“Brexit means Brexit,” according to British Prime Minister Theresa May and a host of other officials. If all goes according to plan PM May and the United Kingdom will formally begin the process of exiting the European Union in March 2017 when Article 50 of the Lisbon Treaty is invoked, starting a possibly irreversible two-year ejection-seat countdown.
Know What I Know?
But Brexit isn’t as simple as walking out the door and will require detailed negotiations on dozen of issues. No one knows what the terms of the exit agreement will be, so no one really knows what Brexit really means. Brexit means Brexit? Nonsense.
Brexit is best understood at this moment as a “known unknown” in Donald Rumsfeld’s famous taxonomy (see below) and not a “known known” as some people pretend.
Britain is sharply divided about what Brexit negotiations should seek to accomplish and in any case each of the 27 remaining members of the EU (and some regional bodies, too) will have to approve the final deal. Talk about herding cats! Who knows what the final agreement will look like?
Britain’s Central Place in Wine
How concerned should people outside the UK be about Brexit? The conventional wisdom is that leaving the European Union will have very substantial economic effects for the UK economy, smaller impacts on the remaining EU nations and smaller disturbances still in the rest of the world.
While this may be true in general, it is clear that there will be more widespread disruptions in several particular sectors: possibly for automobile manufacturing, for example, very probably for finance, and almost certainly for wine.
Britain is not yet a very important wine-producing nation (climate change might eventually change that), but it a key consumer of wine. Data from the UIV’s Wine by Numbers data project for the first nine months of 2016 show the UK’s central place in global wine markets.
The UK is #2 behind the US (and ahead of China) in terms of the value of bottled wine imports, for example.It is also #2 behind the U.S. in sparking wine imports and in second place (after Germany this time) in bulk wine imports, all rankings in value not volume terms.
This makes the UK market the #1 target for many international wine companies — even more important that the larger US market because of the US market’s complex and fragmented regulatory structures. Smaller wine exporters may find that they can get access to the entire UK market for the cost of entry into a couple of US states. Then, of course, you have to sell the wine, which is always the hardest part.
Plunging Pound and Rubik Cube
Any significant change in UK wine imports (or imports by any of the largest markets) has a disruptive impact on the global market for wine because, as I have written before, the global market is like a giant Rubik’s Cube. When one national market moves out of equilibrium it starts a process of changing relative prices and shifting sales that cascades through various interconnected markets until a new general equilibrium is reached.
Wine by Numbers data suggest that the largest direct effects would be concentrated in the countries listed in the table above that are the leading sources of UK imports: France, Italy, Spain, Chile, New Zealand. (The table shows bottled wine imports only — bulk and sparkling imports have different distributions.) These countries are where the Rubik twists happen first.
How and why will Brexit affect British wine imports? Well, as I said, Brexit hasn’t happened yet, but the initial impact of the Brexit vote was to cause the British Pound (GBP) to fall in value on foreign currency markets as the graph above, which shows the GBP versus USD, suggests.
The GBP’s plunge makes all imports more expensive to British buyers and inflation rates have increased in the UK as a result. The degree of exchange rate “pass through” into retail prices and the timing of the increases is different in each market. UK wine prices are on the rise.
The First Shoe Has Dropped
UK wine buyers are famously price sensitive, so wine sales will fall, setting the global market Rubik Cube spinning as sellers who are squeezed out of the changing UK market look for margins and opportunities elsewhere. Falling sales in London mean that more attention is focused on the U.S., Canada, and China sales, for example.
The exchange rate effect is only the first in a series of ways that Brexit will impact global markets. The other effects depend upon what form Brexit takes, making the “Brexit means Brexit” tautology doubly annoyingly. What are the possibilities? Come back next week for analysis.
Here is the famous “known unknown” comment in case you missed it.
Really good article Mike. Highlights again interconnected global market.
Just one point re bulk wine imports to UK and impact on large bottling plants of Brexit.
UK is entrepot for reexport to EU markets and collects significant duty as such. This is very likely to change with further impact on UK economy and cause further upward pressure on wine prices.
That’s a great point, Dave. Thanks!
Very nice piece Mike. It sure is going to be interesting as UK is such an important and as you said “price sensitive” market. I guess time will tell!
You’ve written one of the few sensible Brexit articles around, Mike. As Captain Benjamin Sisko said in the pilot episode of Star Trek Deep Space Nine, “We explore the unknown one day at a time.”
So we’re forced to play the odds And as usual the odds say the future won’t be as bad or as good as various forecasters predict.
In the Casino of life, sometimes it’s best not to bet and far better to sit back and enjoy watching the game.
Well said, Ken!
As a wine enthusiast living in Texas, I second your comments regarding the “fragmented regulatory structure.” On several occasions, I found excellent bargains on internet sites, only to learn they don’t ship to Texas.
All’s well that ends well…I also discovered the website of my favorite winery in Briedel, Germany (I lived in Traben-Trarbach when I was stationed in Germany. To my surprise and delight, they ship to Texas.
Wow! You are very lucky! Thanks for your comment.