Call for a tax on imports prompts concern among tequila producers

Americans are drinking more tequila than ever. It’s a run the world’s largest producers fear could soon falter as President Donald Trump ratchets up trade tensions with Mexico.

A feud over payment for a proposed wall lining the U.S. and Mexico border culminated in Trump’s call for a 20 percent tax on Mexican imports, clouding prospects for one of the most popular spirits in the U.S. Concerns surrounding a border tax could weigh on Jose Cuervo’s filing Thursday for an initial public offering in Mexico and were one of the only blights on Paris-based Pernod Ricard’s estimate-beating earnings.

“It could lead to inflation in the U.S., and in consequence, this could have an adverse impact on consumption,” Pernod Ricard Chief Financial Officer Gilles Bogaert said on a call with investors. “The reality is that we don’t know what’s going to happen. There are many uncertainties.”

From 2010 to 2015, tequila sales rose 30 percent by volume in the U.S., more than any other alcohol category except cognac, according to research firm Euromonitor International.

The surge has been led by small-batch agave-based spirits including mezcal — a smokier-tasting cousin of tequila — rather than mainstream brands mixed in margaritas.

The world’s largest distillers have responded by increasing investment in Mexico — a neighbor that Trump has said is taking advantage of the U.S. by not addressing trade deficits and border security. Unlike cars, the target of some of Trump’s trade broadsides, tequila can be made only in certain regions of Mexico.

“If I were a tequila producer, I might be a little bit afraid, for sure,” Remy CointreauCEO Valerie Chapoulaud-Floquet said on a call with reporters in January. Foreign spirits could be treated differently from U.S. whiskey brands such as the company’s Westland single malt, which may benefit from Trump’s calls for “America-first” policies, she said.

The dispute has yet to dampen international players’ commitment. Diageo, whose Don Julio tequila is growing faster than its flagship Smirnoff vodka and Johnnie Walker scotch, is “absolutely on the path to expanding our manufacturing capacity down in Mexico — that work is starting and underway,” Chief Financial Officer Kathryn Mikells said in January.