A new study has found an unexpected consequence of the Trump-era trade wars: cheaper American whiskey across much of the United States. However, consumers in the major whiskey-producing states of Kentucky and Tennessee experienced the opposite effect, with prices for locally produced whiskey actually increasing.

In 2018, the Trump administration introduced a series of tariffs that triggered trade disputes with several major trading partners. In response, Mexico, the European Union, Canada and China imposed substantial retaliatory tariffs on whiskey produced in the United States. These measures reduced overseas demand for American whiskey and created new challenges for domestic producers.

“Distilled spirits are an interesting sector because consumers have significant preferences, which can influence pricing on a market-to-market basis,” said Carly Burd, co-author of the study and an assistant professor of accounting at North Carolina State University’s Poole College of Management. Because whiskey accounted for the vast majority of U.S. liquor exports before 2018, the researchers wanted to understand how producers responded when foreign sales suddenly declined.

The researchers analysed sales data from 8,674 stores throughout 2018, examining prices for 2,514 different whiskey products, each sold in 750-millilitre bottles. Altogether, the dataset covered approximately 11.4 million whiskey sales, allowing the team to examine how prices changed across different parts of the country following the introduction of the retaliatory tariffs.

To identify the effects of the tariffs, the researchers compared price changes for American whiskey before and after the export tariffs were introduced with changes in the prices of imported whiskey over the same period. Imported products served as a control group because they were not subject to the U.S. export tariffs imposed by trading partners in 2018.

Overall, American whiskey producers responded to declining exports by lowering domestic prices in an effort to encourage sales at home. However, Kentucky and Tennessee were notable exceptions. Producers increased prices for locally made whiskey in these states, which together account for the vast majority of American whiskey production. The researchers suggest consumers there may have been willing to pay more for products associated with their local whiskey-making traditions.

The results showed that whiskey prices generally remained unchanged or increased slightly in states where demand was already relatively strong. Prices declined elsewhere. One factor influencing producers’ response was the nature of whiskey production itself. Because whiskey must be aged before it can be sold, producers cannot quickly reduce production when overseas demand unexpectedly falls, leaving them with limited options for adjusting supply.

Instead, producers appear to have relied on flexible pricing strategies to respond to changing market conditions. The researchers said the findings demonstrate how political tensions, trade disputes and changes in taxation can create challenges for domestic businesses while prompting them to adapt their pricing strategies. The study also highlights how the effects of international trade policy can differ considerably within a country, with consumers in some regions benefiting from lower prices while those in major production centres may end up paying more.

More information: Carlyle S. Burd et al, Domestic Product Market Impacts of Politically Motivated Foreign Tariffs, The Accounting Review. DOI: 10.2308/TAR-2024-0708

Journal information: The Accounting Review Provided by North Carolina State University