SCOTLAND’S TRADING FUTURE
February 2017
TABLE OF CONTENTS
1.
Executive Summary ........................................................................................................................................2
2.Introduction .......................................................................................................................................................3
3.
The United Kingdom and the EU...............................................................................................................4
4.
A Differentiated Deal for Scotland...............................................................................................................6
a)
A differentiated national deal?................................................................................................................7
Legal, Technical and Political Obstacles
Importance of our Domestic Market
b)
A differentiated sectoral deal?................................................................................................................10
5.
Scotland’s Trade................................................................................................................................................11
a)
International Trade Statistics..................................................................................................................11
b)
Domestic Trade Statistics........................................................................................................................12
UK- and EU-owned Enterprises
c)
A Domestic Market vs. A Single Market..............................................................................................13
Non-Tariff Barriers to Trade in Services
Non-Tariff Barriers to Trade in Goods
Case Study: Financial Services
6.
Future Opportunities.......................................................................................................................................16
Domestic Policy
Future Trade Agreements
Grasping Opportunities
Case Study: Scotch Whisky
7.Conclusions .......................................................................................................................................................21
8.
Appendix
.......................................................................................................................................................22
1
1.
EXECUTIVE SUMMARY
This advisory group was set up last year by Ruth Davidson, the leader of the Scottish Conservatives, in
a speech at the European Council on Foreign Relations in London.
Our remit was to examine the implications for Scotland of the UK’s vote to leave the European Union,
and to study the challenges and opportunities that arose from this historic decision.
Our challenge has been to reach across the divide between those who voted to remain and those who
voted to leave and to set out a way forward which, we believe, is in the best interest of Scotland and the
whole United Kingdom.
This paper – entitled “Scotland’s Trading Future” – follows both the Scottish Government’s own
publication, proposing a so-called ‘differentiated deal’ for Scotland, and the UK Government’s white
paper, setting out its strategy and negotiating position. The Prime Minister has said that Article 50 will
be triggered by the end of March, confirming the UK’s intention to leave the EU. It is clear Scotland will
leave at the same time. We hope this document provides a timely and useful addition to the debate as
the negotiations over the UK’s departure from the European Union commence. We believe that a good
trading deal with the EU27 is attainable with goodwill and a political determination to achieve success
on both sides.
At its heart is a core principle: that a good deal on trade with the EU27 for the United Kingdom will, by
its nature, be a good deal for Scotland. Primarily, this is because our own Union is a tightly-bound, highly
integrated nation, offering us a domestic market of 60 million people, which is vital for the economy
and jobs across Scotland. But it is also because, as part of a major G7 country, Scotland can benefit from
the platform the UK has on the global stage. We therefore believe it is in Scotland’s self-interest to do
nothing to fracture our own Union. And we believe it is in Scotland’s self-interest to support the United
Kingdom’s efforts to increase global trade. This aligns with the fact that Scotland’s trade with the rest
of the world is now greater than trade with the EU27.
We would urge the Scottish Government to accept the evidence. The Scottish Government cannot
simultaneously claim that Brexit will damage the UK economy by reducing our access to the EU single
market, whilst failing to recognise that fracturing our own Union would be devastating to the Scottish
economy. As the Scottish Government has itself set out, Scottish trade with the rest of the UK is worth
four times as much to Scotland as EU trade. There is therefore no logic in the SNP’s view that we should
resolve our departure from the European Union by weakening our relationship with the rest of the UK.
We cannot therefore see the self-interest in a so-called “differentiated solution” for Scotland. It would
have the effect of damaging the economy and reducing growth in Scotland.
We are, quite simply, better off as part of our own Union. The United Kingdom’s decision to leave the
European Union has made that case stronger, not weaker.
This report has been unanimously agreed by all of us. It will now be presented this week to the Scottish
Conservative Party and to the UK Government.
2
2.INTRODUCTION
The United Kingdom’s decision to leave the European
Union presents challenges, but also real opportunities
for Scotland and the whole of the UK. An advisory
group was set up by Ruth Davidson MSP to
examine these from a Scottish perspective as the UK
Government negotiates our exit1.
Scotland and its businesses are currently members of
two integrated markets – the single EU market and the
domestic UK market. The Group’s work has initially
focused on comparing the importance of these to
Scotland’s economy and the possibilities for future
trade expansion.
Our conclusion is that the pursuit of a different
European single market access deal for Scotland,
with different legal and market constraints from the
rest of the UK, would result in the fracturing of
the UK domestic market, with significant detriment
to the Scottish economy.
