How Airplane Subsidies Could Lead to Higher Grocery Prices

Hardly an hour goes by without news reports discussing how the trade war with China will affect the stock market, soybean farmers or retail prices. In mid-August, President Trump announced he would retaliate against a French proposal to levy a tax on big U.S. tech companies with steep tariffs on French wine.

Surprisingly, no one is talking about or reporting on a more than decade-long dispute between the United States and the European Union, which, according to the Federal Register (Vol. 84, No. 71), notes that certain member states have breached their World Trade Organization (WTO) obligations by providing subsidies on the manufacture of large civil aircraft and by failing to withdraw the subsidies or remove their adverse effect. It’s basically a fight between the Netherlands-based Airbus and U.S. aircraft manufacturers, including Boeing.

So why is an aircraft subsidy dispute, alleged to be close to $20 billion, such a big deal that it could have dramatic implications for consumers and the U.S. food industry?

On April 12, the Office of the U.S. Trade Representative published a list of 317 products (food and nonfoods) that had a value of $21 billion for the estimated import trade value in 2018 from the 28 member states of the European Union. The list was then amended on July 5, when 89 more product categories were added to the list, imparting another $4 billion in import trade value. The list includes 400 staple food products that most of us have in our kitchens and enjoy on a regular basis.

Why is this an important issue? The Office of the U.S. Trade Representative is considering adding import duties to these and other products of up to 100%. As an example, Pecorino Romano cheese that sells for about $14 per pound would now cost $28 a pound. Italy is the leading exporter of cheese to the U.S. from the European Union. But the implications go much further than how much we would be paying for products.

The imported food supply chain would be highly disruptive to the factories that produce the products in the European Union, as well as the shipping companies, importers, distributors, grocery retailers and restaurants, all of which would be affected by lost revenue, lost jobs and a loss of products that simply will find its way to other consumers in other countries.

I spoke with Phil Marfuggi, CEO of West Caldwell, N.J.-based The Ambriola Co., a leading importer of Italian cheeses, who told me up to 20,000 jobs in the U.S. could be affected if these tariffs are imposed. Marfuggi, who is also president of the Cheese Importers Association of America, went on to explain that many of the imported foods are not the kind of foods that can be replaced by domestic production. Certain foods, by law, can only be produced in certain regions—such as Champagne and my beloved Pecorino Romano. He also said that 90%-95% of cheeses imported from the European Union are on the list.

Marfuggi also told me that he is ordering a lot more nonperishable products than usual to be prepared if these tariffs are initiated, which might be as early as this month. He goes on to say that by World Trade Organization regulations, the U.S. does have the right to punish Europe by not adhering to the regulations, but he doesn’t understand why this dispute between two aerospace companies is involving cheese.

The value of the EU imported cheese business is $1 billion and already has high tariffs to the tune of about $134 million, which the importers already pay to the U.S.—they are now 8.5% to 15%. If the tariffs do increase to 100%, that means the importers would have to pay $1 billion. But Marfuggi estimates that wouldn’t happen because the majority of these foods simply would not find their way to the U.S., so that $134 million that goes to the U.S. would probably drop to about $25 million. Today, according to a survey done by the Cheese Importers Association of America, Washington, D.C., more than 20,000 U.S. supermarkets sell imported cheeses. Marfuggi is concerned and says he can’t import cheese at double the cost because the consumers won’t pay those higher prices and it just won’t sell.

Tom Gellert, a principal with Elizabeth, N.J.-based Gellert Global Group, is also quite concerned. Gellert Global Group owns Atalanta Corp., one of the United States’ largest importer of foods from dozens of countries around the world. It was founded by Gellert’s grandfather in 1945 and is still family-owned, with more than 600 employees across the United States. Atalanta scours the globe for innovative foods that are not found in the U.S. for its grocery, restaurant, cruise line and manufacturer customers. Gellert calls the looming tariffs a “food tax,” the brunt of which will be absorbed by his company, which will not be able to bear the additional costs and will thus be passed on to its customers and, in turn, to the consumer.

Gellert is at a standstill. Atalanta has just invested $12 million in upgrading one of their cheese facilities. The company wants to invest more to increase efficiency and develop new products, but Gellert is uncertain about the future and feels he can’t make decisions about his strategic plan for 2020 as a result of the aerospace battle that has, in his words, paralyzed his and many other companies while it’s unresolved.

Consumers are demanding a variety of specialty and imported foods, such as the olive oils that Americans covet. While California olive oils are available, Gellert says they represent only about 5% of the production needed to fill consumer demand.

What can be done? Gellert is imploring all food industry cohorts, including trade associations, restaurants and retailers, to call, write and visit senators and congressmen and explain their concerns and how these tariffs would have a disastrous effect on their constituents’ businesses. “It’s time to stand up and have their voices heard and stop these tariffs from destroying vibrant, innovative and growing businesses,” Gellert says.

The WTO should focus on fixing the inequities in the aerospace dispute and not punish other industries that are totally unrelated.