II. Basic theory and past experience

It has been well understood for millennia, at least since Plato’s Republic (375 BC), that trade between two entities can be beneficial to both. The reason why that applies to countries was made very clear more than two centuries ago by Ricardo (Reference Ricardo1817) with his theory of comparative advantage. Ricardo showed that even the most technologically advanced nation with the lowest production costs in the world could benefit by specializing in exporting just a subset of products—those it is best at producing—and importing all other products.

Yet most countries still have tariffs on some imports, even though they reduce trade, global welfare, and the economic welfare of each distorting nation that is not large enough to be able to influence its international terms of trade (the price of their exports relative to the price of their imports).

True, a few economies may be large enough to improve their terms of trade by imposing trade taxes. However, the nationally optimal rate of that tax on trade, even for the world’s largest economy (the U.S.), would be small (Itskhoki and Mukhin, Reference Itskhoki and Mukhin2025). In any case, any potential benefit is easily and quickly diminished the more the tariff-imposing country’s trading partners retaliate in kind (Johnson, Reference Johnson1953). Thus, even the largest economies have seen value in international cooperation to desist from exploiting that power via trade taxes when retaliation is likely.

Britain was the first to test Ricardo’s theory in the industrial era, by repealing its Corn Laws in 1846. That allowed it to specialize more in manufacturing and depend more on imports of lower-priced foods and fibers and thereby become the wealthiest country in the world (even though, as shown by Irwin and Chepeliev (Reference Irwin and Chepeliev2021), the reform benefitted the rest of the world as well as Britain due to its influence on the international terms of trade). Britain’s GDP was matched by the U.S. only around 1860, as the U.S. population grew rapidly through immigration, and Britain’s GDP per capita continued to exceed that of the U.S. until 1900 (Maddison, Reference Maddison2007).

In 1860, the signing of the Cobden–Chevalier Treaty liberalized trade between Britain and France. That bilateral treaty included a most-favored-nation (MFN) clause, which required any agreed tariff cut offered to another country would also be applied to imports of that good from this newly signed partner (Viner, Reference Viner1924). It was in their interest to so agree also because that ensured smaller European countries that subsequently signed a bilateral trade treaty with either Britain or France (and most had done so by 1867) also signed onto MFN. The systemic effect of the 1860 Anglo-French accord was thus of much greater significance than its importance to either country alone or even the two together, as it led to a network of treaties that lowered hugely the average level of import tariff protection during 1860–1913, and meant the world enjoyed relative serenity in terms of international trade and monetary relations (Kindleberger, Reference Kindleberger1975). Even though economic growth then was proceeding at less than half the post-World War II pace, it was very rapid by previous standards, as was international trade growth.

However, just when many of the European trade treaties were reaching their expiry date (nearly 50 of them were to expire in the first half of the 1890s), economic difficulties were making their renegotiation contentious and leading to trade tensions. Tariff wars ensued, so that the threat of retaliation, which had served as a deterrent to raising tariffs, was no longer sufficient as a constraint on trade liberalization reversal. Even though MFN was retained, relations were strained by the absence of bindings on tariffs (to prevent backsliding), of constraints on nontariff trade-distorting measures, and of legal means to resolve disputes. Furthermore, the unwillingness of the U.S. or others to adopt the unconditional MFN principle meant the sustainability of the European commercial policy achievements of that period was far from certain. Indeed, the treaty regime ended abruptly with the outbreak of World War I in 1914.

Postwar efforts to restore liberal trade centered on international conferences. However, despite the rhetoric in support of open markets, those meetings did not lead to renewed trade treaties with binding commitments to openness based on MFN. With no country willing or able to replace Britain as the hegemon, there was trade policy anarchy (Kindleberger, Reference Kindleberger, Mathias and Pollard1989). When economic recession hit in the late 1920s, and the U.S. introduced the Smoot–Hawley tariff hikes of June 1930, governments elsewhere responded with beggar-thy-neighbor protectionist trade policies including imperial trading agreements that together helped drive the world economy into depression. Among those “agreements,” Hitler coerced Germany’s smaller neighbors into signing bilateral trade treaties that were highly skewed in Germany’s favor (Hirschman, Reference Hirschman1945, Reference Hirschman1977). The volume of world trade shrunk by one-quarter between 1929 and 1932, and its value fell by two-fifths. Over the entire two-decade interwar period, merchandise trade grew hardly at all (Kindleberger, Reference Kindleberger1973).

The first attempts to reverse the growth in protection were discriminatory, benefitting Europe’s colonies at the expense of other trading partners. While some of those imperial trade agreements were trade creating, others diverted trade from lowest-cost suppliers and so were far from optimal from a global perspective (Viner, Reference Viner1950). By the end of the 1930s, protectionism was far more entrenched than in the late 19th century when only nondiscriminatory tariffs had to be grappled with. Indeed nontariff trade barriers were so rife as to make tariffs redundant and hence a return to MFN irrelevant unless and until “tariffication” of those barriers occurred.

