The Impact of Increased Customs Duties on Luxury Goods

Trade relations between Europe and the United States have never been so strained. The threat of a 25% tax on European products has French luxury goods bosses wondering what to do.

According to President Trump, the trade deficit with Europe is close to 300 billion dollars, figures disputed by the European Commission, which estimates the amount to be 157 billion dollars.

The effects of these taxes could be devastating for the economy of the Old Continent. Is Trump just bluffing, or are his intentions very real?

Some activities would be more affected than others.

Aeronautics is at the forefront, accounting for 18% of French exports to the United States. The pharmaceutical sector, particularly shaken by the policy of US Health Secretary Robert Kennedy, follows, accounting for 9% of total exports. In third place, wines and spirits also represent 9% of exports.

While some luxury goods companies such as LVMH can hope to escape the taxes by increasing production in their American factories - which Bernard Arnault seemed to intend to do following the announcement of tax increases in France - some producers cannot relocate because of the very nature of their products.

For example, Remy Cointreau and its cognac cannot move their vineyards, nor can champagne producers.

Regarding LVMH, while fashion and perfumes can be relocated, it should be considered that its Wines and Spirits division records 40% of its turnover in the US.

According to a report by Moody's, an average of 15% of sales of French luxury brands are generated on the US market and represent 80 billion euros in revenue for French luxury houses, according to the consulting firm Bain & Company. In 2024, France is expected to have exported 1.8 billion euros worth of high-end women's fashion items, 2.8 billion euros worth of cosmetics and perfumes, and 1 billion euros worth of handbags.

What choices will luxury goods companies make to face up to this threat of a trade war?

According to Moody's, some groups, such as LVMH, will still withstand a profit contraction thanks to high margins. If the choice of a price increase were to be adopted, analysts believe that customers would be sufficiently loyal to certain iconic brands to avoid a decline in demand.

The third option of relocating production to the US could also be adopted by some, such as the giant L'Oréal, which has five large production units in the country. The same choice could affect the Louis Vuitton factory opened in 2019 in Texas. However, other luxury groups reject this hypothesis. This is the case, for example, with Hermès, or prestigious family-run groups such as Clarins.

However, following the example of the US, other markets could consider raising customs duties in the future, starting with China. The chain reaction could be devastating for the global economy.