Scotch trade warned of independence risks

Dutch bank Rabobank has issued a stark warning to Scotch whisky makers highlighting the negative impact independence could have on the industry, should Scots vote yes tomorrow.

David Frost, chief executive of the Scotch Whisky Association

Scotch exports were worth £4.3 billion in 2013 accounting for nearly 80% of the UK’s total spirits exports, however the industry is likely to be impacted should Scotland gain independence.

In its latest report, “Going Scot-free”, the bank notes that while many have argued independence has the “potential” to boost sales of Scotch, it believes the “overall short-term impact on the industry will be negative.”

The bank highlighted five key areas which will be impacted, one of which would be the industry’s ability to access EU export markets, which currently account for 37% of Scotch sales, as a result of its temporary loss of EU membership and free trade agreement with member states.

While Scotland would be expected to re-apply for EU membership, the country would likely to shut out until at least 2018, leaving the Scotch sector at risk of seeing higher import tariffs in its core markets for at least two years, competition from other spirits categories and its competitiveness in key EU markets.

“The Scottish government would also have a mountainous task in procuring new trade agreements with non EU export markets following independence,” warned the bank.

It has been suggested that Scotland could instead join the European Economic Area (EEA) and the European Free Trade Association (EFTA), giving it full access to the EU market without required membership to the EU, however foregoing any influence on it which could prove uncomfortable for a newly independent country.

The loss of the British pound would also raise uncertainly with a change in currency likely to lead to an “increase in foreign exchange risk for Scotch exports”, according to the bank.

Should independence be established, the Rabobank warned it was likely interest rates would rise which could create a “serious challenge” within an industry built on inventories stored up for decades with smaller companies likely to be hit hardest.

And while plans by the yes campaign to lower corporation tax by 3% under the UK tax rate would be positive, Rabobank warned that the newly established Scottish government might be “forced to introduce higher taxation for the Scotch industry”, one of its highest grossing sectors, to “plug part of its fiscal gap” in the years following independence.

Independence would also result in the loss of EU subsidies for Scottish farmers.

“The EU Common Agricultural Policy (CAP) currently provides price support to barley farmers in Scotland. It is uncertain whether Scottish farmers will be able to produce sufficient amounts of barley without this support from the EU,” said the bank.

The Scotch Whisky Association (SWA) said in a statement published in its 2014 annual review that even a temporary exclusion from the EU and its markets would be “damaging and difficult to manage” for the industry.

David Frost, chief executive of the SWA said in May: “At the UK level, we are fortunate to have – on the whole – certainty in our domestic business environment. Monetary and fiscal policy is predictably managed. We benefit from the fact that our domestic market is the sixth biggest economy in the world, large enough to support broad and balanced growth and provide a pool of relevant skills. In contrast, as of now, the nature of an independent Scotland’s currency remains unclear, and self-evidently this could affect our exports, management of supply chains, pricing, and competitiveness. The taxation regime also remains to be developed, and any regulatory divergence between Scotland and the rest of the UK may increase costs to business. In all these areas, we need further information and reassurance before we can assess whether we can mitigate these potential risks.

“At the EU level, the legal framework provided by EU membership is fundamental. The ‘Scotch Whisky’ geographical indication is protected in EU law. We are able to export tariff-free across the single market, use EU mechanisms to eliminate market access problems, and benefit from the EU’s clout in trade negotiations.”

The referendum on Scottish independence will take place tomorrow.