Brexit: Sour Grapes for Wine Prices?

Brexit could send the price of wine soaring for British drinkers. A study sponsored by the Chatham House think tank and the University of Sussex has warned that leaving the EU could lift wine prices in the UK by 22% by the year 2025. The study said those price rises would be even higher if not for the fact that British household incomes are expected to suffer because of Brexit, increasing pressure on distributors to lower retail prices to maintain their market share.

Expensive Tariffs?

Professor Kym Anderson of the Wine Economics Research Centre at the University of Adelaide predicted the price hike in the Chatham House-backed study after using a model that took account of Brexit’s role in weakening the Pound and reducing expected economic growth until 2025.

The study assumed that prices would rise by about 4% as a result of the UK taking the EU’s external import tariff and applying it to products from EU member states and Chile and South Africa, which have preferential access to the EU market.

Most of the price hike would flow from the long-term fall in the buying power of the Pound. all of this would add to inflation and make the economy suffer.

Free trade with Europe?

Avid Brexiteers says the UK could reach trade agreements with the EU and other countries to reduce tariff barriers. Swedish economist and writer Fredrik Erixon told The Spectator that “to deny Britain a free-trade agreement would be an extraordinary act of self-harm, for all sides. To use the tariffs and rules of the World Trade Organisation (32 per cent on wine) would mean greater barriers and slower trade. French farmers and winemakers don’t want to see British duties on Beaujolais and Camembert.”

While a trade deal is plausible it may take years to reach. Some estimates based on previous deals vary between four and 10 years of uncertainty, which could be very damaging to the UK economy.

The UK could keep the prices of imports down by allowing free trade for all products and becoming the “Hong Kong of Europe”, Anderson said, but such a strategy was unlikely as many British industries, including beer and spirit production, would be undercut by cheaper imports.

Anderson’s model predicted a 28% drop in UK wine consumption, largely because of falling incomes. VAT and alcohol duty set by Westminster outweigh import duty as factors in wine pricing but the UK Government is unlikely to be able to afford any cuts in those levies.

Prices have already risen

The average price of a 75cl bottle of wine has already risen by 3% over the past year to reach £5.56 in the first quarter of 2017, according to the Wine and Spirit Trade Association. That price rise was three times larger than the rises in the previous two years and was mainly due to the fall in the pound since the Brexit vote and a Government-imposed increase in alcohol duty of roughly 8 pence a bottle.

The UK is the world’s second-largest importer of wine after the US, taking about 15% of all exports. While the top three wine-producing countries – Italy, France and Spain – are all in the EU the wine exporters that depend most heavily on sales to the UK are the US, Australia, New Zealand and South Africa, some of the countries that Brexit campaigners see as key future trading partners.

Australia, the US and New Zealand send more than a third of their wine exports to the UK.

What about Australia?

Britain loves Aussie wine so much that it bought (Aus) $355 million (£212 million) worth of it in 2016, making it the UK’s second biggest supplier after Italy. Those Australian wines now incur EU tariffs that equate to about 1.7% of retail prices but the UK is unlikely to offer Australia a lower tariff rate because it has to protect its own winemakers and alcohol producers.

The Australian Grape and Wine Authority says it “would welcome an exploration of the benefits of a free trade agreement with the UK.” The authority released a report in January on the implications of Brexit for its wine trade, noting that Australia could benefit from a post-Brexit UK having the freedom to blend wine after shipment, which is forbidden in the EU.

Post-Brexit UK imports would also be free of EU rules requiring expensive chemical analysis certificates, raising the possibility that the UK could buy wine with lower quality and safety standards.

Home grown?

The home-grown wine industry is expanding quickly and will gain a competitive edge as imports become more expensive. But UK wines account for less than 1% of the country’s wine consumption and the forecast of falling household incomes makes for grim reading, along with immigration restrictions that are likely to make labour more expensive for the industry.

Brits seem to be faced with the prospect that no matter where their wine comes from it is going to be more expensive post-Brexit.

Perhaps the forecast reduction in the consumption of booze will solve the mystery as to just how Brexit will deliver the boost for the NHS that Brexiteers promised during the referendum campaign.

 

By Stewart Vickers @VickHellfire

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