British wine drinkers will be affected, of course, but so will consumers and producers in other countries as global markets react, redirect, and seek out new market equilibria.
How much will the global wine market be disrupted? It depends upon exactly how Brexit unfolds. There are good, bad, and ugly scenarios (although, as in the famous Sergio Leone film, the good is really only not-so-bad compared with the bad and ugly story lines).
The British Pound’s swift fall has increased UK wine prices already, as I said last week, but this isn’t the end of higher prices. I expect tax increases to be the next shoe to drop.
Mind the Gap: Higher Wine Taxes
Why would the May government raise wine (or alcohol) taxes? Brexit is going to be expensive. Really expensive. The UK will be on the hook for as much as £50-£60 billion of obligations for EU projects that are currently in progress. These payments may be negotiated to some degree, and are sure to be a point of contention, but they won’t go away. So outflows to the EU will continue.
In the meantime, the UK government will need to staff up domestically to replace government functions currently handled by EU personnel. One estimate suggests that 30,000 new government employees will be needed. Some of the first to be hired will be the trade negotiators needed to negotiate Brexit. Incredibly, the now-defunct Cameron government that called the referendum on EU-membership had no contingency plan for Brexit or staff to implement it ready in case it passed.
Higher expenses will come on line just as the British economy weakens (growth estimates for 2017 have been halved already — from 2.2% growth down to 1.5% — although the economy help up very well in 2016), so tax increases will be needed to span the budget gap. I expect wine/alcohol taxes to be part of that package. Such taxes already account for about 50% of the cost of inexpensive supermarket wine in Britain.
Beyond the exchange rate and tax effects, the impact of Brexit on wine depends upon what kind of Brexit is finally agreed — and there is a wide range of possible agreements (and disagreements!).
Too Good to Be True: Buffet Brexit
Many in the UK would prefer what I call “Buffet Brexit” where the UK government picks and chooses what it wants from the relationship (access to the Single Market, please, and special considerations for the London financial sector) and what it prefers to skip (free labor movement and immigration).
Buffet Brexit would be not-so-bad for wine. The British market would retain free access to European wine markets and also the existing system of tariffs and trade agreements with outside countries. The tax and exchange rate issues would not go away, however, but might be less severe.
Buffet Brexit is, however, the least likely outcome. Probability = zero. If the EU lets Britain dine at the buffet, other members will want the same options and benefits and the union could quickly collapse.
Not-So-Bad: BFF Brexit
I call the second option BFF (Best Friends Forever) Brexit but the more common term is “Soft Brexit.” The UK formally leaves the EU but both sides pledge to stay best friends forever and so exit expenses are minimized and spread over many years, “passporting” agreements are made to allow the UK to remain a major financial hub, and access to EU markets, perhaps through customs union membership, allows continued access to EU markets.
Precedent (the Norwegian model) suggests the Britain would have to pay for the privilege of having market access, however, and remain subject to EU regulations without a voice in setting them.
BFF Brexit might not dramatically change the UK wine market depending upon how trade relations are negotiated. UK sales would still fall, however, creating a global surplus that would spill out into other markets, increasing competition and lowering margins elsewhere.
But even BFF negotiations are problematic. In case you haven’t noticed, trade agreements these days are detailed and negotiations take a long time — some believe it will take 10 years to reach complete agreement!
Even if the UK and EU remain BFFs through all this, the uncertainty the comes with these negotiations will be bad for wine and bad, really, for most sectors the British economy. Probability of BFF Brexit = only 10 percent, mainly because the exit cost conflict is likely to turn friends into enemies. That’s what often happens when couples divorce, isn’t it? And this divorce is very complicated and there is a lot more than custody of Fido at stake.
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