Whisky, Planes, and Tariffs
How Scotch whisky got caught in the middle of the Boeing-Airbus trade dispute
I’m taking a detour from equity portfolios this week, sparked by much talk of Trump and his potential tariff policies. You can check out my ongoing tour through the FTSE 250 here.
In June 2021 the EU and the US called time on their 17-year battle over subsidies for their respective national champion aircraft manufacturers, Airbus and Boeing. The final ruling from the World Trade Organisation (WTO) was a bloody draw, or a slight points win for the US, depending on your view.
What then emerged was a series of retaliatory tariffs, in which each side aimed to damage the other in an annoying but not debilitating way. Scotch whisky, alongside other completely unrelated industries, ended up in the middle.
All the talk of Trump’s tariffs reminded me of this slightly bizarre episode of recent years, and I think it’s an interesting vignette of how trade wars play out in practice, and a warning on how the UK could find itself caught between the US and EU.
The trade dispute itself is a subject of vast literature, and no doubt consumed the career of many a lawyer. Since I like planes, I’m going to give a potted history of it here, but the short summary is that both Airbus and Boeing have received a tonne of government help over the years, albeit in slightly different ways.
This was generally fine until Airbus started making better planes than Boeing and selling more of them. Boeing got p$%#ed and the US filed a complaint at the World Trade Organisation (WTO). The EU filed a complaint back. The whole dispute is basically a function of the chart below.
A brief history of Boeing and Airbus
The slightly more detailed story behind this chart is that by the 1970s, Boeing had a near monopoly in the production of large civil aircraft. After World War II, the German and Japanese aerospace industries were disbanded for military reasons, and the French industry lay in tatters.
The US and UK were the only game in town west of the Iron Curtain, with Boeing, McDonnell Douglas, and de Havilland, all looking to launch commercial jet planes. It was the Brits who got there first. The de Havilland Comet launched in May 1952 as the world’s first commercial jetliner, but its entry into the market proved short lived. In May 1953 a Comet crashed in India due to structural failures in the airframe. Two further high-profile crashes followed, and the Comet 1 was withdrawn from service in 1954, with de Havilland’s reputation never to recover. This opened the field for American domination, and by the end of the decade Boeing’s 707 and McDonnell Douglas’ DC-8 were in pole position. Boeing cemented its lead in the 1960s with the launch of the 727, 737 and 747.
It didn’t go unnoticed in Europe that the Americans now had a global monopoly in an industry viewed as central to industrial prestige, defence and employment. And while European countries possessed strong technical capabilities in aerospace, by the 1960s it had become clear that no single European company (or country) had the scale and resources to challenge the Americans. So, in 1967 Airbus was born, in the form of a memorandum of understanding signed by the UK, France and Germany to collaborate on civil aircraft development.
Many twists and turns later (I recommend the Airbus website for a blow-by-blow account) and the first flight of the Airbus A300 took place in October 1972. Sales were slow to start but over time grew, until that point in the chart above, when Airbus finally delivered more planes than Boeing. Airbus is a European success story. An example of active industrial strategy that secured the future of an industry.
Back to trade wars…
But that success didn’t come for free, and here’s where we return to trade wars, if not quite Scotch whisky, yet. The crux of the trade dispute was how Airbus got the money to develop the A300, ride out the early years of no sales, and then develop subsequent models. The answer is “launch aid”, the name given to the loans provided at less than commercial rates by Airbus member governments. The loans typically only had to be repaid when aircraft were delivered.
Round 1 to the US
After years of back and forth, a WTO panel concluded that launch aid, also known as member state financing, constituted a subsidy, and that:
“Airbus would have been unable to bring to the market the Large Civilian Aircraft (LCA) that it launched as and when it did but for the specific subsidies it received from the European Communities and the governments of France, Germany, Spain and the United Kingdom.”
Some further rounds of appeal later, and in October 2019, towards the tail end of the first Trump administration, the WTO ruled that the US was entitled to impose tariffs on $7.5 billion worth of EU products in retaliation for the damage done to the US from the Airbus subsidies.
Robert Lighthizer, US Trade Representative at the time, potentially returning again in some form, said:
“For years, Europe has been providing massive subsidies to Airbus that have seriously injured the U.S. aerospace industry and our workers. Finally, after 15 years of litigation, the WTO has confirmed that the United States is entitled to impose countermeasures in response to the EU’s illegal subsidies.”
Round 2 to the EU
Of course, it wasn’t as simple as that, because Boeing had also been receiving massive subsidies, just in a different way. In its countersuit at the WTO, the EU argued that Boeing had benefited from $23 billion of subsidies in the form of state-level tax breaks; R&D funding from NASA and the Department of Defence that cross-subsidised its commercial programmes; and export subsidies.
The WTO upheld most of these complaints and in October 2020 ruled that the EU was entitled to impose tariffs on $4 billion worth of US products in retaliation for the damage done to the EU aerospace industry from the Boeing subsidies. On principles then, it was a US-EU draw; on dollar amounts of damages, a points win to the US.
