As China threatens tariffs on bourbon, experts reflect on the times Asia and Europe propped up American whiskey

Key Points
  • Last week, China slapped a 25 percent levy on 106 U.S. products, including whiskey.
  • The move is viewed as a strategic political punch since the entirety of bourbon production must occur within the United States.
  • In the late '80s, the whiskey industry relied on Asian and European markets for survival because Americans found vodka more enticing.
John J. Miller | Getty Images

Bourbon, now caught in the crosshairs of a potential trade battle between Washington and Beijing, once relied on foreign markets for survival.

During the 1970s and 1980s, international markets, namely Asia and Europe, threw a lifeline out to whiskey and bourbon distillers as Americans shifted their taste to clear spirits.

"There were bourbons being produced in Kentucky that were only going to Asia," said whiskey expert Bill Thomas, proprietor of Washington, D.C.'s Jack Rose Saloon, which is famous for its collection of nearly 2,700 bottles.

"Foreign markets have always been a big part of keeping up the revenue in distilleries during the downturn here in the United States and they continue to be a big market in the business cycle," Thomas said, noting the budding trade war between the U.S. and China. The Wall Street Journal reported Thursday night that the Trump administration plans to ratchet up trade pressure on China.

Last week, the Asian nation threatened to slap a 25 percent levy on 106 U.S. products, including types of whiskey such as bourbon, which is known for being uniquely American. Similarly, a few months prior, the European Union hinted at retaliating with trade taxes on Kentucky bourbon.

The moves were viewed as strategic political punches since the entirety of bourbon production must occur within the U.S., per a 1964 congressional resolution.

"Right now, the U.S. exports about $1.5 billion worth of spirits abroad, and many producers in America are pinning their future growth to exports," said Reid Mitenbuler, author of "The Bourbon Empire: The Past and Future of America's Whiskey."

"Without a market to sell to, they might have problems recovering these investments," Mitenbuler told CNBC.

However, despite a possible trade battle between the world's largest economies, Mitenbuler and Thomas remind that the American whiskey industry has proven its resilience before.

Vodka, tequila and … light whiskey?

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Thomas, who has amassed a personal whiskey collection of 6,000 bottles, explained that there were two economic downfalls in the brown spirits industry: prohibition and the rise of vodka.

"Going into the '80s you had complete decline with the vodka revolution, tequila and other clear spirits just knocking brown spirits, specifically, bourbon off the shelves," Thomas told CNBC.

Flavored vodkas, along with a seemingly endless combination of cocktail recipes, forced whiskey makers to pivot from the nuts and bolts of the craft.

"Unfortunately, distillers went away from traditional methods and they came out with a thing called light whiskey, which was a complete bomb," Thomas said.

The short-lived product was distilled at a higher proof, stripping out signature flavor profiles associated with bourbon.

"It was a much lighter style and was supposed to compete with vodka and tequila," Thomas said. "But ultimately it was a complete flop and a total waste of time."

Vodka is a neutral spirit that is distilled at a rousing 190 proof, which leaves it "without distinctive character, aroma, taste, or color," according to U.S. Code of Federal Regulations.

In short, vodka is the direct opposite of bourbon.

An international bailout

Bottles of Beam Inc.'s Jim Beam bourbon whiskey, center, are displayed for sale at a liquor store.
Uriko Nakao | Bloomberg | Getty Images

Whiskey expert and author Mitenbuler said vodka's main assault on bourbon began in 1946 with the birth of a particular cocktail.

"Sales of the white spirit [vodka] remained weak, and a Heublein executive named John Martin was wondering how to boost them when he ran into a bartender friend who was trying, unsuccessfully, to push imported ginger beer at his bar in Los Angeles," Mitenbuler wrote in "The Bourbon Empire"

"His creation: the Moscow Mule, a cocktail composed of ginger beer, vodka, and half a lime, served in a copper mug," he wrote. "Like all cocktail origin myths, there are alternative explanations for the drink's creation, but this one seems most likely."

Mitenbuler credits the Moscow Mule as the vodka-based Trojan horse that captivated the market and displaced bourbon and whiskey from their dominant position in America.

But the world still can't get enough of bourbon. China and the EU, in particular, have expressed a significant thirst for American whiskey.

Today, Kentucky, the birthplace of bourbon, produces 95 percent of the world's supply, employs approximately 17,500 workers and generates a cool $8.5 billion annually.

Last year, China imported $12.8 million worth of U.S. spirits. Nearly $9 million of that total was whiskey, according to figures provided by the Distilled Spirits Council, a trade association representing the liquor industry.

Meanwhile, the Bluegrass State exported $154 million worth of bourbon in 2017 to the EU, according to data from the International Trade Commission.

While it is still too early to tell what may come of a possible trade war, Mitenbuler noted, American whiskey is battle-tested and will rally with help from its loyal market of connoisseurs and craftsmen.