Out of the interwar trade policy experience, many in Britain and the U.S. were convinced that liberal world trade required a set of multilaterally agreed rules and binding commitments based on nondiscriminatory principles. After much negotiation, that led to the General Agreement on Tariffs and Trade (GATT). It was signed in 1947 by 23 trading countries who at the time accounted for nearly two-thirds of the world’s international trade. The GATT provided a forum to negotiate subsequent tariff reductions and changes in rules, plus a mechanism to help settle trade disputes. Eight so-called rounds of negotiations were completed in the subsequent 46 years, as a result of which many import tariffs on at least manufactured goods were progressively lowered in most high-income countries. Global merchandise trade grew faster in the half century following the coming into force of the GATT than in any other half century in history.

The last of those GATT negotiations, the Uruguay Round (1986–1994), culminated in numerous agreements to further reduce trade barriers over the subsequent decade. Another agreement involved the GATT’s Secretariat in Geneva being replaced by a new World Trade Organization (WTO) in January 1995. As shown by Saggi (Reference Saggi2009), openness is easier to sustain under MFN rules than under discriminatory preferential ones, which helps explain why 166 nations, representing 98% of world trade, have chosen to become members of the WTO and another 20 are negotiating to join.

Despite the strong theoretical case and ample empirical evidence in favor of trade openness (Irwin, Reference Irwin1996, Reference Irwin2020) and of an MFN rules-based WTO (Anderson, Reference Anderson2016), most countries continue to impose at least some trade-restrictive policies. Those hardest-to-reform policies persist because of strong domestic political economy forces at work that favor some protectionism. Meanwhile, past policy reforms plus technological advances have fragmented production along value chains, which has greatly increased incentives for countries to reduce their trade restrictions (Baldwin, Reference Baldwin2016). They have also been contributing to the eventual structural transformation of growing economies away from producing primary products and basic manufactures and toward services.

Yet Donald Trump seems unconvinced. He apparently believes import protectionism can boost U.S. manufacturing and income growth, reduce bilateral trade deficits, provide enough extra customs revenue to allow income tax cuts,Footnote ¹ and strengthen U.S. negotiating power to coerce other countries to open up their markets to U.S. producers and to restrict their trade with China. He has therefore been determined to raise U.S. tariffs even further during his second term than in his first. And in doing so in announcing on April 2, 2025 so-called “reciprocal” tariffs ranging from a minimum of 10% across all goods for all countries but ranging up to 50% (see Appendix Table 1), and in inviting one-on-one negotiations to lower each country’s “reciprocal” tariff, he has chosen to willfully violate the core principle of nondiscrimination as enshrined in Article I (General Most-Favoured-Nation Treatment) of the founding treaty of the GATT (and now also WTO).

The rest of the world has been forced to share in the cost of this unilateral U.S. action, which will be higher the greater and more prolonged is the continuing uncertainty associated with U.S. actions and others’ reactions and their adverse impacts on consumer and investor confidence and growth of capital (Baqaee and Malberg, Reference Baqaee and Malberg2025; Carballo et al., Reference Carballo, Handley and Limão2022). The trade consequences for each U.S. trading partner will depend on, among other things, the height of the U.S. tariff hike on goods imported from that country and from other supplying countries, the share of that country’s exports that flow to the U.S., the types of initial policy responses by its government and other countries’ governments (including any U.S.-coerced raising of their barriers to Chinese goods and FDI), and any antidumping actions triggered by affected countries lowering their export prices in their search for non-U.S. markets. Also important—but not modeled here—will be the trade-diverting effects of any subsequent bilateral deals struck with the U.S. that open up those partners’ trade to only U.S. exporters, and any follow-on counterretaliation by the U.S. against those partners that retaliate in kind rather than be coerced into a bilateral “deal” with the U.S. While it is still possible that the U.S. might be able to prize open some countries’ markets, history suggests this discriminatory approach to liberalization is very unlikely to boost global economic welfare even if the U.S. and/or some of its trading partners benefit.

III. Model

To analyze empirically the trade consequences of tariff hikes on wine and other alcoholic beverages requires a global model of national beverage markets connected through bilateral international trade flows, in which the interactions between each nation’s producers and consumers of those beverages are recognized. Wittwer and Anderson (Reference Anderson2020) provide such a model, the GLOBAL-BEV model. It identifies three red still wine qualities, three white still wine qualities, and sparkling wine, in addition to having a beer sector and a spirits sector in each country. It also distinguishes on-premise from off-premise sales of each type of beverage, the former (pubs, restaurants, etc.) having much bigger retail mark-ups on the tariff- and tax-inclusive wholesale prices of alcoholic beverages than sales for off-premise consumption.