The upcoming negotiations with the EU27 offers
the chance for a new deal that redefines the UK’s
relationship with the European Union – built on a
free trade agreement that benefits all sectors of the
UK and Scottish economies as well as its regions. This
will require flexibility from all of those involved in the
negotiations, from the Scottish and UK Governments
to EU member states.
The evidence in this respect is unequivocal – while it
is vital that we strive to achieve the greatest possible
tariff-free access to the European single market
following the UK’s exit from the EU, the importance
of the UK domestic market to Scotland’s trade is
significantly higher.
The UK Government intends to trigger Article 50
by the end of March, which would result in the UK
leaving the European Union two years later by the end
of March 2019, with a possible transitional period if
agreed by both parties. The Prime Minister set out
the Government’s 12-point plan in January 2017,
followed by a White Paper in February, which gives a
comprehensive overview of the desired outcome and
negotiating strategy.
The Scottish Government published its proposals
in a paper in December 2016. It argues in favour
of membership of the EEA (European Economic
Area), either for the UK as a whole, or under a special
differentiated deal for Scotland within the UK. In
addition, the paper argues for a considerable further
devolution of powers regardless of the outcome of
the negotiations.
This paper includes analysis of the second option
outlined by the Scottish Government – a differentiated
deal. We have considered not only the practical
deliverability of this proposal but also whether it is
even desirable for Scotland.
1
See appendix
3
3.
THE UNITED KINGDOM AND THE EU
The Prime Minister set out the Government’s 12-point
plan in January 2017, followed by a White Paper in
February 2017, which gives an outline of the desired
outcome and negotiating strategy.
The 12-point plan is summarised below2:
1.
Providing certainty and clarity – We will provide
certainty wherever we can as we approach the negotiations.
2.
Taking control of our own laws – We will
take control of our own statute book and bring an
end to the jurisdiction of the Court of Justice of the
European Union in the UK.
3.
Strengthening the Union – We will secure
a deal that works for the entire UK – for Scotland,
Wales, Northern Ireland and all parts of England. We
remain fully committed to the Belfast Agreement and
its successors.
4.
Protecting our strong and historic ties with
Ireland and maintaining the Common Travel Area
– We will work to deliver a practical solution that allows
for the maintenance of the Common Travel Area,
whilst protecting the integrity of our immigration
system and which protects our strong ties with Ireland.
5.
Controlling immigration – We will have control
over the number of EU nationals coming to the UK.
6.
Securing rights for EU nationals in the UK,
and UK nationals in the EU – We want to secure the
status of EU citizens who are already living in the UK,
and that of UK nationals in other Member States, as
early as we can.
7.
Protecting workers’ rights – We will protect
and enhance existing workers’ rights.
8.
Ensuring free trade with European markets
– We will forge a new strategic partnership with the
EU, including a wide reaching, bold and ambitious free
trade agreement, and will seek a mutually beneficial
new customs agreement with the EU.
4
2
HMG (Feb 2017), The United Kingdom’s exit from and new
partnership with the European Union
9. Securing new trade agreements with
other countries – We will forge ambitious free trade
relationships across the world.
10.
Ensuring the UK remains the best place for
science and innovation – We will remain at the vanguard
of science and innovation and will seek continued close
collaboration with our European partners.
11.
Cooperating in the fight against crime and
terrorism – We will continue to work with the EU to
preserve European security, to fight terrorism, and to
uphold justice across Europe.
12.
Delivering a smooth, orderly exit from the
EU – We will seek a phased process of implementation,
in which both the UK and the EU institutions and the
remaining EU Member States prepare for the new
arrangements that will exist between us.
One of the key objectives of the UK Government is
to secure a free trade agreement with the European
Union and maintain the maximum possible tariff-free
access to the single market with minimal non-tariff
barriers. We believe that this is the right approach,
which both respects the result of the referendum and
aims to protect the UK’s trading links in goods and
services with the EU.
The Prime Minister has also made it very clear that
while the UK is leaving the EU, it is not leaving Europe.
This means that the UK will maintain close links with
our European partners and continue to cooperate
in areas where it is in the common interests of the
UK and the EU. This could include arrangements
on matters of law enforcement and the sharing of
intelligence material, but also continued cooperation
in high-quality university research or student exchange
programmes – issues which will be a matter for the
negotiations.
