My remarks at the Unified Wine and Grape Symposium‘s “State of the Industry” session earlier this year focused on the uncertainty surrounding Brexit (Britain’s choice to exit the European Union) and the great potential it has to damage wine markets in both the UK and other countries.
I called Brexit a “known unknown” because we know (or should realize) that we really don’t know what Brexit will look like when the two-year exit process concludes or what its impact will be when the dust finally clears.
The exit negotiations will begin in earnest after the June 8 elections in the UK, which Prime Minister Theresa May and her Tory party are expected to win although perhaps not by as big a margin as originally conceived.
An Inconvenient Truth
One particular problem for the wine industry is that wine isn’t very important to the overall British economy (so don’t expect it to get much special attention in the trade negotiations), but the British market is extremely important to the global wine industry, both as a major importer and a bottling and distribution center. The UK market is a top target for many wine exporters, including Australia, New Zealand, Chile, and even the United States.
Kym Anderson (University of Adelaide) and Glyn Wittwer (Victoria University, Melbourne) have taken a first stab at understanding what is at stake in a study that they released earlier this month titled “Will Brexit Harm UK and Global Wine Markets? (pdf). Anderson and Wittwer ran three Brexit scenarios through their econometric model of the global wine market and reported the results. I encourage you to take the time to study their research.
Major Impact on Wine
Anderson and Wittwer’s conclusion, to cut to the chase, are that there would be substantial Brexit impact on UK wine imports:
In our ‘large’ Brexit scenario, as compared with the initial baseline scenario, the consumer price of wine in 2025 would be 22% higher in the UK in local currency terms (20% because of real depreciation of the pound, 4% because of the new tariffs on EU, Chilean and South African wines, and -2% because of slower UK income growth). The volume of UK wine consumption would be 28% lower (16% because of slower UK economic growth, 7% because of real depreciation of the pound, and 5% because of the new tariffs). Super-premium still wine sales would be the most affected, dropping by two-fifths, while sparkling and commercial wines would drop by a little less than a quarter.
The authors examine three Brexit scenarios, judging that the most likely general outcome (the “large” Brexit model) is that the UK would adopt the same tariff barriers as the EU27 in the short run and then work eventually to restore free trade arrangements with Chile and South Africa. This makes sense to me if for no other reason than that Britain lacks the time and staff necessary to negotiate Brexit and to work out its own detailed tariff regime and also to negotiate detailed free trade agreements to replace those that will be lost.
Losers and Winners?
Brexit will obviously have high costs for UK wine consumers and retailers and for the bottling and distribution industries as well. Who will suffer the most among countries that export wine to the UK?
Australia, New Zealand, and the US will have to deal with the negative income growth rate effects of Brexit and the exchange rate impacts, too, but won’t see an increase in tariff rates under the “large” Brexit scenario, since their exports to the UK are already subject to EU rates. They will gain a little form a more level playing field with respect to European wine producers in the UK market.
Chile and South Africa are more vulnerable to Brexit woes because they currently have preferential access to the EU (and thus British) market. Their wine exports to the UK will be subject to tariff at least until they can reach new free trade agreements.
European wine exports (France, Italy, Spain and others) previously had tariff-free access to the UK market and so will face new barriers to trade. But, as Anderson and Wittwer note, the likely tariff rate of 13 pence per liter is dwarfed by Britain’s domestic excise tax of nearly £3 per liter and 20% VAT.
No Rising Tide
Does anyone win in this analysis of Brexit? Well you would think that the small but growing UK wine industry would gain from the various hurdles that imported wine faces — and they will. But Brexit is also likely to make imported winemaking and vineyard equipment and supplies more expensive and restrict or increase the cost of migrant seasonal labor, so it is unclear if Brexit will be truly beneficial.
And of course the declining overall wine market is bad news — the opposite of the idea that a rising tide raises all ships, if you see what I mean.
The devil is in the details of scenario forecasts like this and we won’t really know what to expect until the May government announces its intentions (and even then we might not know because the government has developed a recent habit of reversing itself on economic policies and, of course, the final outcome depends on the EU negotiating stance, too). Until then, however, this forecast is a very good place to start your thinking.
This column is just a summary of the new research with a few thoughts of my own. I encourage you to read the Anderson-Wittwer paper and note your own thoughts and reactions in the Comments section below.
Very interesting Mike. I wonder how these same possible scenarios will effect other aspects of the UK’s economy as well as the global economy beyond wine. I guess only time will tell.