Scotch whisky: US tariffs

Karen Buck Excerpts

Thursday 30th January 2020 Westminster Hall

[David Mundell]

I absolutely agree. It was very welcoming to hear Ivan Menezes, head of Diageo, one of the most successful spirits companies in the world, focusing on that. He said that although Diageo has a portfolio of spirits and can weather the storms, this is devastating for the industry as a whole; Diageo wants to see a resolution through its own offices and through the Scotch Whisky Association for the whole industry.

Since a tariff was imposed on 18 October, export figures appear to paint a bleak picture, although there may have been some additional exporting ahead of the possible introduction of the tariffs to avoid them. According to the Scotch Whisky Association, single malt Scotch exports to the US in November 2019 fell by 33% by value compared with November 2018, following a fall of 26% in October. Although it is too early to tell the longer-term impact, if such drops in exports are sustained over a year and mirror the fall in US whisky imports to the EU in the last 18 months, that would mean a loss of around £100 million in exports to the United States, with a corresponding impact on investment, productivity and, eventually, jobs at home.

For medium-sized and smaller distillers, single malt is all they have and the US market is vital. They have invested in single malt because that industry is growing. Over the last decade, global sales of single malt have grown 166%, and growth in the United States has been even higher—up 230% over the past 10 years. These small and medium-sized distillers cannot shift their investment and are being hit particularly hard.

Distillers are waiting now to see what will happen in the next few weeks. They have paused investment, reduced exports and delayed launching new brands. Some have cut jobs in the US and have stopped hiring in Scotland. Over time, as stocks in the US market run down, the impact will be clearer. Some brands will disappear from the US market altogether, as it becomes uneconomic for smaller distillers to export them. Market share and brand recognition built up over many years, once lost, will take a considerable time to rebuild. The longer the tariffs are in place, the more profound the impact will be on the industry and in Scotland.

Three months ago, when it became clear that import tariffs would be imposed on Scotch whisky, the UK Government asked the Scotch Whisky Association to suggest a package of support for the industry to help distillers cope with an unprecedented challenge in its largest marketplace worldwide. That request was welcome, but the industry is now looking for action to follow through on the proposals submitted. The Budget is due soon, and yesterday my hon. Friends the Members for West Aberdeenshire and Kincardine (Andrew Bowie) and for Berwickshire, Roxburgh and Selkirk (John Lamont) and I met the Chancellor to discuss those proposals and how the industry, and cashmere and shortbread, could be helped more generally in the current circumstances. I look forward to his formal response in or before the Budget.

Obviously, any increase in excise duty in the March Budget would be unacceptable, and the potential impact of the introduction of a digital service tax on UK/US trade discussions and on whisky needs to be understood. It is too simplistic to suggest that France’s decision not to proceed with the digital services tax as planned is the reason why champagne and cognac are not subject to the tariffs, but the full implications of the unilateral introduction in the UK of a digital service tax need to be understood before that step is taken.

It is instructive that the EU has already agreed to increase the co-financing for wine promotion schemes to help boost exports in the face of the tariff on wine. Since the EU imposed tariffs on US whisky, the US government have delivered a $3 million package for trade promotion activities in the EU. The UK Government can learn from those actions. Support must clearly be focused on the need to build a more secure UK base while the US market, which is the cornerstone of investment and business plans, is under threat. We also need to see a resolution of the underlying dispute, starting by taking unrelated sectors out of the line of fire, as the right hon. Member for Orkney and Shetland (Mr Carmichael) said.

On a visit to Roseisle Distillery on Speyside last December, the Prime Minister committed to removing the EU’s tariffs on US whisky as soon as the UK is legally able to following its departure from the EU. That was a welcome statement. I know the Prime Minister, the International Trade Secretary and the Trade Minister have raised this issue at the highest levels in the US Administration in multiple meetings and calls. As we embark upon a trade negotiation with the US, eliminating existing tariffs on both single malt Scotch whisky and American whisky would be an important early confidence-building measure. I urge the Government to make that explicit when publishing the UK’s negotiating objectives for trade talks with the US; otherwise, one could understand why an industry as pro free trade as the Scotch whisky industry would start to question the value of such talks.

