Trade policy is like a game of four-dimensional chess. The UK is now stuck between the big beasts of the trade policy world – the European Union and the United States – and must become streetwise in looking out for its own interests. These and other lessons from US tariffs on Scotch Whisky and ongoing UK trade negotiations with Washington by Martin Bell.
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My family come from the ‘Far North’ of Scotland; an economically fragile, remote community. During my lifetime, industries have come and gone and many people have had to move south for employment. But a constant throughout that period has been the local Scotch Whisky distillery.
The nature of the jobs the distillery supports has changed over the years, but they are well paid, secure and growing in number. Increasingly, the distillery is a key attraction for international tourists and the renaissance in the Scotch Whisky industry over the last 30 years has led to the rebuilding of a long closed second distillery in the village, which will begin production next year.
I am constantly amazed that the spirit distilled in this small corner of northern Europe is enjoyed by consumers worldwide. That what is, on the face of it, a cottage industry is, in fact, the UK’s biggest food and drink export, accounting for 20% of the total value of Scotland’s goods and services exports combined. It is an iconic product.
The Airbus dispute and collateral damage to unrelated sectors
Usually, being an iconic product is an advantage. In the last year, it has proven anything but.
In October 2019, the United States imposed retaliatory tariffs of 25% on Single Malt Scotch Whisky and Scotch Whisky liqueurs.
This followed a World Trade Organization arbitrator’s finding that WTO-inconsistent support for Airbus provided by four EU member states, including the United Kingdom, had caused $7.5 billion of harm annually to US exports. The United States, as it was entitled to do, targeted a range of EU exports to force the EU to the negotiating table and, in the meantime, to rebalance bilateral trade – for background here.
US law requires the Office of the United States Trade Representative – also known as USTR – to review these measures periodically, which it did in January this year and is doing once again this month. As well as consulting on increasing existing tariffs and bringing in products that had previously been identified but not targeted, such as Blended Scotch Whisky, USTR is also seeking views on whether to retaliate against new EU and UK categories, such as gin. As last time, there is speculation that USTR might consider ‘carousel’ retaliation, where tariffs are applied to new products, while others are taken out.
Single Malt Scotch Whisky accounts for less than 1% of UK merchandise exports to the United States by value, yet is currently bearing two thirds of the UK’s total exposure to Airbus retaliation.
Indeed, adding shortbread and cashmere to the mix, the good people of Aberlour and Elgin in picturesque rural Speyside must be wondering what they have done to irritate the US administration.
It certainly isn’t manufacturing large civil aircraft.
Meanwhile, the EU had already targeted Bourbon and Tennessee Whiskey with 25% ‘rebalancing measures’, in response to the imposition by the United States of tariffs on EU steel and aluminium on national security grounds, under Section 232 of the Trade Expansion Act of 1962. These measures have been challenged in the WTO by the United States, with a Panel expected to rule before the end of the year.
From Zero-for-Zero to Brexit
In 1995, the United States and the EU implemented a ‘zero for zero’ agreement, eliminating their Most Favoured Nation tariffs – i.e. tariffs applying all members across the board on a non-preferential basis – on whiskies and most other distilled spirits.
Transatlantic trade in whiskies has boomed since then. Even in traditionally difficult areas, such as the recognition of protected names, the United States and the EU recognised Scotch and Bourbon and Tennessee as ‘distinctive products’ of their respective countries in an exchange of letters.
In January 2019, the United States and UK agreed to maintain this recognition after Brexit. Over decades, both industries have worked together on shared market access challenges in third countries, while their interdependence is so profound that the Scotch Whisky industry’s biggest import is oak casks from the United States.
And yet, as a result of disputes in unrelated sectors, the American and Scotch Whisky industries have seen their bilateral trade fall – by 31% since last October, in the case of Scotch Whisky. The situation is complex, resolving a longstanding dispute as to how the development of large civil aircraft can be supported fairly is immensely challenging. And Brexit has added a further layer of complexity.
Lessons for wider UK trade policy
What does this tell us about the UK’s independent trade policy?
Tariffs can cost more than gains from FTAs
Firstly, it highlights how the impact of one, admittedly rather big, trade dispute can dwarf the economic impact of some bilateral free trade agreements.
A 31% fall in Scotch exports to the United States in 2020 would cost the industry over £300 million in shipment value alone. There is no MFN tariff to eliminate under a UK-US FTA and the direct economic gains to the Scotch industry of the welcome regulatory changes that might result are significantly lower. To paraphrase a golfing maxim, one negotiates FTAs for show, but tackles market access barriers and resolves trade disputes for dough.
Secondly, what we have here is a classic, 1980s-style trade dispute, with each side targeting iconic and politically sensitive sectors in an effort to ratchet up the pressure on the other. It’s a street fight. On this and other issues, the UK is now stuck between the big beasts of the trade policy world – the EU and the US – and must be streetwise in looking out for its own interests. The UK needs to negotiate bilaterally with the US. No-one else will. And Ambassador Lighthizer believes a deal can be done.
Managing competing demands
Thirdly, trade policy can feel like a game of four-dimensional chess. Everything is connected to everything else. The UK needs to ensure that what it does in domestic industrial policy is in line with its international obligations.
In developing its trade policy, it must understand the needs and interests of all domestic stakeholders, both defensive and offensive, and balance sometimes competing interests equitably. To my mind, the openness shown by the Department for International Trade in its assessment of the economic impact of the new wave of FTAs is a welcome example.
Meanwhile, the architecture of the UK’s stakeholder consultation processes – the Strategic Trade Advisory Group and the Expert Trade Advisory Groups – is in some ways superior to that of the EU. But its execution needs some fine tuning, as recognised by the institution of a DIT review in recent months.
Ensure the UK can have its rights enforced at the WTO
Fourthly, it’s now time for the UK to get serious about its role as an independent member of the WTO. That means fully engaging in legal disputes foreseen there – as party, as third party and as animateur in resolving the well-known concerns of some members regarding the Appellate Body .
In the meantime, it should join the Multi-Party Interim Appeal Arbitration Arrangement – MPIA. The MPIA is a stop-gap appeals arbitration arrangement agreed by a subset of WTO members, including Canada, Australia, New Zealand, China and the EU to bridge over the time needed to re-instate the Appellate Body, which became inquorate after outgoing members were not replaced in December .
This also means genuinely playing its part in driving reform proposals for the WTO, as trade policy thought leaders such as Canada, Australia and New Zealand have done. And it means getting stuck in to the humdrum, everyday work of the WTO Committees and disciplines which, as a humble trade policy practitioner in industry, I see as fundamental to any effective trade policy function.
Finally, out of adversity can come gains. As Ambassador Lighthizer himself has recently acknowledged, although progress on the US-UK FTA negotiation has been significant, it is difficult to see it concluding before the US Presidential campaign begins later this year. Particularly when one hears both sides repeat the eternal trade negotiator’s mantra ‘substance over speed’. Ministers and officials will want something to show for their efforts, a sense of momentum in the negotiations. Returning to tariff-free trade in whiskies across the Atlantic would be one such outcome.
Meanwhile, back in the tranquil beauty of the Scottish Highlands, real jobs and real communities’ futures depend on the rapid resolution of trade disputes involving industries with no connection to them.
Martin Bell is Deputy Director for Trade at The Scotch Whisky Association. He writes in a personal capacity. Follow him on Twitter @TheEmbraExpress
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