In the GLOBAL-BEV model, the world is divided into 44 individual beverage-trading nations, with all other countries being captured in seven composite residual regions (listed in Appendix Table 1). The primary sources of data for constructing the model’s baseline database are Anderson and Pinilla (Reference Anderson and Pinilla2024) plus Anderson (Reference Anderson2020) for taxes on beverage consumption and imports, Holmes and Anderson (Reference Holmes and Anderson2017) for wine, beer, and spirits average consumer expenditure data, and the United Nations (2024) for volume and value of international trade in beverages.

The GLOBAL-BEV model has income- and price-responsive demand equations, price-responsive supply equations, and hence quantities and prices for each of the grape and wine products and for beer and spirits, plus for a single composite of all other products in each country, such that it has elements of an economy-wide model. Grapes are assumed to not be traded internationally, but other products are both exported and imported by each country from potentially every other country.

We shock the baseline of this model by raising tariffs on U.S. imports from the various countries and then also by those of its targeted trading partners who are assumed to retaliate. The tariff rate hikes announced by President Trump on April 2, 2025 and are scheduled to come into effect a week later, are listed in Appendix Table 1.

To illustrate, if the U.S. had a 7% MFN tariff on a product, then imports of that product would now be subject to a tariff of (7 + 10 = ) 17% if it came from the UK and (7 + 20 = ) 27% if it came from the EU. In the case of China, the 20% tariff hike on its goods, announced by the U.S. in March, is added to the additional 34% hike announced on April 2, so its new tariff would be (7 + 20 + 34 = ) 61% on that product. Then on April 10 the U.S. raised its tariff hike to 145% on goods from China and Hong Kong (a change that came too late for including in this analysis, but it is not important for this study since their beverage exports to the U.S. are negligible).

IV. Simulation scenarios

The baseline of the global beverage markets model is shocked to simulate the following scenarios, each building on the preceding one:

1. 1. The U.S. imposes a 20% tariff on imports of all wine, beer and spirits from the EU;

2. 2. Simulation 1 plus the U.S. imposes tariff hikes on all wine, beer and spirits imports from all other countries at the rates listed in Appendix Table 1;

3. 3. Simulation 2 plus, in retaliation, Canada, China, and all other Asian countries impose a tariff hike on all their wine, beer, and spirits imports from the U.S. at the same rate as the U.S. has imposed tariff hikes on each item from them; and

4. 4. Simulation 3 plus a slowdown in global economic growth as a result of these and other trade wars triggered by the Trump Administration’s trade policy upheaval (simulated as a medium-term cumulative reduction in all consumer expenditure of 2% in all countries relative to the benchmark).

The EU, UK, Australia, and other countries have indicated they would not be immediately retaliating by imposing tariffs on U.S. goods. China has raised its tariff hike on U.S. goods to 125% and thereafter will use other means such as nontariff import barriers and restrictions on its exports to the U.S. of critical minerals. The EU plans to negotiate but may also retaliate by July 8, possibly by restricting imports of U.S. services rather than goods. The extent and timing of other responses and any U.S. counter-retaliation or new bilateral deals (that may include value-chain-disrupting rules of origin aimed at disrupting China’s attempts to circumvent U.S. restrictions) are unknown at this stage. But the uncertainty associated with them will itself slow global economic growth and is the reason for including Simulation 4 in the above list.

V. Model results

The results suggest Italy’s wine exports would be reduced by only a fraction of the U.S.$1.1 billion/year predicted by the news clipping reported in the opening of this article. The global model’s first three simulation results suggest Italy’s loss in wine exports to the U.S. would be less than one-third of that amount. They also suggest that Italy would export more wine to the rest of the world, such that its net loss would be less than one-fifth of the value predicted in that news item, other things equal. Those simulations assume, though, that consumer expenditure is not dampened by the tariff war. Should there be a global slowdown in expenditure as a result of the tariff war as modelled in Simulation 4, however, that global loss in Italy’s wine exports may be close to U.S.$500 million per year, because the quantity of wine demanded in not only the U.S. but also the rest of the world would shrink (Table 1). That is a nontrivial sum, even if it is still less than half what that news clipping suggested.

Table 1. Impacts on annual value of Italy’s wine exports of a U.S.-triggered tariff war (2025 U.S.$ million)

Source: Authors’ model results.

