UK-Turkey relations and Turkey's regional roleWritten evidence from the Scotch Whisky Association

1. Executive Summary

1.1 The Scotch Whisky Association warmly welcomes the Committee inquiry and the UK government’s effort to strengthen relations with Turkey. Our sector greatly appreciates the dialogue with government departments and the collective effort to improve trading conditions for Scotch Whisky exporters in Turkey.

1.2 Scotch Whisky exporters have long faced significant trade barriers in Turkey, ranging from onerous import permit requirements to discriminatory excise rates under which Scotch Whisky is taxed 66% more than Turkey’s national spirit, raki.

1.3 Turkey should already be applying most EU laws under the terms of the 1995 EU-Turkey Customs Union Agreement. That it has not done so is a matter of great concern, as is the current low ebb in EU-Turkey relations. Strong bilateral relations between the UK and Turkey have therefore become even more important.

1.4 All previous phases of EU enlargement have brought marked improvements in trading conditions for Scotch Whisky. We therefore support Turkey’s EU accession, even though the process currently appears to have stalled.

2. Introduction

2.1 The Scotch Whisky Association (SWA) is the trade organisation which represents the interests of the Scotch Whisky industry. Its main objective is to protect and promote Scotch Whisky at home and in its overseas markets.

2.2 The SWA welcomes the Foreign Affairs Committee inquiry. Our submission includes an overview of the market for Scotch Whisky and other spirits in Turkey, a summary of the numerous barriers we face, and perspectives on trade aspects of UK-Turkey relations and EU enlargement. We have not addressed the Committee’s other questions, ie foreign and security policy, energy and governance in the Middle East.

2.3 Scotch Whisky is vitally important to the economy of Scotland and the UK. Despite the unfavourable economic climate, overseas sales continue to grow. Exports of Scotch Whisky were £3.45 billion in 2010, a record year. They have risen continuously since 2004, when they were worth £2.2 billion. Confidence in the industry is high and there is currently growth in every export region.

2.4 Scotch Whisky alone represents 80% of Scotland’s food and drink exports, 23% of the UK’s and 7% of the EU’s. The industry employs over 10,000 directly and a further 35,000 jobs across the UK are supported by the industry. Our sector spends £1 billion each year with UK suppliers of goods and services. Prospects for further export-led growth have resulted in our member companies investing around £1 billion in additional distillation, maturation and bottling capacity over the last five years.

2.5 More than 90% of all Scotch Whisky is exported. The ability to trade in international markets is vital to the health of the industry. The SWA is a proactive campaigner against trade barriers and seeks to ensure fair and non-discriminatory trading conditions in export markets.

2.6 Our members have been exporting in significant quantities for over a hundred years and we sell in more than 200 markets worldwide. Our members are fully familiar with the mechanics of international trade and a wide variety of national trading environments, not all of which are benign. Turkey is among the most challenging trade regimes in which our members operate around the world.

3. Scotch Whisky in Turkey

3.1 In 1995, the year the EU-Turkey Customs Union Agreement (CUA) was signed, Scotch Whisky exports to the market were worth £33.6 million. Despite the CUA’s intention to improve and increase trade between the two sides, barriers against Scotch Whisky imports were put in place immediately and our exports nosedived; they have never since regained the 1995 level. In 2010, exports to Turkey were worth £21.5 million.

3.2 The Turkish spirits market was thought to be around 7.7 million cases (each of 12 bottles), in 2010, nearly 90% of which is produced domestically. It is dominated by the national aniseed spirit, raki, which alone has two thirds of the market. The domestic industry (until 2004 a state monopoly), has effectively been shielded from competitive pressures. The principal raki producer has, however, been bought (in 2011) by the leading Scotch Whisky producer and local awareness of the advantages of international trade is expected to improve.

3.3 The Turkish economy has experienced significant growth over the last 15–20 years and, in our sector, there is strong demand for premium imported products. SWA members believe that non-discriminatory trade conditions will result in Turkey becoming a key export destination. Traders believe there is scope for annual exports to Turkey to reach £100 million. In neighbouring Greece (with a 7th of Turkey’s population), our exports (prior to 2010) were regularly over £100 million.

4. Market Access Barriers Facing Scotch Whisky in Turkey

4.1 Market access for imported spirits is tightly restricted. Although the CUA prohibits restrictions on EU imports or measures having equivalent effect, shortly after the agreement took force, Turkey introduced a “control certificate” (CC—effectively an annual import permit), for Scotch Whisky and all other spirits.

4.2 To obtain a CC, companies are required to provide the Agriculture Ministry with numerous documents (on issues including: price; chemical analysis; origin; ingredients; and proof of production in a hygienic environment) on each of the brands they hope to import. CC rules are subject to frequent change and existing rules are re-interpreted without warning or consultation. The import quantities on the CC cannot be exceeded; separate permits have sometimes been required for each bottle size of each brand.