The detail of a free trade deal cannot be predicted at
this stage, as it will be unique, but there are numerous
examples of bespoke trade agreements between the EU
and third countries which can help clarify the issues to
be addressed. A prominent and most recent example of
a free trade deal is the EU’s Comprehensive Economic
and Trade Agreement (CETA) with Canada. Whilst
not fully ratified yet, it is an example of a bespoke deal
which removes 99% of customs duties between the
two economic blocks, some with a phased-in period3.
3http://ec.europa.eu/trade/policy/in-focus/ceta/ceta-explained/
Other examples are the three Deep and Comprehensive
Free Trade Areas (DCFTA) between Ukraine,
Georgia, Moldova and the EU. While we recognise
that these have largely been seen by both parties as
a stepping stone towards full EU membership, they
set an interesting precedent. The three DCFTAs are
characterised by their comprehensive structure and a
high degree of inclusion in the single market, but only
adhering to three of the four freedoms (free movement
of goods, service and capital, but not people)4.
Whatever final form the UK’s free trade deal with the
EU takes, a key feature of such an arrangement will
be the power for the UK to strike further trade deals
with countries outside the EU. While some customs
alignment with the EU might continue for certain
sectors, it should be considerably easier to negotiate
free or preferential trade agreements one on one,
rather than one of 28.
willingness of the remaining 27 EU members to reach
an agreement which is in the interests of the EU as
much as the UK.
In our view, the primary objective of all levels of
government across the UK should be achieving the best
possible deal in the negotiations. The UK Government
is entering negotiations with 27 other states, which will
have different priorities and willingness to cooperate.
It is pivotal that all parts of the UK come together and
present a united front, so that efforts are focused on
getting the best possible deal.
This focus on new trade deals presents an opportunity
for the UK to become a global trading nation, outside
of the EU Common External Tariff, and Scotland can
and should be leading this process. Scotland and the
UK can make a renewed case for open, international,
liberal economic trade, and show how this approach
benefits individuals, regions and nations, without
undermining our high environmental standards,
workers’ rights or any other domestic policy priorities.
As opposed to protectionist policies, free trade deals
generally lead to increases in employment, income levels,
Gross Domestic Product as well as lower commodity
prices and boost innovation and productivity through
competition. FTAs increase exports from both
signatories, regardless of the size of their economies,
but they can also disproportionately boost growth in
developing countries in addition to any direct foreign
aid. Importantly, modern trade deals can respect both
parties’ priorities without undermining any domestic
approaches to laws, standards or procurement. This is
the approach we should champion in the future.
We want to emphasise that striking a free trade deal
with the EU need not be difficult if the political will
is there. The UK and EU single market regulatory
frameworks are currently entirely aligned and, through
the Great Repeal Bill, will remain aligned on the day
of departure too. There will be decisions to be made
on issues like dispute resolution procedures, but the
speed of an agreement will primarily depend on the
4
Emerson, M. (October 2016): Which Model for Brexit?, CEPS Special Report
5
4.
A DIFFERENTIATED DEAL FOR SCOTLAND
The result of the referendum in Scotland has led the
Scottish Government to publish their own paper with
a series of options around Scotland’s place in the
European single market. Scotland’s Place in Europe is
centred around EEA membership – either for the UK
as a whole or under a differentiated deal for Scotland.
We believe there are several reasons why the EEA model
is not one for the UK to follow. The primary reason
has been articulated well by the Scottish Government
itself in a paper which explored Scotland’s relationship
with the European Union5:
“The real cost of the EEA is that it imposes on these countries a
whole range of EU laws and regulations over which they have no
legislative control. Whilst EEA members are consulted on the
development of relevant EU regulation and legislation, the EU
legislators are under no obligation to consider their views. Nor do
the EEA countries participate at any stage in the EU legislative
process, and have no vote (or influence) over whether these laws
and regulations should be adopted, amended or rejected.”
These factors led the Scottish Government to the
following conclusion:
“The Scottish Government therefore does not consider that EEA
membership is a desirable option from a democratic perspective Scotland’s citizens would lose all ability to influence the laws and
regulations to which they would be subject.”
An agreement which amplifies a democratic deficit –
already perceived to exist within the EU – is in our
view highly undesirable and would undermine the
result of the referendum.
Secondly, EEA members have to continue to comply
with the four freedoms of the internal market – freedom
of movement, goods, services and capital. The EEA
agreement does allow its member states to temporarily
enact “safeguard measures” in the event of “serious
economic, societal or environmental difficulties”.