Finally, we get to Scotch whisky
In a bygone era, these countermeasures might have just been netted off and a truce called. Jeffrey Garten, a trade official for Clinton administration, wrote in 2005:
“The judicial outcome is already clear: both aerospace companies have taken considerable government handouts. The court will declare both guilty, creating a political stalemate in which both sides will probably ignore the penalties the WTO wants to impose.”
Jeffrey Garten, former Clinton administration trade official
But this wasn’t 2005, it was 2019. Trump was in office, the US imposed its tariffs, and a year later the EU did the same; although it made clear it would prefer not to. By the end of 2020, the US was imposing tariffs on European airplanes and a load of agricultural goods from European countries, while the EU was imposing tariffs on US airplanes and a load of agricultural and industrial goods.
Although Britain had Brexit-ed, it was still involved in all this as a party to the original dispute and a key contributor to the Airbus consortium. UK exports of single-malt whiskies, cashmere jumpers, and industrial equipment were targeted, but it was single-malt that got a parliamentary debate and caused the most headlines.
This was partly due to the industry’s recent renaissance, partly due to politics. The Scotch Whisky Association (SWA) estimates that the industry contributed £7.1 billion in gross value added to the UK economy in 2022, supporting 66,000 jobs and generating over £5 billion in exports per year. It’s also highly productive – producing £273,000 GVA per employee versus a UK industry average closer to £50,000.
As importantly, it’s very regional - every Scottish MP with a distillery in their constituency was no doubt getting lobbied hard about the tariffs.1 - and even more importantly, the US is the largest single export market. It was therefore a perfect target for US tariffs. Outside of single malt drinkers, tariffs would have little impact on Americans; but they were going to cause a big fuss and lots of anguish for UK politicians.
Counting the cost
The Scotch Whisky Association claims the dispute cost the industry over £600m in lost exports to the US over the 18-month period over which the tariffs applied. I haven’t managed to back that figure out but think it is based on the reduction in UK exports.
A more sophisticated study from the Scottish government in 2021 attempted to control for other factors going on at the time, such as Covid.2 Its conclusions are (shockingly) less clear cut than the industry group, but the punchline is that the tariffs had a negative effect on output.
Local MPs were certainly far from happy:
“The finest single malt whisky is distilled on the isle of Arran in my constituency, and the tariffs are a matter of great concern. Ultimately, jobs are threatened, and sustainability of employment is extremely important in island communities such as Arran. Hundreds of Scottish exporters, including our world-renowned Scotch whisky industry, face paying the price of punishing US trade tariffs.”
Patricia Gibson, MP for North Ayrshire and Arran
It wasn’t just the Scotch whisky industry that was damaged though, the American whiskey makers didn’t like it either. That’s partly because they were caught up in another US-EU tit-for-tat, this one kicked off by the Trump administration imposing tariffs on EU imports of aluminium and steel. In retaliation the EU whacked tariffs on US whiskey and bourbon, said to be targeted at Mitch McConnell and his fellow Kentuckians. It was also partly because American companies were suppliers of barrels to Scottish whisky distilleries.
Calling a truce
After the UK left the EU single market at midnight on 31 December 2020, it was free to pursue its own trade policy; and it used this freedom to almost immediately remove the tariffs on US goods stemming from the Boeing dispute. This was pitched as a gesture of good will to pave the way for a future settlement, although earlier in the month the US claimed the UK had no jurisdiction to impose tariffs once outside the EU – so it may have also been an elegant solution to avoid a Brexit-induced legal quagmire.
Conveniently, the timing coincided with Biden taking up residence in the White House and a more conciliatory dialogue between the US and EU. In March 2021, the US announced a temporary suspension on its tariffs on the UK and the EU, including the Scotch whisky industry, as did the EU on the US. A five-year suspension was then negotiated later in the year. At some point, the EU also dropped its US whiskey tariffs as part of the steel and aluminium dispute, but at this point I’m too confused by the world of trade and tariffs to go into it further.
What happens from here
1,800 words later and there you have how the history of civil aviation influences the future of Scotch whisky.
I find it a fascinating episode of how trade wars play out in practice. Interests get traded off against each other (what matters more to the UK - exports for Scottish whisky or manufacturing wings for Airbus), domestic lobby groups jockey for position (we need to persuade politicians that we matter more), small decisions have wider implications (who cares about whisky, this is about the global trade order and not getting bullied by Trump), and industries targeted are as much to do with politics as economics.
I don’t know how Trump’s trade policies are going to play out in practice, but I can foresee a lot more incidents like the above. You do X, we’ll do Y, and so on and so on and so on. And the UK will need to work out how to manage that, stuck as it is between the US and EU.
Unilaterally removing US tariffs as a gesture of good faith might have worked under Biden, but I’m not sure I’d trust Trump in making that move. The Airbus-Boeing truce is due to expire in 2026, and Boeing is in a worse state than it was three years ago. “America first” could again see whisky, cashmere, and stilton caught in the crossfire.