Karen Betts speech to Scotsman Food & Drink Conference

04 Sep 2018

Karen Betts speech to Scotsman Food and Drink conference, 4th September 2018 

The water of life: how Scotland's national drink is confronting new challenges to thrive beyond Brexit

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Good morning.

Thank you for inviting me to speak today at the Scotsman Food and Drink conference. It's great for me to be here for a second time. And in any event, how could I not be? Where would a food and drink conference in Scotland be without Scotch Whisky? Well supplied with Irn Bru perhaps, but certainly lacking the water of life.

But joking apart, I've learned an enormous amount about the industry in the last year. It has been fascinating, as well as a lot of fun. And boy, has it caused me to travel: from Islay to Skye and Raasay, from Fort William to Dingwall and Elgin, from Speyside to Perthshire, from Edinburgh to Glasgow - and back again, many times. Then from London to Paris, Kentucky to New York and Chicago, from China to Japan, and from South Africa to Nigeria and Kenya.

So today I am going to say something about what I've learned as I've got to know the industry; then speak about three of the challenges Scotch currently faces: Brexit, the importance of free trade to us, and tax. So, the industry. Well, it's in good shape. Exports rose again in 2017 to just shy of £4.4 billion; marking a 9% rise in the value of exports on 2016. Those exports accounted for 70% of Scotland's food and drink exports. Scotch was shipped to more than 180 markets, at the rate of 39 bottles a second. And given there are only 195 countries in the world today, that means we are exporting Scotch pretty much everywhere. The figures reflect the steady, and indeed impressive, 4% annual growth that Scotch whisky has averaged over the last 20 years.

Quite simply, as I have discovered, Scotch whisky travels incredibly well. In doing so, Scotch remains THE aspirational spirit, the whisky that everyone, all over the world, wants to drink. A dram - savoured for its flavour, its luxury, its integrity and its timeless heritage - is how so many people from so many different countries and cultures wet a baby's head, toast a marriage, seal a business deal; or simply pause to relax with family and friends. And it's the hard work of all our member companies, painstakingly building and maintaining their brands and export markets, that have made this so. Alongside the work my own organisation, the SWA, does in tackling trade barriers and lobbying for the removal of tariffs around the world, ensuring that Scotch competes on the most level playing field possible in all our markets. Linked to the growth in our exports is the current the boom in distilling. For this is not an industry content to sit back and admire its successes. Instead, across the board companies are driving forward with signifi¬cant investments in distilleries, bottling halls, prod¬ucts and marketing, ensuring that supply will meet demand and working to ensure Scotch is relevant to every generation.

There are now 128 operating whisky distilleries in Scotland, which is more than there have been since the Second World War. And still more are planned - with new ones such as Douglas Laing's Clutha distillery due to open in Glasgow next year, or old distilleries coming back into life such as Brora. Investment in new distilleries is taking place alongside investment in existing distilleries and facilities too. I hardly visit a distillery these days that isn't expanding capacity, whether it's those at the larger end of the spectrum - Macallan, Glenfiddich, Glenlivet - or at the smaller, such as Kilchoman. Investment today is, of course, tomorrow's growth - for the industry but also for the many companies that make up our supply chain, from bottle and package makers to hauliers. As many of you will be aware, investment is also going into tourism. Last year, collectively Scotch whisky distilleries were the third most popular tourist attraction in Scotland, after the National Museum of Scotland and Edinburgh Castle. Visits to distilleries are up 45% since 2010, with 1.9 million visits in 2017. Visitors now spend on average more than £30 per visit. The industry is also creating some superb visitor experiences. I never fail to be impressed by the thought that has gone into visitor centres, the friendliness of the welcome, the knowledge and passion of those showing visitors around. Through these investments, Scotch whisky distilleries are sending millions of visitors home with a very special affinity to Scotch. Now to Brexit. Well, my view is that the industry needs to look at this in context. We have been exporting successfully for 150 years. In that time, much has changed and we have faced many challenges - notably two World Wars and Prohibition in the US - and dealt with a good deal of change, not least as a result of the UK joining the EU in 1973. And still the industry has succeeded.