These measures allow member states to suspend parts
of the EEA agreement and could theoretically be used
as an emergency brake on immigration. However, they
are not a meaningful policy lever. We recognise that
6
5
2013
Scottish Government: Scotland in the European Union, November
the full control of UK borders was a key feature of the
referendum campaign and the EEA model would not
achieve that objective.
Thirdly, while EEA members do not directly
contribute to the EU budget, they do pay to secure
participation in certain EU programmes and provide
direct contributions to less developed EU member
states. In Norway’s case this is almost €391m every year
between 2014 and 2021.6 When all of this is taken into
account, Open Europe calculates that EEA members’
contributions are not significantly lower in per capita
terms than that of the UK - in 2015 Norway’s per capita
net contribution was 88% that of the UK (£100.03
compared to £113.79).7 This too would undermine the
final EU referendum result.
It is for these reasons that we conclude that the EEA
model is not one for the UK as a whole to follow.
Scottish Government Proposal
Following the publication of the UK Government’s
White Paper, the Scottish Government, despite the
conclusions it drew in 2013 on EEA membership, has
focused on their second option – a differentiated deal
to secure EEA membership with significant devolution
of further powers from Westminster.
Our work leads us to conclude that not only are there
legal, technical and political obstacles which make
such a deal undeliverable, the evidence shows
it would also be to the detriment of Scotland.
We explain why we believe that a differentiated deal
would break the domestic UK market, with serious
consequences for the Scottish economy and to trade
flows between Scotland and the rest of the UK.
That does not, however, mean that differentiation
within the UK by sector (some of which have a
disproportionate presence in Scotland) could or
should not happen. The areas where the Scottish
Government wants a differentiated deal to address
what they see as Scottish issues are, however, common
to other areas and sectoral needs in the UK. We think
the right approach is for the UK Government to focus
on protecting the particular interests of economic
sectors on a UK basis.
6
http://www.eu-norway.org/eu/Financial-contribution/#.
WKb94vmLSM9
7http://openeurope.org.uk/intelligence/britain-and-the-eu/as-the-uksearches-for-a-post-brexit-plan-is-the-eea-a-viable-option/
a)
A differentiated national deal?
Under the Scottish Government’s proposed model, it
is envisaged that Scotland would join the European
Free Trade Association8 and then become a member
of the European Economic Area9.
The Scottish Government’s Scotland’s Place in Europe
paper has drawn on the work of the First Minister’s
Standing Council on Europe. It does not, however,
present definitive conclusions of this group as the
members “differ on some aspects of the analysis
and options” in the paper. In fact, several members
of the Council have already spoken out about the
differentiated deal option:
• Lord Kerr of Kinlochard, the architect of Article
50, said he does not think it would be possible for
Scotland to remain in the EU single market if the
UK as a whole is leaving.10
• Dr Fabian Zuleeg of the European Policy Centre
said to MSPs “There are some considerations as to
whether there can be special deals. The one I think
which is highly unlikely is a special deal for any part
of the UK to remain in the single market.”11
• Charles Grant, director of think-tank Centre for
European Reform (CER), said that the proposal
“would be politically, technically, and legally very
hard to make work.”12
• Sir David Edward has said that he does not see how
Scotland could remain part of the UK and have a
separate relationship in relation to the single market due
to its land border with England. He said that it would
be impossible for Scotland to do a “reverse Greenland”
because it is “connected by its navel” to England.13
The lack of agreement amongst the First Minister’s
advisers is understandable. Our own group has
looked at the challenges of a differentiated deal for
Scotland and we have unanimously concluded
that it is not deliverable. The following section looks
at the identified obstacles.
8
Includes Norway, Iceland, Liechtenstein and Switzerland
9
Includes all 28 EU member states and 3 EFTA states, excluding
Switzerland
10http://www.bbc.co.uk/news/uk-scotland-scotland-politics-37852628
11http://www.heraldscotland.com/politics/14837019.
Sturgeon__39_s_soft_Brexit_plan_for_Scotland__quot_highly_unlikely_quot__
says_her_adviser/
12http://uk.businessinsider.com/sturgeon-charles-grant-scotlandbrexit-plans-politically-and-legally-problematic-2016-12
13https://stv.tv/news/politics/1359216-brexit-independence-issimplest-method-to-stay-in-eu/
Legal, Technical and Political Obstacles
One of the primary problems with the Scottish
Government’s plan is the need for Scotland to be a
separate legal entity from the rest of the UK. In other
words, Scotland would need to be an independent state
to apply for EFTA membership in the first instance.
