Scotch whisky and French Cognac as pawns in geopolitical spats

Europe | Talking about political risks: In January, China began an anti-dumping investigation into all brandy imported from the European Union. The measure is effectively targeted at cognac, which is by far the biggest-selling imported spirit in China because of its luxury appeal.

The country imported nearly USD 1.6 billion worth of brandy in the 11 months to the end of November 2023, with France accounting for 99.8 percent of all EU brandy exports.

The anti-dumping investigation follows a request from the China Alcoholic Drinks Association, which said that prices of imported brandy had been reduced by an estimated 16 percent. As Pernod Ricard told the Financial Times newspaper, the complaint was made by an anonymous domestic producer, who argued that import duties on brandy should be raised to 16 percent [from today’s 5 percent] to level the playing field. The period under investigation is 1 October 2022 to 30 September 2023. The investigation, to which producers and exporters are invited to respond, should conclude before 5 January 2025.

Why cognac?

Dumping, or selling a product in a foreign market at less than domestic prices, is a normal commercial practice, the Australian Financial Review (AFR) explained in November 2023. It does not contravene trade rules. However, if it can be proven that the product, in this case French cognac, has been dumped and causes serious injury to domestic producers, anti-dumping duties may be legally imposed under WTO rules.

Why would China go after cognac? In September 2023, the EU had launched an investigation into electric vehicles (EV) made in China. European officials alleged that EVs made in China benefit from state subsidies, which allow them to undercut models made outside the country. Beijing has often used bilateral trade as a tit-for-tat measure to express its displeasure. In most cases, the tactic helps Beijing get what it wants. In choosing its target – cognac - Beijing is picking a big country – France - that it thinks can exert its influence in the EU to stop the investigation.

Populist politics

Nonetheless, there is more to this story. Cognac was also singled out because it is high-value and heavily dependent on export markets. The investigation will be high-profile and will garner lots of media coverage around the world. As many see it, it is a straightforward populist display of power towards cognac’s country of origin, as well as Chinese punters partial to counterrevolutionary tastes. Above all, it will cause no pain to domestic producers of brandy. If tariffs or duties are imposed, they will even benefit.

Florent Morillon, President of the Bureau National Interprofessionnel du Cognac (BNIC), alluded to this when he commented to media: “This investigation is part of a trade dispute between the EU and China concerning other industrial sectors, unrelated to our business. This political issue must, therefore, be dealt with at a political level.”

Cognac exports dropped in 2023

However, should the EU be found guilty, the investigation would result in plenty of angry and belligerent growers in France, who would see their businesses go south. The announcement has already sent down the shares of leading drinks firms including Rémy Cointreau, Pernod Ricard, LVMH and Italy’s Davide Campari Milano, which only in December had agreed to buy the French cognac house Courvoisier from Beam Suntory for USD 1.2 billion.

The timing of the investigation is also suspicious. 2023 was a so-so year for cognac exports. They plunged by almost 15 percent to EUR 3.35 billion (USD 3.6 billion), mainly due to overstocking in the US and economic anxiety among Chinese consumers, its two major markets.

A message to Chinese punters

Rapping cognac exporters on the wrist is not the only purpose of the investigation. It is widely interpreted as a signal to Chinese punters that cognac is now politically out of favour and they had better stop drinking and gifting the stuff. The implicit message is: “Go and drink premium baijiu or locally made brandy instead.”

It must have annoyed China’s communist rulers that their countrymen had developed a taste for very high-end cognacs. China alone accounted for nearly one in two bottles of global VSOP-and-above cognac sales by value in 2023.

However, we need to remember that when China first launched an anti-corruption campaign in 2012, which sought to eradicate expensive gifting, this only temporarily dented the consumption of Scotch whisky. From 2015, when Scotch exports tumbled to GBP 41 million (USD 52 million), they have since risen to GBP 235 million (USD 297 million) in 2023. Most likely, only massive tariffs on spirits will have a lasting impact.

Australia’s woes

This is not the first time that the drinks industry has been turned into a pawn in geopolitical spats. In March 2021, China slapped punitive tariffs of between 116 percent and 218 percent on Australian wine, after the former Australian prime minister Scott Morrison had asked for an international inquiry into the origins of covid-19.

The anti-dumping measures provided a convenient, and in the view of China, “legitimate” tool to inflict high-profile pain on Australian wine producers. The tariffs certainly hurt like hell. They wiped out Australian wine producers’ biggest market, worth USD 800 million in 2020 (or 40 percent of total exports by value) almost immediately. Not enough, wine producers are now faced with an oversupply of 2.8 billion bottles, the “equivalent of 859 Olympic-sized swimming pools of surplus wine sloshing around Australia”, the AFR said.

Few expect Australian wine exports to China to return to pre-2020 levels even if the trade dispute is eventually resolved. The Australians have since lost all their market share to rivals from Chile, Argentina, South Africa, and Europe. Besides, Chinese consumption has changed too in line with global trends. As Chinese consumers are drinking less wine, domestic wine consumption dropped to 880 million litres in 2022, down 16 percent over 2021.

Bourbon and whisky have been hit too

To be fair, western countries have also dragged spirits into their political disputes. After US President Trump put tariffs on EU steel and aluminium in 2018, following a 16-year dispute over aircraft subsidies, the EU retaliated by taxing US cheese and bourbon whiskey. These tariffs were parried by the Trump administration, who responded in 2019 by taxing a whole laundry list of European products, including Scotch single malts and Irish whisky as well as European wines.

Although US consumers – the biggest market for Scotch whisky exports by value – were used to paying extraordinarily high prices for single malts, the tariffs made Scotch exports to the US nosedive by 30 percent in 2020 to GBP 729 million (USD 920 million), a loss of GBP 340 million in sales compared to 2019. US whiskey exports to the EU fared even worse: They decreased by over 30 percent between 2018 and 2020 (from USD 552 million to USD 368 million).

What can drinks exporters do

Luckily, the Biden administration saw sense and negotiated a temporary tariff suspension until 31 March 2025. Bourbon exports rose again as did Scotch whisky exports. However, the Scottish whisky industry warned recently that US tariffs could be reintroduced in 2025. It has already urged the UK government to press for longer-term tariff-free trade for Scotch whisky in its talks with the US administration.

The often-heard advice that exporters should not become too dependent on one export market sounds arrogant. It is also irrelevant. No one in the spirits industry deliberately wants to end up as collateral damage in geopolitical disputes. At the same time, drinks producers would be daft if they gave a market a wide berth just because it might introduce punitive tariffs one day. In the meantime, they will have to contend with ups and downs in their exports, though.