Does Scotch Whisky need the EU?
07 Oct 2015
David Frost, SWA chief executive
At the Crichton Conversations event in Dumfries on
6 October, I set out why membership of the European Union is in the
Scotch Whisky industry's interest, what our industry gains from it,
and what further changes we would like to see as part of the
Government's renegotiation efforts.
Here are some key extracts from the speech:
For the Scotch Whisky industry, the big gain of being part of
the European Union is the single market and the EU's single trade
For the UK overall, the single market has probably boosted GDP
by 5% or so. That's about £1,000 per person in the UK every
year, and that is a gain worth having. For business generally and
for the Scotch Whisky industry as a producer of consumer goods,
more affluent customers are always an advantage.
But the Scotch Whisky industry, as a big exporting industry,
gains particularly from the EU. We export 90% of what we
produce, well over 1 billion bottles of Scotch every year. Indeed
Scotch Whisky is Scotland's leading single export and Scotch whisky
is the second biggest net contributor to Britain's balance of trade
in goods. The EU represents about a third of our overall
exports, at about £1.25 billion. France is our second biggest
market, Spain our fifth, and Germany is our sixth.
The single set of rules that is, or at least should be,
represented by the single market, makes it much easier for us to
operate across all of Europe.
Outside Europe too, we also rely on the EU's weight in
international trade, bringing the weight of 28 member states to
bear rather than just one. We believe this helps us secure fair
access to overseas markets.
What do I mean by that? Scotch Whisky is a highly regulated
industry, like the rest of the alcohol industry. We accept that we
always will be the case. But it means that we face all kinds of
rules when we export outside the EU, and often these rules become
barriers, either deliberately or otherwise. The kind of issues we
face are high tariffs, for example the 150% tariff in India, other
discriminatory excise duties and taxes, restrictions on
certification of imports, complex and constantly changing labelling
rules, or rules on licensing which restricts access to the
The EU's trade policy is the best way of changing this. At the
moment the EU is engaged in a series of negotiations for Free Trade
Agreements (FTAs) around the world. TTIP is perhaps the most
well-known and it will be a really important signal for the health
of the world trading system if we can get that agreed. But
for us it is FTAs in emerging markets that often make the biggest
difference. These agreements can knock over many of the trade
barriers that matter to us and make our life a lot easier. For
example the FTA with Korea agreed a few years ago reduced the
tariff on Scotch whisky to zero, and we are now seeing an increase
in exports to Korea as a result. The FTA with Vietnam agreed over
the summer will reduce the tariff from 45% to zero over time. This
is a big opportunity for us. The agreement with Colombia, when
fully implemented, makes it illegal for Colombia to discriminate
against foreign spirits or to restrict the availability of Scotch
onto their markets.
These are the kind of agreements that really matter to us. We
believe we are much more likely to get them with the weight of the
whole of the EU behind us that we are in a negotiation
A third area that really matters to us is the EU's protection of
the geographical indication, the GI as it is often known. That is
the descriptor "Scotch Whisky" which shows that Scotch Whisky has a
specific geographical origin, i.e. Scotland, and possesses
qualities or reputation that is due to that origin. The rules
protecting this are set at European level. They make it impossible
for the term Scotch Whisky to be misused within the EU. The rules
are also usually incorporated into FTAs globally, meaning that the
countries that we agree FTAs with also have to enforce these rules.
That makes it much easier for us to chase down those who seek to
exploit the reputation of Scotch Whisky unfairly.
Still we would certainly like to see reform too, to make these
policies work even better. A more efficient and freer single
market. Eliminating unnecessary national regulations. And the EU
becoming even more ambitious and free trading internationally.
What does that mean specifically?
One example is labelling rules. The sizes of bottles for spirits
are regulated at European level. Only a limited number of bottle
sizes can be used and this is a deliberate policy to ensure that
there can be no confusion of consumers by tinkering with bottle
sizes. That is also great for us because it means that our bottles
can be produced for the whole European market, not just individual
markets. However, the labels that you put on those bottles are
hugely differentiated at European level, with, for example,
different language requirements, different health warnings,
different practice on what needs to go on the front and the back
label and so on. That increases costs, generates complexity, and
means that we have to produce labels for 28 national markets even
though we are supposedly within one single market.
Another example is excise duty discrimination in favour of local
spirit drinks. Particularly in the new member states, EU
legislation often allows lower rates of excise duty on local
traditional forms of spirits. There is no objective reason for
this, a decade after enlargement, and indeed these rules are
sometimes exploited by some governments to more openly discriminate
against foreign spirits. We would like to see consistent
Similarly, EU directives tax alcohol in different forms in quite
different ways. The minimum rate of taxation on wine in the EU is
zero. And some countries do indeed tax it at zero. The
minimum tax on spirits is about £4 per litre of alcohol - though I
can't help noting that the UK rate is seven times higher than this
minimum, at £27.66. We don't understand why alcohol is taxed
differently simply because of the form in which it appears and we
would like to see a single regime across the EU.
