Australian wine and Brexit: What does the future hold?

Australian wine and Brexit

What does the future hold?
Australian wine and Brexit: What does the future hold?

It’s been nine months since the U.K. voted to leave the European Union, and on the 29th of March 2017 Theresa May formally triggered Article 50 enabling Britain’s exit from the E.U. to begin. To mark this historic occasion, Wine Australia considers what the impact of this decision could be for Australian wine in the U.K. and whether Australian wine will be one of the winners in a post-E.U. age.

Hard Brexit and Australian wine – Possibilities abound?

Thus far, we have been given little certainty as to what the U.K.’s relationship with the E.U will look like post Brexit as details have been kept scant to avoid prejudicing negotiations. What we do know, following the prime minister’s speech of 17 January, is that the U.K. will not seek to remain a member of the single market – the largest free trade block in the world – and will not look to remain in the E.U. Customs Union either. Instead the U.K. will look to secure as great an access to the single market as possible, but Brexit meant Brexit, and the U.K. could not be ‘half-in’. This amounts to what some have called a ‘hard Brexit.’

A hard Brexit is a game-changer for the U.K. Depending on which side of the referendum debate your sympathies lie, it’s either a bold, strategic vision for the U.K. to become free to trade with whom it chooses, or it’s a reckless abandonment of a trading block that has given the U.K. a great deal of prosperity.

It certainly isn’t a decision that hasn’t gone unnoticed. The prime minister’s call for the U.K. to become a global trading nation has resonated around the world and was met with a quick response from the Australian Government. Former prime minister Tony Abbot called for ‘absolutely free trade’ between the U.K. and Australia and many have taken Malcolm Turnbull’s eagerness to shake hands with Theresa May at the G20 summit as a clear sign of his enthusiasm for a deal. The UK is currently Australia’s eighth  biggest export market, with around AUD $8.8bn of total exports coming in each year. Were the U.K. and Australia to agree a free trade deal post-Brexit – something Australia managed to negotiate with the U.S. in just eight  months under President Bush – then this would have to offer an opportunity to the Australian wine industry, which would in-turn offer opportunities to the U.K. wine trade.

The freeing of Australian wine coming into the U.K. from E.U. tariffs could see Australian wine exports into the U.K. rise from their current level of AUD $355m. Such a possibility would be greatly enhanced were the U.K.-E.U. to default to the World Trade Organisation (WTO) trading arrangements. Under the WTO’s current system, wine imports from the E.U. would be subject to tariffs of 32%, and, as Theresa May has already made clear her willingness to have no deal rather than a bad deal, such a scenario is far from impossible.

The currency question

One thing that could hurt Australia wine’s position in the U.K. post-Brexit is the relative strength of the Australian dollar. As already mentioned, Sterling has plummeted since the decision to leave was announced and now stands around 19% lower against the Australian dollar than it did on the 23 June 2016. While UK wine retailers have absorbed these effective price rises in the short-term in an effort to remain competitive, this is unsustainable in the long-term unless U.K. wine buyers can negotiate improved deals with their Australian suppliers.

Of course, Sterling hasn’t just been taken a dive against the Australian dollar, it’s also plunged against other significant wine producing nations’ currencies. Against the Euro, Sterling has fallen by over 13% and it’s down almost 25% versus the U.S. dollar. This effectively means that all wines are set to become more expensive in the U.K., not just Australian wines. And with premiumisation taking place in place in the Australian wine market in the U.K. – as evidenced by exports at AUD $10 or more per litre growing by 25% to AUD $28 million in 2016 – and with premium wines being less sensitive to price fluctuations than wines at the lower end of the market, the outlook for Australian wines in the U.K. may be brighter than it first appears.

Again, the U.K.’s future relationship with the E.U. could also be an important factor in terms of currency valuations. Failure to reach a deal, the reverting to W.T.O.’ rules and a British government decision to let Sterling fall in order to compete globally, could see the Euro soar past the late 2008 levels of near-parity. With an Australian trade deal in place, this could be great news for the U.K. wine trade.

Post Brexit regulation

The regulatory framework that the U.K. currently employs is currently that laid down by the E.U.  and Brexit will bring this to an end – particularly now that the U.K. has signalled its intention to leave the Customs Union. A changed regulatory landscape will have an impact on everything from

winemaking practices and wine composition to labelling and certification. Understandably such regulations have been devised to accommodate, and to an extent promote, the appellation systems that abound in European wine regions. To prevent such rules becoming technical barriers to trade, the Australian government has negotiated treaties with the E.U. – the first in 1994 which was revised in 2010 – that cover a range of technical issues such as an acceptance of each other’s winemaking techniques, labelling and wine composition that takes into account Australia’s soils.

In a post-Brexit world, the U.K. will likely require its own set of regulations; one that Australia, given its close historical ties and significant presence in the U.K. wine market – would be well-placed to help shape. Were Australia to be put into this position of influence then it could provide some genuine opportunities for Australian wine importers.

Consumer demand: A European backlash?

The referendum revealed a distinct animosity towards all-things European and this sentiment could well play into wine buying habits – especially if the E.U., in particular the French and the Germans, are seen to be punishing the U.K. for leaving. Such a shift is not without precedent. Post-World War 1, British wine buyers deserted German wines and more recently the French wine industry suffered a downturn in America in reaction to the French government’s criticism of the U.S.-led war in Iraq. Unsavoury as some of the connotations of this may be, it is not an outcome that should be ignored, nor should its potential benefit to Australian wine exports to the U.K. be overlooked.

Australian wine in the U.K. post Brexit: Why we can’t wait and see…

The U.K.’s decision to leave the E.U. is a once-in-a-lifetime occurrence. While the election of Donald Trump may have sent shockwaves around the world, his presidency, for good or ill, will only last a maximum of eight years. Britain’s decision to leave the E.U. is permanent. Such a seismic event will leave many reeling for years to come and the temptation is to wait and see how matters unfold. To do so, however, is to potentially miss a great opportunity. Australian wine needs to start preparing and positioning itself for a post E.U. U.K. now and it will need the U.K. wine trade’s support.

‘Brexit means Brexit’ has become prime minister May’s mantra since taking office, and in just two short years from now Brexit will bring a new world order to Great Britain and Australian wine is well-placed to be one of the beneficiaries of this change.  Wine Australia is already working with the Wine and Spirit Trade Association (WSTA) and the World Wine Trade Group (WWTG), while the Australian government’s Department of Foreign Affairs and Trade (DFAT) are talking with businesses in the U.K. and the WSTA to secure Australian wine’s future post Brexit. If the Australian wine industry can continue show its friendship to the U.K. now as it negotiates the doubtless treacherous waters ahead, then then it’s future in the U.K. could be even brighter than its past.

Disclaimer

This information is presented in good faith and on the basis that Wine Australia, nor their agents or employees, are liable (whether by reason of error, omission, negligence, lack of care or otherwise) to any person for any damage or loss whatsoever which has occurred or may occur in relation to that person taking or not taking (as the case may be) action in respect of any statement, information or advice given via this channel.


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