I am confident that we can continue to succeed through and beyond Brexit, and emerge as an industry in growth. But that's not to say all will be plain sailing. There will be challenges, and quite possibly disruption, ahead. The UK government and the European Union are now reaching the end game in their negotiations on the terms on which the UK will leave the EU and on the shape of any trade deal to come.

There are still some significant areas of disagreement and some fundamental issues to be resolved in the coming weeks. We continue to underscore to the UK government the importance of reaching an exit deal this autumn - in formal terms, that means agreeing the Withdrawal Agreement. Not least, this would lock in the 21 month transition period to the end of 2020, allowing us to plan properly for changes in the way we do business with the EU post-Brexit. We need the practicalities of leaving the EU to be managed smoothly, and in a way that works for business. We do not want a "no deal" Brexit, which would cause very real difficulties for our exports.

We hope to see positive progress between the negotiating teams very soon, otherwise the risk of a deliberate or accidental "no deal" scenario will rise. Nonetheless, in parallel the SWA is advising the industry to look at contingencies and consider how our companies best protect themselves if the UK does leave the EU without a deal. If it comes to it, our industry may well be less affected than some others, given that under WTO rules Scotch whisky would still be exported to Europe at a zero tariff. But we could nonetheless face significant problems if there are delays at the border, or unplanned changes to customs systems and processes, and we would be subject to tariffs on many of our imported inputs - such as, glass, closures, and machinery. Beyond a clear exit deal, the following three things are important to us if Brexit is to work for Scotch whisky:

  • First, we want a future trade deal with the EU that will enable us to export to Europe as successfully as we do now, with minimal added complexity and cost, particularly on customs procedures. For us, that means a minimum of regulatory divergence too. It makes sense for our industry to continue to remain close to EU rules on labelling, food safety, permitted bottle sizes and so on; not to would simply push up costs.
  • Second, we want the UK government to secure the benefits of the trade agreements the EU already has with a range of third countries, such as South Korea, into the future; these agreements matter to Scotch whisky, since without them our annual trade tariff bill alone would go up by more than £50 million. Last week's agreement that the UK will continue to trade with South Africa on the same terms post-Brexit as we do now, which was announced during the Prime Minister's visit to Africa in which I took part, is a welcome start.
  • Third, it's really important to us that we retain our protection as a Geographical Indication post-Brexit. The Geographical Indication system allows us to protect Scotch whisky as a unique, traditionally made, product of Scotland. It is our most robust form of legal protection. It is hugely helpful in tackling counterfeit products around the world, in helping us remove fake Scotch from sale, and in denying illegal actors the space to operate. The system above all protects consumers who can be confident that, when they buy a bottle of Scotch, it is Scotch whisky and not a cheaply produced fake. It is essential that UK and EU negotiators reach agreement without delay on maintaining the status of all existing UK and EU Geographical Indications in their respective markets post-Brexit.

And, as we deal with challenges and change in the short term, we are also keeping a firm eye on the longer term. For it's worth noting that Scotch whisky's growth markets are outside the EU. 30% of our exports go to EU countries, which are stable and established markets for us. We hope those markets will continue to grow. But it's unlikely they will do so at the pace of potential growth in emerging economies. India, China and Brazil are exciting markets for us with untapped potential, as are other Asian markets - for example, Vietnam; a good deal of South America, such as Columbia; and Africa too - for example, Nigeria where I was last week.

Going back to what I said earlier, Scotch whisky is an aspirational drink, and our consumers tend to increase as middle classes around the world grow and become more affluent. So future trade deals which improve our access to markets outside Europe are very interesting to us, and we are urging the UK government to focus on our priority markets as they look at trade beyond Europe post-Brexit. In addition to new trade deals, we are also urging the UK government to reintroduce duty free with European countries from the end of the transition period - that is, from the start of 2021. This would be popular with both our companies and consumers. Now, moving on from Brexit.