We need to find a solution that works for the Scotch whisky and US whisky industries together. We need to return to tariff-free trade in whisky across the Atlantic. We need to see a laser focus from the Government on resolving the Airbus issue. I hope the Minister will commit to pressing colleagues in the Department for International Trade and 10 Downing Street to do that, and will reassure us that the concerns we have raised about a digital service tax are well understood within the Government, to ensure that no further unintended or collateral harm is done to the Scotch whisky industry.

Every time a small Scotch whisky distiller exports a bottle of single malt Scotch whisky to the United States, it is writing a cheque to the US Government for an additional 25% of its value, to pay for a dispute that has nothing to do with it. We should think about that for a second. On average, one bottle of single malt is exported to the US every second, and every second since 18 October, each bottle has had an additional 25% tax added to it. That equates to 5,400 bottles being taxed over the course of the debate, if it runs its duration. No business or industry could sustain that for long.

The scale of the industry, and its importance to Scotland and the wider UK economy, should focus minds on a swift resolution to this dispute. From my constituency in the south of Scotland, to communities on Speyside and on the islands of Scotland, ambitious small businesses are paying the price for a trade dispute that is entirely unrelated to their industry. That cannot be fair or proportionate, and we cannot allow it to continue.

[Ms Karen Buck (in the Chair)]

It might be helpful to Members to know that we will start the winding-up speeches at about 2.40 pm. Given the number of people who want to speak, Members should limit themselves to about five minutes, so that everybody has a chance to be called.

--- Later in debate ---

[Peter Grant (Glenrothes) (SNP)]

I am very pleased to be speaking a lot sooner than expected, Ms Buck.

[Ms Karen Buck (in the Chair)]

Members have been admirably restrained.

[Peter Grant]

It is the first time that I have seen so many Members fail to reach the indicative time limit. I will try to reciprocate because the Minister will undoubtedly have a lot to say. I commend the right hon. Member for Dumfriesshire, Clydesdale and Tweeddale (David Mundell) on securing the debate and on the very detailed and thoughtful way in which he set out not only the value of the whisky industry to Scotland, but the very serious harm that the tariffs can and have caused.

Very few of us in the Chamber represent constituencies that would make someone think immediately of whisky, yet everybody who has taken part in the debate—and the Minister perhaps more so—has in their constituencies significant numbers of businesses that rely on the wealth of the Scotch whisky industry. Unfortunately, the debate has clashed with another major parliamentary highlight, the maiden speech of my hon. Friend the Member for Aberdeen South (Stephen Flynn). I have no doubt that, had he not been in the main Chamber, where he is supported by a number of hon. Members, he would have been here to speak.

Very few manufactured products anywhere in the world are as iconic as Scotch whisky—we are one of the few countries in the world to have a diminutive adjective for nationality that people immediately identify with our best-known export. As has been mentioned, the industry is critical to the economies of Scotland and the whole of the UK. It supports around 42,000 jobs and contributes £5.5 billion to the UK economy in gross value added. That is important to an economy the size of the United Kingdom, so how important must it be to one the size of Scotland?

What surprises a lot of people, no matter how often I remind them—I will continue to remind people and am grateful to the hon. Member for North East Fife (Wendy Chamberlain) for doing so, too—is that my constituency in central Fife is one of the cornerstones of that industry and of the wider distilled spirits industry. Diageo’s Cameron Brig distillery in Windygates produces 480 million bottles of spirits annually. The nearby bottling and packaging plant at Banbeath in Leven, which the hon. Member for North East Fife mentioned, packs 39 million cases of spirits every year. At the recently opened Cluny Bond warehouse at Begg, 1.1 million casks of the golden nectar are sleeping as they wait for the angels to come and work their magic. Those facilities represent Diageo’s recent investment of almost half a billion pounds in my constituency, providing jobs for a workforce that fluctuates between 1,000 and 1,500 people.

