Is Whisky Going to Become More Expensive

Brexit and its Implications for Europe

The vote in the UK on June 23rd, 2016 to leave the European Union came as a surprise to many politicians and media representatives. For many months, the polls had shown the Remain camp in the lead. However, the Leave camp slowly gained momentum. That the result was Leave at the end even surprised me. I expected the result to be narrow like in the Scotland referendum in the autumn of 2014. But I 've never believed in a Brexit personally. 

Leaving a community always means an increase in uncertainty, but just like with a broken marriage, the benefits of severing the ties sometimes seem to outweigh the negative consequences. Whether that's really true can only be judged in hindsight. And that's exactly what creates the uncertainty. 

The financial markets reacted immediately. While the pound had become stronger and stronger against the Euro since 2013, making whisky more expensive on the continent, it fell massively after the result had been known. It wasn't as bad as the press in the EU announced, though. The exchange rates to the Euro are still at levels last seen in 2013. Sinking currency rates are always bad for imports. It will therefore become more expensive for the United Kingdom to buy foreign goods. In return, exported goods such as our whisky become cheaper on the target markets, since the export conditions become more favourable. A sinking pound should boost British exports. 

Now the question of possible duties is arising here on the continent. Will the EU levy customs duties, especially on Scotch whisky? The question is legitimate, since many officials in Brussels are moping and may want to make an example of Britain. However, imposing a duty on a trade partner is a two-edged sword, since the 'disadvantaged' country in turn is going to levy duties on imported goods, too. At this point, it's worth to take a look at the European trade balances. This balance has been negative for Great Britain for more than a decade. At the moment, it is -150 billion Euros. The most important export nation in the EU is Germany with a surplus of 250 billion Euros. The UK imports 90 billion Euros worth of goods from Germany alone, followed by the Netherlands, France, Belgium and Italy. Britain would levy duties on these goods, too. But since the British trade balance is negative, this would do more harm to the EU than to the UK. Thus it is not very likely that there will be duties on our beloved whisky. 

You can find the number of 550 Euros per hectolitre (23 US$/Gal) of pure alcohol as consumption tax in the EU. However, this has nothing to do with customs duties. It's just the minimal value member states should set for their consumption tax. In Germany, for example, it is 1,303 euros per hl of pure alcohol (55US$/Gal). Whisky exempt from the consumption tax in the country of origin when it is exported. Only the target country adds its individual consumption tax on the whisky. Since this tax is raised by the customs authorities, there are often misunderstandings. 

In the coming two years (or rather three years), the EU and the UK will negotiate the details of Britain's exit and will conclude adequate trade agreements. There are several examples. Norway, for instance, belongs to the European Economic Area (EEA). With Switzerland, on the other hand, there are a lot of bilateral agreements. Canada and the EU negotiated the CETA agreement, and Turkey and the EU are in a customs union and don't levy duties. All these agreements have one thing in common: custom duties are reduced significantly or avoided altogether in order to boost trade. This will most likely also apply to whisky. After all, beside oil, whisky is one of the most important export goods of Great Britain. But even if customs duties were to be levied, on average they are between 2.5% and 3.5% for imports from all over the world into the EU - nothing that couldn't be compensated by a weaker pound. 

At the moment import prices for whisky on the continent are falling, since the pound has fallen and the UK is still in the EU. But the difference won't affect whisky prices immediately. Since the major part of goods is only moved between branches of corporations, their internal fixed exchange rate applies, which is an important internal financial figure. Companies don't like changing this exchange rate because the automatic, internal clearing would become much more complicated. This rate is typically adjusted once a year. That's why you shouldn't expect great changes in whisky prices in the EU within a year. 

However, cautious people should stock up on whisky soon. Changes always carry risks with them, too. Those a bit more willing to take risks, however, may well wait, since there may be the chance of reduced prices if the exchange rate keeps sinking. 

I myself don't worry much about the Brexit. The normal people in Great Britain are just as nice as the people in the rest of the EU. And nice people always find a way to exchange goods. Prosperity can only be created by division of labour and by trading. On this basis we can enjoy the fruits of our labour together, which for us is whisky.

 

Horst Luening, July 2016