4.3 While the CC currently takes between two to four weeks to issue, at various times all the main importers have faced serious delays (up to six months) in renewing permits. Traders therefore always seek to renew well in advance. Thus the annual permit is often only used for nine months; at one point the leading importer renewed all CCs every six months.

4.4 There are further restrictions associated with the CC. Scrutiny of applications has often resulted in a requirement to amend labels. Some of the world’s leading internationally traded spirits have had to re-design labels exclusively for Turkey. In addition, goods arriving at Customs are “sampled”. Numerous bottles are removed even though the analysis conducted requires only a few cl of spirit. Separately, our members’ ready-to-drink (RTD) products, eg pre-mixed whisky and cola, are banned. Turkish beverages akin to RTDs are permitted to be manufactured and sold.

4.5 There is no CC or equivalent requirement for domestic spirits. There is no CC or equivalent requirement for Turkish spirits in any EU Member State. The CC is not compatible with Turkey’s CUA commitments. We believe it also contravenes Turkey’s WTO obligations.

4.6 When Turkey sought to open EU accession negotiations, the Commission and Member States agreed that CUA obligations needed first to be met. An opening benchmark was therefore set (in the “free movement of goods” chapter), requiring Turkey to abolish the CC on imported spirits before negotiations could begin.

5. Tax Discrimination Facing Scotch Whisky

5.1 Legislation in 2002 and 2003 introduced minimum excise tax rates for each category of spirit. The rates on the main imported spirit, whisky, were double those on the main domestic spirits, ie raki and vodka.

5.2 The excise tax law also included a value component. Importers of Scotch Whisky and other spirits had to make two tax declarations to Turkish Customs: one based on the value of their goods; one based on alcohol content—Customs chose whichever yielded most. The system was designed in a way that the discriminatory minimum rates usually applied.

5.3 Tax rules were subjectively interpreted, however, and disputes arose over the declared value of spirits imports. Despite importers showing their pricing policies were compatible with OECD guidelines and trade in other jurisdictions, hundreds of legal challenges were instigated. When importers lost cases the sanctions were punitive. The dispute ran for several years and eventually included every shipment; the collective potential liabilities would have driven Scotch Whisky and other importers from the market. A legislative resolution was finally reached in 2011.

5.4 Meantime, Turkey continued to apply discriminatory excise tax rates. In 2008, Scotch Whisky paid TL71 per litre of pure alcohol (lpa) while the domestic spirit raki paid TL36 per lpa. EU rules require a single rate of tax on all spirit drinks. WTO rules require excise taxes not to discriminate between competing products.

5.5 When Turkey sought EU accession status, we were very grateful that a “benchmark” required Turkey to agree a plan for the removal of excise tax discrimination before negotiations could begin in the tax chapter. In 2009, an ‘Action Plan’ was agreed in which, following an immediate 30% cut in discrimination, a timetable was established for the gradual elimination of all discrimination by April 2018.

5.6 Although the Action Plan included specific dates and rates of tax, Turkey subsequently increased taxes beyond the level set out in the agreement. The differential between the tax on Scotch Whisky and raki (currently over £3.30 per bottle) is now as wide as before the Action Plan was agreed. The Commission has advised Turkey it needs to bring rates back into line, but Turkey does not accept the need to do so. It remains uncertain what will happen in April 2012, when the next step in the Action Plan is due to be taken.

5.7 Turkey also discriminates in the way taxes are collected. Imported spirits must pay excise tax before they can be put into circulation in Turkey. Locally produced spirits are allowed to defer payment of excise tax for as much as 45 days.

5.8 The level of excise tax in Turkey is extremely high, especially considering purchasing power and the lower levels in neighbouring countries. Were Turkey in the EU, the tax levied on whisky would be the third highest of all Member States. The excessive tax rates provide an incentive for the large market in smuggled and counterfeit spirits, some of which are highly dangerous. Several Russian tourists died recently after consuming fake spirit; the worst incident was in 2005, when at least 40 Turks died from counterfeit raki.

5.9 Turkey has long been a market or a transit route for fake whiskies. In 2003 we concluded legal negotiations which brought an end to the sale of fake whiskies in Turkey (3 million bottles in 2002), by four companies based in N Cyprus. Investigations on another issue revealed that Turkey had been the transit country for over 15 million cans of fake Scotch Whisky that were sold throughout the middle east between 2002 and 2005. While the extent to which Turkey is committed to eradicating such trade remains uncertain, we were very grateful that in 2011 Scotch Whisky became the first foreign product to be registered as a ‘geographical indication’ in Turkey, thereby helping its legal protection.

6. UK—Turkey Relations: Trade Aspects

6.1 The Association has discussed the difficulties in Turkey with all the relevant UK government departments over many years. We have been extremely grateful for their readiness to raise our concerns directly with Turkey and also with the Commission which leads on the EU’s external trade policy.