Article 56 of the EFTA Treaty states that: “Any State
may accede to this Convention, provided that the
Council decides to approve its accession, on such terms
and conditions as may be set out in that decision.”
This was also identified as an issue by Svein Roald
Hansen, head of Norway’s EFTA and EEA delegation,
who said that Scotland could only become a member
of the EFTA with independence:
“To enter the EEA agreements, they have to be either be a
member of the EU like they are today or a member of EFTA.
If they were to become members of EFTA, they would first have
to break free from the UK. If the UK is out of the EU and they
negotiate free trade agreements with other countries, that would
presumably be applied to Scotland. Scotland can’t have agreements
as part of the UK and other agreements as part of EFTA.”14
The Scottish Government, in response to these
concerns, cites examples of exceptional circumstances
and exemptions that could form a precedent for
Scotland. The so-called “reverse Greenland” option is
one of these, drawing parallels under which Greenland
opted out of EU membership despite being a
constituent country of Denmark. Secondly, the Faroe
Islands have in the past raised the possibility of joining
EFTA despite not being a sovereign state, possibly
through using Denmark as a sponsor.
However, neither Greenland nor the Faroes offer a
comparable scenario with Scotland. Firstly, neither
are connected by a land border to a different territory,
which permits bespoke arrangements on trade.
Secondly, neither are comparable in size of economy
or population with Scotland. Each has a population of
around 50,000, which is around 100 times smaller than
Scotland. Thirdly, and most importantly, Greenland
was opting out of (rather than into) the EU and the
Faroes have in over ten years not progressed beyond
getting Iceland’s support for their approach. There
is simply no precedent for a land-connected, highly
populated non-state territory with a large diversified
economy joining the EU, EFTA or EEA.
14http://www.telegraph.co.uk/news/2017/01/11/norwegians-rejectnicola-sturgeons-norway-plan-stay-single-market/
7
There is also a range of technical issues that seem
insurmountable.
Within EFTA/EEA Scotland would be subject to
EFTA’s compliance machinery, namely the EFTA
Surveillance Authority and the EFTA Court. The
former performs the role of the European Commission
(ensuring that EEA EFTA states comply with internal
market laws, including state aid), while the latter deals
with infringement actions brought against an EEA
EFTA state. The rest of the UK, however, would not
be part of this.
As a member of EFTA/EEA, Scotland would need
to comply with the entire substance of internal market
law. Over time EEA regulations and standards would
diverge from the rest of the UK. Complying with the
EU acquis and maintaining the integrity of the UK
domestic market are contradictory objectives.
This separate status also raises important questions
on issues of procurement, state aid and competition
policy jurisdiction. What would such an arrangement
mean for UK procurement and the provision of UK
state aid in Scotland? The Scottish Government’s
proposal would seem to suggest a self-enforcement
mechanism, under which the UK Government
would have to adhere to procurement and state aid
rules only in respect of Scotland. This would mean
the UK Government would, in effect, be prevented
from providing a desired level of support in Scotland,
resulting in a lose - lose situation for the Scottish
Government and Scottish companies.
In competition policy, issues like mergers, acquisitions
and overall market presence would be in the scope
of the EFTA Surveillance Authority, but it is unclear
how this would operate in a fully integrated domestic
market, with thousands of cross-border businesses,
some of which are headquartered in one part, but the
majority of its operations in the other.
On top of these legal issues, political difficulties can
sometimes be even harder to overcome. An EFTA EEA
deal would not only require agreement from 4 existing
EFTA states, it would also require unanimous agreement
from 27 EU states. There has, so far, been no indication
at senior level among EU member state governments of
a willingness to pursue a special deal for Scotland.
8
There are political concerns that special treatment of
a region within a state might encourage secessionist
movements in other states. Spain is often cited as an
example of such a state. Shortly after the publication
of Scotland’s Place in Europe, Jorge Toledo, the
Spanish secretary of state for the European Union,
was reported as saying: “If the UK leaves the single
market, the whole UK will leave the single market.
There is only one negotiator, the UK government.”15
Spain is not alone – a number of member states have
strong regional and secessionist movements that will
make them reluctant to support the SNP’s position.
Another political factor, not often acknowledged, is
the fact that Norway is by some distance the most
powerful and influential EEA EFTA member. It is
not unreasonable to see why it might be reluctant to
welcome Scotland into a structure that it effectively
controls. It is for this reason that Norway strongly
welcomed the UK’s decision to pursue a bespoke deal,
rather than the EFTA EEA option mooted in the
weeks and months after the referendum.
