A chill wind is blowing through the Scottish glens as the Scotch whisky industry hunkers down to withstand stinging duties on sales to its most valuable export market, the United States.
Scotland’s whisky business has been an export success story. The industry sent 137 million bottles of Scotch to the United States last year, or around four bottles every second. Scotch exports to the U.S. brought in just over one billion pounds ($1.3 billion), accounting for more than a fifth of worldwide export revenues, which grew in 2019 by 8% to a record 4.70 billion pounds ($6 billion).
But that success is now at risk as the Scotch whisky industry has become an unwitting victim of a 15-year-old trade dispute between the United States and European Union over commercial aircraft subsidies.
The U.S. government has said it will impose 25 percent import duties on a long list of European goods, including single-malt Scotch and Irish whiskies produced in the U.K., after winning a green light from the World Trade Organization to slap tariffs on up to $7.5 billion of EU goods.
The import duties, in retaliation for what the WTO found to be illegal subsidies to European plane-maker Airbus, are due to take effect in a matter of hours, beginning tomorrow.
The tariffs on one of Scotland’s most important and historic industries will hit a country with which U.S. President Donald Trump has close ties. Trump’s mother, Mary Anne MacLeod, was born on Scotland’s Isle of Lewis before emigrating to the U.S. in the 1930s and Trump’s family business owns two Scottish golf courses.
“The staggering thing is it’s a dispute between Airbus and the American government. I’m not sure what that has to do with the single malt whisky market,” said Anthony Wills, managing director of the Kilchoman Distillery Co. on Islay, an island of the Inner Hebrides.
Kilchoman, which Wills founded in 2005, was the first distillery built on Islay in over 120 years. The small-scale producer sells about 10-15% of its output in the U.S., mainly its Machir Bay and Sanaig whiskies.
Wills said Kilchoman and its U.S. importer would absorb the cost of the tariffs in the short term, avoiding sharply pushing up prices for U.S. drinkers. “We’ve already decided to ship enough out there to hopefully see us through until the New Year so those won’t be impacted by the tariffs, but if it’s a long-term measure … then we will have to review the situation as we go forward.”
Tariffs are largely unfamiliar territory for the impacted European importers of this trade dispute. In some industries, like cheesemaking, the producers are unwilling or unable to sell their goods at lower prices to maintain market share. The end result: in the short run, at least, American consumers will be paying a higher price. In the long run, it could mean fewer European products on American store shelves.
Scotch on the rocks
The U.K., Germany, France and Spain, members of the consortium that makes Airbus airliners, are the main targets of the U.S. tariffs. Scotch whisky producers believe they have been singled out because the European Union imposed 25% duties on imports of bourbon and other U.S. products last year in retaliation for U.S. tariffs on European steel and aluminum. (Producers of Parmigiano Reggiano cheese, in Italy, were also hit by a 25% tariff that goes into effect on Friday. They suspect they were targeted because of an ongoing dispute with American cheesemakers over the “parmesan” trademarks in the U.S. market).
The Scotch Whisky Association, which represents the Scottish producers, says that if the U.S. duties stay in place, it would have a negative impact on investment and job creation in Scotland.
Some whisky producers could be forced to raise prices in the U.S., making single malts less competitive and eroding Scottish producers’ market share, the association said. It estimated that U.S. imports of single malt Scotch, worth $516 million last year, could fall by around 20% in a year.
Scotch producers fear the U.S. tariffs could have the same effect on their sales in the United States as the EU tariffs are having on U.S. whiskey in Europe. (By law, Scotch whisky, spelled without an “e” in Scotland, must be distilled and matured in Scotland using only three raw materials: cereals, water and yeast. Scotch malt whisky must use 100% malted barley. U.S. whiskeys, spelled with an “e”, include bourbon, made mainly from corn, and rye whiskey, made mainly from rye).
Exports of American whiskey to Europe rose 33 percent in the first half of last year but dropped by 13 percent in the second half after tariffs were imposed, according to the Distilled Spirits Council of the United States, a trade association.
No deal in sight
British Prime Minister Boris Johnson urged President Trump not to impose the tariffs in a phone call last week, but hopes of a last-minute reprieve were fast receding on Thursday.
“If tariffs do come in on Friday, then it’s vital that the UK government has a strategy in place to get these tariffs removed as soon as possible,” said Graeme Littlejohn, director of strategy and communications at the Scotch Whisky Association.
He urged the UK and Scottish governments to come forward with a support package for the industry, particularly to help smaller distillers that would be worst hit by the tariffs. He said the British government could help by reducing the high duty levied on whisky sold in Britain in a budget set for next month.
“That will allow the small- and mid-sized distillers to continue to invest in their businesses, perhaps pivoting to tourism and other enterprises while we work on an urgent removal of these tariffs,” Littlejohn told Fortune.
The transatlantic trade war could worsen next year should the EU, as expected, win WTO approval to impose tariffs on billions of dollars of U.S. exports in a parallel dispute over subsidies paid out to Boeing. The state of global trade is so rocky, even among longtime trade partners, that an impasse over such a dispute, seems more remote by the day.
The Scotch whisky industry is dominated by British drinks giant Diageo, which has a 38% market share, according to WhiskyInvestDirect, a whisky investment company.
It is followed by Chivas Brothers, owned by French drinks company Pernod Ricard, with a 20% market share. Chivas’ brands include Ballantine’s, a blended Scotch, and The Glenlivet, a single malt.
The biggest independent Scotch whisky company is William Grant & Sons, maker of Glenfiddich single malt and other brands, which has an 8% market share.
U.S. firm Brown-Forman, owner of the Jack Daniel’s U.S. whiskey brand, also owns several Scotch distilleries in Scotland.
The Scotch and U.S. whiskey industries are inter-related—the Scotch industry spends almost 70 million pounds ($90 million) a year importing U.S. bourbon barrels used to mature Scotch.
Diageo, which markets blended whiskies like Johnnie Walker and J&B and single malts like Talisker and The Singleton, has brought limited stocks forward before the imposition of the tariffs and is understood not to expect any material impact on its business from the U.S. measures.
There has been a resurgence over the past decade with a number of new distilleries opening in the last decade, taking the total to 132 in Scotland, a post-World War Two record, according to the Scotch Whisky Association.
The trade row with the United States comes at a bad time for Britain’s Conservative government, which is preoccupied with negotiating terms for leaving the EU. One of the main arguments used by Brexit supporters is that leaving the EU will allow the U.K. to negotiate comprehensive free trade deals with the United States and other countries.
The U.K. minister responsible for Scotland, Alister Jack, suggested on Wednesday that, once out of the EU, Britain could drop sanctions against U.S. whiskey, and the United States could reciprocate by dropping sanctions on Scotch.
“Bourbon is the issue and if we weren’t putting tariffs against bourbon, then we wouldn’t have tariffs against malt whisky,” minister Alister Jack told a British parliamentary committee. “Why do I know that? Because I met with the American ambassador (Robert Johnson) on Monday … and he pointed out that whisky and bourbon were part of the disagreement.”
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