A lot is being said about Trump’s proposed trade and economic policies as he is set to return to the White House on January 20th. Due to a significant trade deficit and rising immigration tensions, front and centre of these proposals is a 25% tariff on Mexican imports. Understandably a rising concern for investors in the burgeoning tequila market. So, how could all of this affect things?
The Proposed Tariff: Why Tequila Might Be Spared
Most likely to be affected by the tariffs could be industries such as automobiles and autoparts as they are historically huge exporters to the US. However, other markets like tequila are in a somewhat fortunate position thanks to Mexico’s Denomination of Origin (DO) laws. These regulations mean that tequila can only be produced in 5 very specific regions of Mexico. This makes it impossible to shift production to the US, unlike other industries mentioned above.
Additionally, tequila is rapidly becoming America’s favourite spirit, with growth rates higher than any other spirit category over the last decade, with global demand currently driven by the US market expected to exceed $40 billion by 2032. This factor alone makes it extremely unlikely that tariffs would specifically target tequila, as it would make it even more expensive for American consumers without any additional economic benefits for the US.
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As a result of these factors, it seems improbable that tequila would be at the forefront of Trump’s tariff plans. Tequila demand is booming, and with no domestic alternative, a steep price hike due to tariffs would surely face significant pushback from businesses and consumers.
The Resilience of the Tequila Market Amid Tariffs
The tequila market is extremely well insulated should Trump’s administration implement a 25% tariff on tequila, due to its high-end premium appeal. This means brands would pass on increased costs to consumers as they are less price sensitive, and the impact on demand is likely to be limited.
Moreover, key alcohol markets such as Canada, the UK, Europe and Asia Pacific are experiencing the highest growth rates for tequila, all of which demonstrating annual growth rates of 8-12% over the last decade. Therefore, even if tariffs were to slow sales in the US, the ongoing globalization of the tequila market makes it extremely robust and shelters it from any US specific trade policies.
Could Economic Growth Boost the Tequila Market?
Many believe Trump’s policies could put more money in American consumers’ pockets as they could boost job creation and economic growth in the U.S. While the US currently accounts for 70% of global tequila consumption, this could spell good news for the tequila market.
People often treat themselves to premium products when they have more disposable income. With US consumers increasingly demanding high-end, premium spirits, tequila’s premium-and-above segments have been driving the market’s growth, with over 55% of the market’s value projected to be held by the ultra-premium segment by 2026. A thriving economy could amplify this trend, creating even more opportunities for growth in the tequila industry.
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A Cautious Perspective on Tariffs and Inflation
When it comes to tariffs and immigration, whilst there’s potential upside, I have my doubts about Trump’s policies. If tariffs push up prices generally, and wages don’t keep pace due to slower economic growth, inflation becomes a significant concern as consumer purchasing power declines. This reduction in disposable income would negatively impact demand for non-essential goods like tequila.
However, during times of inflation, tequila’s status as a premium product provides some insulation to the market. Consumers are less likely to stop spending on luxury items like tequila, as those who gravitate towards them typically do well in any economy. This resilience could help mitigate the potential downside of inflationary pressures in the tequila market.
Tequila Cask Investments: Navigating Uncertainty
Trump’s return to the white house is an important reminder for those of us investing in tequila casks to stay informed and adaptable. Tequila is steeped in tradition and is the fastest growing spirit category world-wide. But external factors like tariffs and economic policy shifts are always worth keeping an eye on.
Final Thoughts
Donald Trump’s policies could have a mixed impact on the tequila market. On the one hand, a stronger U.S. economy with more disposable income could be great for tequila sales. On the other hand, the risks of inflation and higher costs associated with tariffs could create challenges.
At GORDON PWC, we’re committed to helping our clients navigate these uncertainties. Since 2024, and as the first on the market, we have created a Tequila Cask Investment Program allowing you to invest in the future of tequila. First steps are simple, make sure to Join our Waitlist and register your interest and we will contact you for a custom-made investment plan.
Stay tuned for more updates following Trump’s inauguration on January 20th relating to the tequila industry and what this could mean for investors in the tequila market.