The statistics published last week in the most recent Scottish index of multiple deprivation confirmed that parts of Levenmouth, and Buckhaven in particular, are among the most deprived areas in Scotland. Cameron Brig is barely a mile from those communities, and the massive vote of confidence and real commitment to corporate responsibility—rather than just words in the annual report—are welcome signs that things may be starting to improve for thousands of my constituents. They see one of the world’s biggest brand names investing in them and their neighbours time and again.

Anything that jeopardises the long-term sustainability of the Scotch whisky industry, or fundamentally undermines the market forecasts on which Diageo have invested heavily in my constituency and others elsewhere in Scotland, is of concern to us all. It concerns me as the SNP Treasury spokesperson but also as a constituency MP that, although Diageo do not yet expect tariffs to cause any problems to the Fife operations, that will change if they are continued or extended to cover blended whiskies and other sprits.

We can already see the impact of the tariffs: during their first full month, there was a 33% fall in malt whisky exports to the USA, as hon. Members have mentioned. If that continues, it will equate to a £100 million drop in annual sales, which could reach £200 million or £300 million if the tariff is also applied to blended whiskies. Although we should not forget the damage that has been done to other exporting businesses, as the right hon. Member for Dumfriesshire, Clydesdale and Tweeddale alluded to, it cannot be right that 62% of the entire UK tariff is hitting one industry that had absolutely nothing whatever to do with the escalating dispute. Will the Minister consider producing an analysis of the proportional impact of the tariffs in the different nations and regions of the United Kingdom? I will bet that it bears no relation whatever to the proportional analysis of the nations and regions that benefit from the Airbus operation.

It remains to be seen how effective the UK Government will be at persuading the American Government to think again, as it is very difficult to persuade an irrational President to do anything rational. The UK Government have the chance to use the Budget to help Scotland’s world-leading drinks industry to get through what is literally an existential threat to many businesses. The Scotch Whisky Association is asking for a 2% cut in spirits duty, and I hope the Government will give that careful consideration, although in reality, such a cut would return only a small proportion of lost sales revenue.

A more fundamental problem is the continued and inequitable way in which different kinds of alcohol are taxed in the UK. It is not fair, rational or defensible for different kinds of alcohol to be taxed according to how they are made rather than by their alcohol content. If someone at the pub buys a glass of whisky and a glass of wine that contain exactly the same amount of alcohol, they pay 16% more duty on the whisky than on the wine. The only justification for that is it has aye been, and that is no justification at all.

If the Prime Minister is to keep his promise to scrap the import duty on American bourbon, he should make it clear that he expects complete reciprocity from the President of the United States and the complete abolition of import tariffs on Scotch whisky. A number of hon. Members present were there earlier in the week when we met not only senior representatives of the Scotch Whisky Association, but the President and CEO of the Distilled Spirits Council of the United States. They are determined to see the import tariffs on Scotch whisky and the export tariffs on their product abolished. They do not want a protectionist Government to protect them artificially; they want to be able to compete on fair terms with top-quality spirits, not only from Scotland, but from elsewhere. That is one of the few cases that I have seen in which an industry that would expect to benefit from the imposition of import tariffs is among the first to shout out that they want them abolished.

This sorry affair is yet another indication, for those prepared to look with open eyes, that Britain’s place on the world stage—it is currently being debated in the main Chamber—is nowhere near as influential as some people like to think, and that getting any kind of rational trade deal from a wholly irrational President will be neither quick nor easy. I hope that this debate and other exchanges will make it clear to the bully boys in No. 10 and the White House that we will not allow either of them to treat the economy of our nation as a pawn to be sacrificed in the way that our fishing industry was sacrificed.