports, thus becoming an important factor in employment creation.
Rural communities in areas like Cognac, where making cognac has been the commitment for generations and living style for centuries, are being put to the test. The potential loss of a generation’s wisdom and skills is more than just an economic issue; it is a cultural one as well.
European representatives of trade are going to engage with their American partners the next week in a bid to secure the possibility of limiting or revising the tariffs. However, people are not really hopeful of positive revelations since the government is standing firm on their policies.
It is not just a local matter; that is why businesses are coming up with plans in all the regions of France, as they feel the need to be prepared for the April 9 deadline of the reciprocal tariffs.
The solution for some is to look for other markets for export, while the rest are thinking about moving their production to another place or reformulating their product to avoid the tariff issue as much as possible.
The situation at hand is a representation of how the industries which focus on a specific product can be vulnerable to political clashes and trade wars. In the case of cognac, where products are with protected geographical indications and have a traditional production process, the idea of moving them to another place is not practical.
Consumer advocates have a reason for concern saying that American consumers shall in reality be the main sufferers since they will need to cover the cost through the high prices for European luxury goods. Naturally, this may lead to a change in the consumer’s behavior and will provide the chance to promote a different foreign or domestic product.
Leaders in the sector made it clear that despite all the difficulties, they believe in the necessity of the industry to adapt in such difficult times. They mentioned the history of the industry being strong enough to pull them through the crisis of the market, which is mostly political and economic, but in all of this, it is also very important to note that it is the most severe scenario so far.
The next months are considered to be decisive for the assessment of whether these tariffs are a short-term disturbance or a core redefinition of the world trade picture that may undergo permanent changes in the position of France in luxury goods market.