Another Brexit Casualty? Scotch Trade Association Warns Whisky May Cost More In Some Countries

Of all the ways Brexit can damage Scotland’s weighty Scotch whisky trade, the industry worries most about two things Of all the ways Brexit can damage Scotland’s weighty Scotch whisky trade, the industry worries most about two things: significantly higher tariffs to countries that offer reduced rates to the European Union; whether the British government will seek to maintain a relationship with the EU that allows it to stay within the union’s regulatory framework or whether Scotch producers will have to comply with a new set of United Kingdom-specific regulations.

The Scotch Whisky Association (SWA), which represents most producers in Scotland (the only country that can legally produce Scotch), released its first complete set of post-Brexit concerns, questions and expectations Wednesday. On the economic side, the SWA says that because the World Trade Organization (WTO) governs trade agreements between its members that supersede EU arrangements, tariffs will remain at 0% on products sold to the EU and countries like the United States, Canada and Mexico, which hold the WTO Most Favoured Nation status that keeps them low. Tariffs will stay high where they’re already high, like in India.

It’s the countries that discount their rates as much as 20% specifically to the EU that will show volatility and likely require the UK to negotiate its own terms. Examples include Korea, South Africa, Columbia and Peru, which charges 0% to the EU and 6% to non-EU favoured nations.

On the regulatory side, the U.K. and the EU have to decide between two options for Britain’s regulatory status when exporting to EU members: the same Economic Area (EEA) status given to Norway, which, according the SWA, “keeps most EU single market laws in force in the UK, at the price of accepting free movement and a budget contribution;” or the Free Trade Agreement (FTA) that Canada and Switzerland enjoy, which allows Britain to set its own rules when it comes to legal matters like whisky definitions, labeling laws, food safety, bottle sizes, etc…

These rules are currently set by the EU, and the SWA is waiting on the British government to offer some clues as to which route it will seek.

The association says, “If these laws are to be rewritten it will make Brexit more complicated and the industry will need to start planning now.”

The SWA entreats the government and the EU to set trading policies that are as “open and free” as possible and to allow existing FTAs to remain intact or at least stay in place while the industry can transition to new ones. Fortunately, Scotch should be able to protect its brand name equally effectively even after Scotland leaves the EU.

Much rides on Scotland’s trade with the EU, and it will serve Britain well to listen closely to what the SWA recommends. Scotland exports 90% of its Scotch outside the U.K., with a full 1/3 of its annual £3.8 billion ($5 billion) worth of exports going to the EU. Because Scotch can’t be imported into the UK, the SWA says it’s “the biggest single net contributor to the UK’s balance of trade in goods, and without this contribution the UK’s trade deficit would be over 10% larger.”

Indeed, SWA executive director David Frost – an EU specialist and former ambassador to Denmark -- has met with Scottish parliamentarians as an appointee of the first minister to Scotland’s Standing Council on Europe, which will advise the government about ways to proceed in a post-Brexit world.

However, the British government has not always shown itself to be sympathetic to Scotland’s needs and currently charges such exorbitant taxes on the domestic sale of Scotch that a full ¾ of the price of an average bottle goes toward excise and value-added taxes. This far outpaces taxes on other alcohol and the SWA would like to see Britain assess Scotch more fairly.

Companies I contacted for this article, including Beam Suntory , didn’t want to speak about Brexit, though London-based Diageo warned against Brexit before the vote, as did the SWA. Now that the British people have spoken, both entities are seeking to reassure stakeholders that with the challenges come some opportunities.

“Brexit is not a big deal for us,” Diageo CEO Ivan Menezes told shareholders on an earnings call last week. With 28 Scotch distilleries that represent a quarter of its business and 1/3 of the world’s supply, Diageo has negotiators in Brussels whom Menezes identifies as more experienced than those of the British government. He says his sole goal for those negotiators is to protect his Scotch assets and that WTO tariff rules should cushion most of the global blow.

Diageo also owns American whiskey brands, like Bulleit, which should help EU sales remain buoyant and its global position secure.  Lew Bryson, author of Tasting Whiskey and former managing editor of Whisky Advocate, says American whiskey is performing well in the EU, and Britain’s impending loss of special EU privileges should help American brands compete a little better, though Brexit will likely result in an additional layer of paperwork for those brands trading in the U.K.

And there’s “the snarky little bit about this that almost guarantees that U.K. officials are going to be hard to get around because they’re pissed,” he says.

However, he agrees with Menezes and Frost that opportunity does exist for Scotch after Brexit.

“There’s a feeling in the industry that the E.U. hasn’t been doing as good a job in opening up new markets,” he says. “They’re hoping they can get a better deal (on tariffs in those markets).”

As for the whisper of a second Scottish referendum to leave the U.K., the SWA says it's concentrating on Brexit for now.