*This video with Adriana McKinnon, Director of Logistics at Park Street, was recorded on January 30, 2025, prior to the signing of the executive order imposing beverage alcohol tariffs.
On Saturday, President Donald Trump signed an order to impose 25% tariffs on imports from Mexico and Canada and a 10% tariff on imports from China. While these tariffs were expected to take effect on February 4, 2025, today the U.S. reached deals with both Mexico and Canada to delay the implementation by one month. Regardless, the announcement of these tariffs sent waves through the global trade ecosystem. Tariffs on Mexico and Canada, in particular, present significant challenges for the beverage alcohol industry.
Understanding the Tariffs
These tariffs represent a duty on imported goods, fundamentally altering the cost structure for U.S. businesses that rely on trade with Mexico or Canada. A product valued at $100,000 now incurs an additional $25,000 in expenses, a substantial increase that can dramatically reshape profit margins and pricing strategies.
Precise Application of Tariffs
The tariffs will be applied with specific nuances that businesses must carefully navigate:
- Tax-paid products arriving on or after the implementation date are subject to the full tariff
- Cases withdrawn from bond and Foreign Trade Zones (FTZs) face similar tariff requirements
- There remains uncertainty about potential retroactive application for shipments that arrived before the implementation date, depending on specific declaration language
Strategic Responses for Businesses
Successful navigation of this new trade environment requires a multifaceted approach that goes beyond simple cost absorption or pricing changes.
Sourcing and Supply Chain Flexibility
Businesses must carefully evaluate their supply chains, considering factors like denomination of origin and potential alternative sourcing strategies. For instance, some products, like Tequila, have geographic production requirements that limit sourcing options.
When possible, companies might explore strategies such as bulk import and domestic bottling, which could potentially mitigate tariff impacts. This approach requires careful analysis of CBMA eligibility.
Utilizing Trade Zone Advantages
Free Trade Zones offer a potential lifeline, allowing businesses to defer or potentially avoid tariff payments. By strategically storing goods in these zones, companies can create breathing room for more comprehensive strategic planning.
Collaborative Producer Relationships
Engaging directly with producers presents an opportunity to collectively address tariff challenges. Renegotiating contracts, exploring cost-sharing mechanisms, and developing joint strategies can help mitigate individual business impacts.
Advocacy for Beverage Alcohol
While tariffs introduce significant challenges, they also create a critical opportunity for collective advocacy. Businesses, particularly in industries like wine and spirits, can actively communicate the real-world impacts of these tariffs to build public awareness about trade policy consequences and influence future policy discussions.
Through strategic adaptation and unified advocacy, companies can transform potential disruptions into opportunities to create a more resilient beverage alcohol industry.
How to Adapt to Beverage Alcohol Tariffs Transcript
Adriana McKinnon (00:03)
Hi everyone, my name is Adriana McKinnon. I head the logistics department at Park Street, and today we are diving into a topic that could have a significant impact on businesses and consumers: tariffs. Specifically, we are going to talk about the proposed imposition of a 25% tariff on imports from Canada and Mexico. Yet, the application of these tariffs would be very similar to any other tariff that we see in the future. Whether tariffs go into effect now or later, they have the potential to shake up the industry. So whether you are an importer, a business owner, or just someone who likes to know about global trade, this video is for you. Let’s break down what’s at stake, what the potential impacts are, and how businesses can prepare for tariff changes.
Adriana McKinnon (00:50)
For US importers, a 25% tariff means that every product imported from Canada and Mexico would have an additional 25% ad valorem tax added onto the cost. For example, if your product is valued at $100,000, you’re now looking at an additional $25,000 tariff that would derive from the commercial invoice issued by the producer.
How is it applied?
- They would apply to tax-paid products that arrive on or after the implementation date.
- They would apply to cases withdrawn from Bond and FTZ (Free Trade Zone) withdrawals for shipments that arrive on or after the implementation date.
- It is unclear if tariffs will be applied to withdrawals from Bond and FTZ for shipments that arrived before the implementation date, as that will depend on how the declaration is written. However, it could happen.
Adriana McKinnon (02:00)
So how can businesses mitigate the impact? I’ve received many questions about diversifying sourcing, and while tariff engineering is an acceptable response to potential increases, it is important to consider the full scope of a product, including its denomination of origin and how that influences sales as well as its permissibility. For example, tequila: tequila has to be produced in Mexico. If it were to be imported to another country for production, it could no longer be tequila.
Another consideration is CBMA (Craft Beverage Modernization Act). Bringing product in bulk and bottling it in the US, for instance, would affect the product’s CBMA eligibility. If for any reason origin and tax-cut eligibility are not influential factors, then considering bottling in the US could be an option—I say the US because it could be the safest option.
Price and product adjustments are another focus. Analyzing profit margins and calculating what a cost increase would look like could be an option. This is to be done conservatively as there’s still a great deal of uncertainty; however, you could still give the scenario some thought for future planning.
Adriana McKinnon (03:18)
Using Free Trade Zones is another option. Free Trade Zones allow you to defer or even avoid paying tariffs, which can be a lifesaver if you have the option to store in these zones. It might give you some breathing room to figure out the best way to move forward without having to pay any tariffs upfront. What I’m referring to when I say avoiding tariffs is under the possibility of the tariffs being cancelled; at that particular time, when you remove the product from the FTZ, you would no longer be responsible for any tariff payment.
Another option is working with producers. Speaking with your producers about locking in favorable rates or renegotiating contracts could be a good idea. After all, their commercial value is what is going to drive the tariff. This is a great time to strengthen relationships and explore ways to absorb the impact together.
Adriana McKinnon (04:18)
Here are some strategic recommendations:
- Early Planning: The best time to prepare is now. If something happens, you’ll be resilient. Reviewing your existing contracts and supply chains and starting to think about how these tariffs might impact your operations now is a good idea.
- Advocacy: It’s crucial for businesses, especially in industries like wine and spirits, to make their voices heard. You may not be able to fight every tariff, but spreading the word about how tariffs on wine and spirits impact American businesses is something we can all get behind.
- Ongoing Monitoring: Tariffs can change fast. Stay updated on announcements and any trade negotiations. Having a reliable source of information will help you stay on top of developments.
Adriana McKinnon (05:06)
To wrap things up, the key to navigating this tariff situation is risk management. By planning ahead, keeping an eye on supply chains, and being proactive about renegotiating contracts and adjusting your pricing, you can keep your business competitive and resilient. Sure, these tariffs might introduce some short-term costs and challenges, but with a strategic approach, you can turn them into an opportunity to adjust, adapt, and stay ahead of the curve. Thanks for watching!
More Resources on Market Strategies
The Park Street Insider Daily Newsletter
Choosing the Optimal Route to Market for Your Brand
Our Guide to E-Commerce Strategy for Beverage Alcohol
Our Guide to Getting Started in the U.S. Market