This is but a small sample of the many trade results generated from the global beverage markets model. The rest of this section summarizes other key results generated from the above-listed simulations.

a. Simulation 1: A 20% hike in tariffs on U.S. imports of alcoholic beverage from the EU

The unilateral imposition of the 20% hike in tariffs on U.S. imports of beverages from the EU would wipe 18% off the annual value of EU wine exports to the U.S. and $564 million off the value of the EU’s total wine exports (Table 2). As well, the value of U.S. imports from the EU of beer would shrink by 49%, and that of spirits by 42%. In dollar terms, the total net loss in annual wine export sales would be $196 million for France, $268 million for Italy and $44 million for Spain. Italy’s loss includes its Prosecco trade, as the average price of sparkling wine in the U.S. would rise by 7% and the volume consumed there would drop by 4% in this scenario—about twice as much as for still wines (Table 3).

Table 2. Impacts on annual value of U.S. beverage imports from selected economies of a U.S.-triggered tariff war (%)

Source: Authors’ model results.

Table 3. Impacts on U.S. consumer prices and the volume of sales of beverages in the U.S. of a U.S.-triggered tariff war (%)

Source: Authors’ model results.

As always from such discriminatory trade practices, other exporters could gain via trade diversion even though the value of all beverage exports to the U.S. shrink by about 10%. For example, if only the EU was targeted, the value of U.S. imports from the UK of beer would rise by 15% and that of spirits (and wine) by 19%. Meanwhile, annual U.S. wine imports from the southern hemisphere’s wine-exporting countries would rise by between 10% and 18% (Table 2). But those countries’ wine exports to the rest of the world would shrink by $96 million, such that their net gain would be only $78 million (last row for Simulation 1 in Table 4).

Table 4. Impacts of the U.S.-triggered tariff war on annual value of wine exports to the U.S. and rest of world from selected economies (2025 U.S.$ million)

Source: Authors’ model results.

d. Simulation 4: Simulation 3 plus a 2% reduction in all consumer expenditure in all countries

These beverage tariff impositions are part of a more-comprehensive tariff war that is raising uncertainty and thus lowering consumer and investor confidence. If aggregate consumer expenditure were to be 2% lower everywhere than it otherwise would have been, the value of U.S. imports from the world would shrink by one-fifth for wine, by one-third for beer and by one-quarter for spirits (last row of Table 2). Consumer prices in the U.S. would rise least in this scenario because quantities demanded fall, as reflected in the larger drop in U.S. sales volume reported in Table 3.

The loss in value of EU wine exports to the world would be three times larger in this Sim than in Sims 1 and 2 and five times larger than in Sim 3. And in this fourth scenario, virtually all wine-exporting countries would sell less wine to both the U.S. and the rest of the world. For example, annual wine exports from the EU would be lower by $1.5 billion, that from the southern hemisphere by $0.4 billion, and that from all countries by $2.6 billion (Table 4). The differences in these impacts on wine exports across the four simulations are illustrated in Figure 2.

Source: Authors’ model results.

Figure 2. Impact of tariff hikes on the value of wine exports from the EU and all other wine exporters to the U.S. and to rest of world (2025 U.S.$ million).

The story for beer and spirits is more mixed even in this demand-shrinking scenario, with exports from the EU, Canada, Mexico, and China declining but exports from numerous smaller countries rising thanks to the trade-diverting effect of these unequal tariffs (Table 2). But the latter increases are partly because beer and spirits (and wine) consumption fall in every country in this fourth scenario, making more available for export.

China retaliated the next day to the U.S. tariff hike of 34% on its goods (which was added to the 20% hike the U.S. imposed on Chinese goods a month earlier). Table 5 summarizes the results on China’s wine imports for Sim 4 which includes that retaliation by China. It shows those imports decreasing from all countries, but the decreases are uneven across countries: unsurprisingly they fall most from the U.S., but the harm to Australia’s wine sales is not much less (columns 1 and 2 of Table 5). The shares in China’s wine imports fall three percentage points for both the U.S. and Italy, while those of Australia and France each rise by about half those amounts (column 3 of Table 5). But China’s share in the exports of all countries fall, and global wine exports to China are estimated to be lowered by 0.4% thanks to this latest tariff war (column 4 of Table 5). That would add to the decline in China’s role in global wine markets that has been going on since the mid-2010s (Anderson, Reference Anderson2025).

Table 5. Estimated effects of the U.S.-led tariff war on the value of China’s imports of wine, by source country (2025 U.S.$ million and percentage points)

^a Sim 4 assumes China’s retaliatory tariff hike on U.S. beverages is just 34%. Non-U.S. exporters would be estimated to replace more U.S. wines in China’s market if we had updated that tariff hike to 125%, as announced by China on April 10 following the announcement on April 9 that the U.S. “reciprocal” tariff hike on Chinese goods had been raised to 145%.

Source: Authors’ model results.