Under the recently implemented Economic Partnership Agreement (EPA), the EU makes a provision for South Africa to export 110 million litres of wine duty free, in 2017. This volume will increase by roughly 1% per year until 2021, to reach 114 million litres.
The overall volume is split 70:30 between packaged and bulk wine – meaning that in 2017, the quota for packaged wine will be 77 million litres, and that of bulk wine will be 33 million litres. South Africa’s wine exports exceeding this volume are charged a tax of between €15.40 and €35 per 100 litres, depending on the type of wine.
How will the departure of the UK from the EU affect the EPA wine quota? Will Brexit reduce South Africa’s potential to fill the EPA wine quota in the future? To answer this question, let’s look at South Africa’s wine exports to the EU and the UK, respectively.
Between 2012-2016, South Africa exported an average of just over half a billion litres of wine per year. About two thirds of this went to the EU, with packaged and bulk wine exports being 90 million litres and 230 million litres per annum, respectively (see Chart 1).
That said, there are two reasons why Brexit is an important factor in South Africa’s wine exports. First, because the UK accounts for an average of 36% of packaged wine volume and 32% of bulk wine exports of South Africa’s wine exports that went to the EU between 2012-2016. Overall, the departure of Britain reduces the EU market by 108 million litres (or 34%), which makes Brexit significant.
Secondly, because the UK has been one of South Africa’s fastest growing markets for packaged wine over the past 5 years. The UK has increased its consumption of South Africa’s directly exported packaged wine by 10 million litres between 2012 and 2016, whereas the rest of the EU grew by 6 million litres over the same period. This translates to a growth of 8% per year for the UK, and 2% per annum for the EU.
After running 10 000 possible wine export scenarios over the period 2017-2021, there is a 90% probability that South Africa’s export volumes to the rest of the EU (without the UK) will lie between 189-211 million litres. Table 1 summarizes three scenarios at the margin.
The scenarios can be described as follows:
- A low road scenario: South Africa’s wine exports to the rest of the EU decline by 1% per year to 189 million litres in 2021; consisting of 54 million litres for packaged wine, and 135 million litres for bulk wine.
- A middle-of-the-road scenario: South Africa’s wine exports to the rest of the EU remain stagnant at around 200 million litres in 2021; consisting of 57 million litres of packaged wine, and 143 million litres of bulk wine, and
- A high road scenario: South Africa’s wine exports to the rest of the EU increase by 1% per annum, to 211 million litres in 2021; consisting of 61 million litres for packaged wine, and 150 million litres for bulk wine.
In light of the scenarios above, will Brexit reduce South Africa’s future export opportunities to the EU under the EPA wine quota? There are two points to note. Firstly, packaged wine exports to the rest of the EU will lie between 54-60 million litres, which will be well below the packaged wine quota of 80 million litres in 2021. This leaves an excess capacity of between 19-26 million litres.
Secondly, however, the EPA allows for bulk wine to be exported under the packaged wine quota from 1st September of each calendar year. As such, South Africa will be able to utilise the excess bulk wine exports over the last four months of each calendar year. This means South Africa will export an additional 11-26 million litres of bulk wine between September and December each year, bringing annual bulk exports to between 45-60 million litres of bulk in 2021, instead of 34 million litres.
The collective implication of the points above is, South Africa’s total of bulk and packaged wine exports to the rest of the EU will remain above the EPA quota, exceeding it by between 75-97 million litres under low and high road scenarios, respectively. Therefore, Brexit will not reduce South Africa’s opportunities for “direct wine exports” into the EU.
While on this point, there is a key caveat to take into consideration; which is, South Africa’s bulk wine that is exported into the EU, and then re-exported into the UK as packaged wine. This analysis has not taken this dimension of the argument into account because available data does not provide insight into South Africa’s wine re-exports within the EU.
So, South Africa’s direct exports to the UK under-estimate, somewhat, the level of impact of Brexit, especially because it doesn’t take into account the outcome of the EU-UK negotiations – whether there will be a trade deal or not. That uncertainty, combined with a lack of data, makes the exercise of calculating the overall cost difficult to estimate.
If we stick to direct exports, we can deduce that Brexit will present a further opportunity if South Africa can secure a trade agreement with the UK. A SACU-UK trade arrangement might see South Africa exporting 106 million litres of its wine duty free into the UK market (consisting of an average of 33 million litres of packaged wine and 73 million litres of bulk wine).