Scotch tariffs: counting the cost
The tariff war between the US and the EU has hit drinks companies hard, especially Scotch whisky brands. As the situation eases, Arabella Mileham speaks to producers about how they have weathered the storm and the challenges they still face.
In March, the US and the EU temporarily halted tariffs on Scotch imports to the US until July, as the trading blocks worked to resolve a 16-year-old trade spat over civil aviation subsidies. The news was greeted by the industry with relief, but what has been the effect of the tariffs, and is the four-month suspension a big enough window for the sector to get back to business?
As an NBCNews headline in January put it, former President Trump’s economic legacy can be summarised succinctly as “trade wars, tariffs and tax breaks”. The US tariffs on single malt whisky and wine came into effect on 18 October 2018, shortly after the World Trade Organization (WTO) formally granted the US authorisation to implement tariffs on a number of EU-made goods. This was a penalty against the EU for having unfairly subsidised Airbus production and sales at the expense of its US competitor, Boeing in the early 2000s.
The Scotch Whisky Association (SWA) described the combination of tariffs and Covid-19 as contributing to a “lost decade of growth” for the Scottish whisky industry. Global exports of Scotch fell by over £1.1 billion last year, 23% down by value to £3.8bn – the lowest level they have been in a decade, the organisation said, with volumes down by 13%.
Immediate effect
For many, the effect was felt immediately, and price of Scotch rose in the US, as wholesalers and retailers passed on the cost increases, George Grant, sales director of Speyside distillery Glenfarclas told the drinks business.
“It did vary state by state and by retailers as well – it depended on whether they said ‘this particular bottle was imported when imports tax were at x level’ or not,” he explained.
“But people forget that it’s not just a 25% rise, by the time it hit the retail shelf and the consumer, it was more like 45%, as it was 25% on the import price, not the retail price.”
However, Grant notes there were clues that tariffs might be imposed in the months before the WTO ruling, with whisky on a list of probable products drawn up by the Office of the United States Trade Representative in August 2018. This enabled some producers – including Glenfarclas – to ship extra whisky to the US, which arrived before the tariffs were imposed, protecting them from the increased import costs, and effectively delaying or staggering price increases for consumers.
“In normal times it would have been a significant amount of stock, but it did mean that when everyone got caught and their prices had to go up with the next shipment that was going in, we were able to hold our prices for considerably longer,” he explains of the situation.
Smaller producers hit
In many cases, the tariff ended up disproportionately hitting smaller producers, many of whom produce no blends, meaning all of their exports to the US were hit, according to Karen Betts, the chief executive of the SWA.
“They also tended to have a tougher time with importers and distributors, some of whom were unwilling in the end to continue to take stock that would have to be sold at higher prices, making it less competitive,” she points out.
Nick Garland, chief commercial officer of Whyte & MacKay says the key to navigating these challenges was strong relationships with its US supply chain partners and wholesalers.
“We are fortunate to have a strong partner in our importer, E&J Gallo. Together we have worked hard to manage the situation, ensure our product remains available and minimise the impact to the consumer,” Garland says.
Covid complexity
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However, Betts points out that wasn’t just smaller brands that were hit, big brands also saw an effect at a time when Covid-19 started to circulate around the world, closing the on-trade, and making “a bad situation much harder to weather”.
As a result, she says, the suspension of the 25% whisky tariff has been a huge relief for the entire Scotch industry, which lost around £600 million in exports in the 18 months that the tariffs were in place for.
“The suspension means that distillers can start to restock their US distributors and focus on building back the US market after what’s been a very challenging period for exports,” she says.
“Everyone was delighted to see the tariff lifted and to be able to turn their energies towards recovery.”
However, as Garland notes: “The very nature of Scotch whisky means that it will take time for the impact of the tariffs to unwind”, and the pandemic has also “unavoidably” added complexity.
Betts agrees, saying: “Recovery will take time and all our export markets, including the US, remain disrupted by continued restrictions to mitigate the spread of Covid-19 What’s more, constraints in shipping and a shortage of containers are also impacting some Scotch whisky producers.”
Port congestion and global shipping volatility have been widely reported around the world as a result of the pandemic, and exports departing from Europe and arriving on the east coast of the US have been affected. Bottlenecks could continue to hit products by delaying arrival in the US, meaning they arrive after the temporary window is up.
In the meantime, the tariff suspension is a positive sign of intent, and producers such as Whyte and Mackay are planning for tariff-free trade beyond 4 July, hopeful that even if the dispute is not fully resolved in that time another suspension will be agreed.
The UK government is said to be hopeful that the permanent solution can be reached by early July, but German newspaper Der Speigel recently reported that the EU trade commissioner Valdis Dombrovskis indicated mutual tariffs could be suspended for a total of six months (until September 2021) to give the necessary breathing space for industries and workers on both sides of the Atlantic”.
This would give the added bonus of suspending EU tariffs on US whiskey and Bourbon that have been imposed since June 2018.
Betts says the “timing is tight” for July and argues companies will want to know “as far as possible in advance of the deadline what the likely outcome will be”, not only for the whisky and drinks sector, but for those in US distribution, retail and hospitality, who are also affected by the decision.
“We are urging all parties to expedite the negotiations and give the unrelated sector that have been drawn into this dispute certainty as soon as possible,” she says. “We are relying on governments on both sides of the Atlantic to find a pragmatic way through all of this that doesn’t cause us any further, unnecessary damage.”
Planning ahead
For, as George Grant points out, forecast planning is generally longer than a mere four months ahead.
“We’re eight-month forecasting on sales going forward,” he explains. “It’s about how to plan and move things forward, so, for example, one of the things we were looking at was bringing out a new 50-year old whiskey. But there was the question of when will it be ready? Will we be able to ship it to the United States in that four-month window? Will it have cleared customs before the tariffs change?
“It’s a US$9,000 bottle of whisky, so 25% on 100 bottles of that would be a significant amount of money. The fact that it may be six months is therefore is a bit of a relief, and would definitely make a difference,” he says.
However, Grant – and the wider industry – is confident that recovery will come. Betts adds: “Scotch whisky has proven itself to be a resilient category over many years, and I don’t think the current situation is any exception.”
Garland agrees. “Consumer demand for Scotch whisky is strong, and single malt is accelerating strongly,” he says. “The US is an important export market for our whisky now and will be even more so in the future, and the nature of the industry means that we need to take a long-term perspective.
