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 policy.

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 market.

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 nationally.

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 rules.
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 ambiguity.  
For example:

  • 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 consumer. 

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 executive

The photo shows David Frost, CEO of the SWA, with Andrew Walls, convenor of the Trustees of the Crichton Foundation.