I also wanted to say something about the importance of free trade in general, not least since it has developed something of a bad rap. The World Trade Organisation is coming in for a lot of criticism; the US is taking aim at enemies and allies alike, imposing trade tariffs in an attempt to revitalise ailing parts of the US economy; and many of those targeted, from China to Canada and Mexico, are imposing tariffs in return. This trend is concerning. Protectionism risks economic self-harm, escalation and contagion. We don't want to see the WTO, the guardian of a predictable, rules-based, world trading system - with its origins dating back to 1947 - undermined.

Yes, there is certainly a case for reform and yes, there are certainly arguments that China has been misusing the system. But you only have to look to the trade wars of the 1930s, when - combined with the impact of the Great Depression - the global economy shrank by 20%, to know why the WTO was established, and why we need it. The important point for us in this is that Scotch whisky has benefitted greatly from trade liberalisation, particularly in the last 20 years when our exports have more than doubled.

Tariff and non-tariff barriers in many of our markets have gradually been removed. We are now able to export Scotch to a number of countries with no restrictions at all, and too many more with minimal restrictions. Our ability to sell Scotch without the costs imposed by market access barriers to so many global consumers has seen our businesses thrive and expand, and in turn support thousands of jobs across Scotland. Put simply, Scotch whisky is a textbook example of the benefits of free trade. So it is not in our interests for world trade to move backwards, or the advances of the last 20 years to unravel.

There is, however, certainly hope. The US Administration's approach, whatever you make of it, has given the system a jolt. Politicians are starting to grasp the nettle. We are seeing proposals for the reform and updating of the WTO system, including from the US, that are sensible. There is an acknowledgement that something does need to be done about global overcapacity in steel and aluminium. A NAFTA update looks likely. And that many are now refocussing on why free trade is a good thing and needs to be nurtured is helpful. Still, more than ever, we all need to make sure the economic benefits of free trade - which support the 34,000 jobs in or linked to the Scotch Whisky industry in Scotland - are heard loud and clear.

Finally, tax. We have started our campaign for a freeze in spirits' duty in this autumn's Budget. As I've said, the industry is currently thriving, with production up and exports growing. In part, the health of the industry - with more than £500 million of investment going into it in the last 5 years - is because of the Government's careful tax treatment of spirits in that time, when excise has risen only once. Against this backdrop, our members are visibly playing their part in ensuring our industry's robust health, as a job-creator, employer, tax generator and exporter. But, to continue, we need the right levels of tax creating the right business environment at home.

Excise on spirits in the UK is already very high - 76% higher, in fact, than the EU average. Ironically, a bottle of Scotch Whisky costs less in France than it does in the UK because here consumers are paying £3 in every £4 directly to the Treasury in tax. This is not good for consumers, nor for the market for Scotch whisky at home. And this is not simply only a UK-market problem. Many of our export markets look back at the UK when considering appropriate levels of taxation - so very high tax rates in the UK can impact us far from our own shores. That is why I believe that duty on spirits in the UK has hit a ceiling and cannot reasonably rise further.

A duty freeze on spirits in this year's budget is imperative. Recent freezes have delivered investment and growth. Our companies want to see this sustained. They also need a competitive business environment to be able to navigate Brexit with confidence and the flexibility to continue to thrive. So conclude, it does feel at times as though we are living under the old Chinese curse: may you live in interesting times. Will we, then, be able to confront new challenges to thrive beyond Brexit? Yes, I believe we will. The Scotch whisky industry has faced challenges before and we will do so again.

This is a highly collaborative, pragmatic and hard-working industry. Our companies are both ambitious and determined to emerge from Brexit in growth. But it may not be easy.

In which case, as we all know, enjoyed responsibly - and these are not my words - the best thing for a case of nerves may well be a case of Scotch.

Thank you.