6.2 UK officials at all levels have regularly provided guidance and advice in relation to the effort to remove the trade barriers. They have also provided invaluable support in, eg securing the two benchmarks for the accession negotiations and in the effort to resolve the valuation dispute.

6.3 There are no immediate signs that Turkey is ready to improve trading conditions for imported spirits; indeed the opposite appears possible. Changes in the CC regime are planned and there has been talk of requiring a CC for every shipment—operationally this would be highly problematic. New restrictions have been introduced on advertising and promotion; and reports suggest the national Tobacco and Alcohol Board (TAB) has a new remit purely to restrict the availability and sale of alcohol. While we have hitherto liaised closely with the TAB in removing fake whiskies from the market, it has recently ignored all such efforts.

6.4 While UK officials, in many fora, promote Turkey as an export destination and encourage UK traders to explore the potential of the market, our experience means that we are unable to support the effort to highlight Turkey’s potential. Although we often stress the advantages that 3rd country trade agreements or EU accession negotiations bring Scotch Whisky, Turkey cannot be included as it has breached all the provisions that would have benefitted our sector.

6.5 The UK’s effort to broaden and deepen relations with Turkey, via, eg the recently established JETCO, “knowledge partnership” and Tatlidil, are very encouraging. We hope these and other fora will improve the environment in which UK and Turkey interact. In addition, it will be important that the forthcoming Ministerial and other bilateral visits are used to try to secure improvements in trade relations.

6.6 We strongly support the UK government’s dialogue with Turkey, and very much hope this effort will convince Turkey that it would be preferable to improve trading conditions. The UK is by far the most important producer of internationally traded spirit drinks. It is therefore all the more regrettable, and perplexing, that despite the excellent bilateral relations, the trade barriers adversely affect UK interests more than any other.

7. Turkey’s EU Accession Negotiations

7.1 The accession negotiations appear currently to be the only forum through which the EU and Turkey can secure improvements in trading conditions. While the CUA should already have brought our sector barrier-free access to the Turkish market, this has not happened and the Agreement’s problem-solving mechanisms have proved to be ineffective.

7.2 We were extremely grateful that, in an effort to ensure Turkey’s non-compliance with CUA did not defer remedial action until the accession negotiations concluded, two important opening benchmarks were agreed: abolition of CC (import permits) and removal of tax discrimination. Regrettably there has been no movement on the first because the free movement of goods chapter is frozen. An agreement on the second initially was very promising but Turkey’s subsequent, unilateral re-interpretation of the provisions has meant the level of discrimination is as bad as before.

7.3 Five years after they began, the accession negotiations have therefore yet to benefit our sector. The problems that existed in 2006 remain; new barriers have arisen.

7.4 The negotiations have been hampered by political objections from some Member States, and which have resulted in the freezing of many chapters. It is not easy to see how the negotiations might be re-energised. It was therefore disappointing that in 2010, when presented with an opportunity to cut through the logjam by supporting direct trade links with North Cyprus, the European Parliament opted for the status quo. It is unlikely there will be many chances to break the deadlock and secure genuine movement. We cannot help feeling this was a missed opportunity.

7.5 Despite the difficulties, we continue to support the accession negotiations. If they are allowed to proceed they will, as has been the case for 12 other countries since 2004, result in implementation of the EU acquis in our sector and the removal of trade barriers facing Scotch Whisky.

7.6 We would urge the UK to continue to liaise closely with the Commission and Member States to try to find a mechanism to thaw the various frozen chapters and allow accession talks to resume.

8. Conclusions

8.1 Scotch Whisky (and other UK spirits) have been unable to secure meaningful market access to Turkey due mainly to the onerous and unpredictable import permit regime, and application of excise taxes on whisky which are 66% higher than on the national spirit.

8.2 Turkey offers significant potential as an export market for Scotch Whisky. Turkey has already committed itself to implementing the EU’s acquis under the Customs Union Agreement. However, as yet it has not met its CUA and WTO commitments.

8.3 The SWA is seeking fair market access and non-discriminatory taxation in line with Turkey’s existing obligations. Removal of the barriers will demonstrate Turkish ability to implement the acquis in the spirits sector and thereby remove suspicion of protectionism; a more transparent and stable trade regime will encourage inward investment.

8.4 We welcome the UK’s close dialogue with Turkey and the effort to strengthen it—this will bring opportunities to seek improvements in trading conditions. UK interests are most affected by the trade barriers in the spirits sector.

8.5 Despite the blockages in the accession negotiations, we continue to support the effort to bring Turkey into the EU and hope a mechanism can be found to break the deadlock and re-invigorate the process.

8.6 The SWA would be ready to provide further written evidence on any aspect of this submission where such additional briefing might be helpful to the Committee.

30 August 2011

Prepared 2nd April 2012