Externally, we would like to see the EU focusing its efforts
much more on the big emerging markets. These are the markets that
have complex rules and where discrimination and poor practice is
the most problematic. That is why we'd like to see the negotiations
with India revived, and new effort put into free trade talks with
South America or south-east Asian markets. We think the
Commission needs more resource to do this properly and to enforce
FTAs when they are finally agreed.
So, all in all, the Scotch Whisky industry gains hugely from the
single market and single trade policy. It could be better but we
still gain a lot.
But, some people ask, you could still trade with the EU without
being a member of it. They argue that Brexit would not be so
bad, that in many areas there would still be zero tariffs, that the
World Trade Organisation would stop discriminatory practice, and
that anyway the UK could negotiate a free-trade deal of its own
with the EU.
So what would happen if the British people vote to leave
the EU in the referendum when it comes?
First, I have absolute confidence in our industry's ability to
deal with any problems that face us. We have dealt with
difficult situations in the past - war, prohibition, the closing of
markets - and I'm sure we would cope with any future difficulties,
including the extra barriers of various kinds we would face if we
were out. So I am not a catastrophist on this.
All the same life would certainly be more complex. There would
definitely be huge transitional costs and a big process of
adjustment to a new business environment. In some places existing
EU rules would remain in place, in others the UK would need to
replace them, and in many areas there would be
- Scotch Whisky would no longer be covered by the EU's
FTAs. We might see tariffs going up and it would certainly be
unclear as to whether Scotch Whisky could benefit from other
regulatory improvements set out in FTA's.
- We would need to protect the GI at national level instead of
European level and it would no longer be clear whether other
countries had to protect the GI as required by the EU's FTAs.
- In exporting to the single market, even if tariffs were zero,
we would face additional paperwork and other formalities at the
border that would increase costs and complexity.
It is also hard to see what the real advantage of being out would
be. There are various models for the UK outside the EU but none of
them seem very satisfactory.
If we had the status of Norway we would have continued access to
the single market, though we would still face the paperwork burden
and the border, but we would no longer have influence to shape its
rules. That is very important. The UK is a big member state that
can shape the rules to the advantage of Scotch Whisky and other
industries. Outside we would simply have to observe the rules
without having shaped them.
Another model is that of Switzerland, but this would require us
to negotiate our own FTAs with the EU and keep them fully
up-to-date as rules and practice changed. The Swiss case shows that
in practice this is extremely difficult, and the UK economy is much
more complicated than that of Switzerland.
All in all it is quite hard to see how the balance sheet could
possibly stack up in favour of leaving as far as the Scotch Whisky
industry is concerned, even if the picture is not a purely
black-and-white one. That's why most people in the industry believe
that EU membership has been important to our success and why it is
important in the future.
So, does the Scotch whisky industry need the EU?
The existence of the industry does not depend on the EU.
It depends on our ability to make a great product, at acceptable
cost, and to beat the competition. Over the last hundred
years we have always done that and I am confident we will carry on
doing so in the future.
But our life is made a lot easier by the existence of the
EU. For all its frustrations, the EU allows us to develop,
gradually, a single business model for the whole of the European
continent. That makes production cheaper, paperwork simpler,
and competition stronger and hence better for the
The EU may punch under its weight globally. But that
weight is still very strong and it is able to secure trade
agreements that really make a difference with other global
powers. These help us get Scotch Whisky into new markets and
to knock down discriminatory barriers when we are in them.
Emerging markets is where future growth will come from and
therefore trade agreements with these countries will be vital to
our future success.
Anyone who thinks that doesn't matter should look at yesterday's
agreement in the US of the Trans Pacific Partnership - the trade
deal between the US and various Asian and South American
countries. That is going to give US producers an advantage in
many countries and the EU needs to get its deals in place too - not
just TTIP, but with many countries across the world.
So we would say - let's not do needless harm to our economy.
Let's continue to work for reform and improvement from the
EU. But the UK is a great free trading economy, and its
greatest industries benefit from trade and open markets - so let's
not turn our back on one of the world's greatest free trade areas
on our own doorstep. EU membership is important - let
us stay and make it work.
by David Frost, SWA chief
The photo shows David Frost, CEO of the SWA, with Andrew
Walls, convenor of the Trustees of the Crichton