Importance of our Domestic Market
Practicality aside, the more important question is not
could this be delivered, but should it be. We think
the pursuit of a differentiated deal in the interests of
Scotland is misguided. Such a deal would break our
integrated domestic UK market, whose economic
importance to Scotland is paramount.
The rest of the UK has over the last few years been
around four times more important to Scotland’s
trade than the EU. Long term trends are even more
revealing. While Scottish trade with the rest of the
UK increased by 74% since 2002 (from £28.6bn to
£49.8bn), it has only increased by under 8% with the
EU (from £11.4bn to £12.3bn).
It seems clear to us that devolution of swathes of
policy to secure a differentiated deal for Scotland
within the EEA/EFTA would result over time in
new non-tariff barriers to trade within the UK as a
result of diverging legislative and regulatory systems.
We return to a discussion of non-tariff barriers and a
comparison between the UK and EU regarding these
in Chapter 5.
Irrespective of the devolution of further powers,
however, this group looked at whether a differentiated
deal in and of itself would have an impact on the two
key features of our domestic UK market - the complete
free movement of goods, services and people.
15http://www.heraldscotland.com/NEWS/14984269.Spain_rejects_
Sturgeon__39_s_idea_of_bespoke_Brexit_deal_for_Scotland/?ref=rl&lp=5
Free Movement of Goods and Services
Regarding future customs relationships with the EU,
the Scottish Government’s proposal for a differentiated
deal only acknowledges two options – the UK as
a whole in or out of the customs union. This is in
recognition of the impact that differing customs rules
between Scotland and the rest of the UK would have
on domestic trade.
However, even with tariffs aligned, were Scotland to
remain a member of the single market, the flow
of goods between Scotland and England would
inevitably be affected. Processes would have to be
put in place to differentiate between trade to and from
Scotland and to and from the rest of the UK. The
Scottish Government’s Scotland’s Place in Europe paper
makes the position clear:
“The laws of the European Single Market would apply only to
those goods and services traded between Scotland and the rest of
the European Single Market.”
As a useful parallel, while Norway is a member of
the EEA and therefore of the single market, it is
outwith the customs union. As a result, it is required
to adhere to rules of origin on its exports, which
specify thresholds for imported content before tariffs
are payable. This is not only onerous for businesses
due to complex reporting requirements, it also means
Norwegian exporters have to consider adjusting their
supply chains.
Scottish businesses with rUK supply chains and
UK businesses with Scottish supply chains would
see a significant increase in reporting requirements
under such variable market access scenarios. Scottish
exporters may be required to adhere to different rules
of origin within their goods, which could potentially
increase their supply chain costs. Conversely, the rest
of the UK may need to treat Scotland as a separate
region in its future trade relationships, with knock-on
effects on the considerable Scottish supply chain of
UK businesses.
This inevitably means that the flow of goods between
Scotland and the rest of the UK would have to be
controlled, not least to ensure that rules of origin were
being observed and that exports from third countries
with which the UK or rUK had bilateral trade
agreements were not using the UK or rUK as a back
door to evade EU rules, if Scotland was a member of
the EEA and the rest of the UK was not.
Looking beyond customs rules, the provision of
cross-border services relies on fully aligned legal and
regulatory frameworks. As we highlight below, the main
reason for a lack of an EU single market in services is
the existence of a broad range of non-tariff barriers,
which simply do not exist between Scotland and the
rest of the UK. It is the common regulatory and
institutional oversight that allows 55.3% of Scottish
trade with the rest of the UK to be in services.
This was acknowledged by a member of Nicola
Sturgeon’s own Standing Council on Europe. Charles
Grant, who is director of the Centre for European
Reform (CER), said he believed a possible outcome
would be similar to the border arrangement between
Switzerland and France, with light customs controls,
but saw there was also a risk of more comprehensive
paperwork requirements and, in consequence, delays
for cars and lorries on the border.16
A differentiated deal under which Scotland became
a member of the EEA would inevitably mean a
divergence in regulations and laws from the rest of the
UK over time. Scotland would be required to adhere
to the entire body of law of the European single
market and adapt its domestic legislation in line with
any future developments, in contrast with the rest of
the UK. The impact on the provision of cross-border
services would be considerable.
Rules of origin requirements would need to reflect
differential single market membership between
Scotland and rUK. Possible partial tariffs on goods
exported from Scotland with a rUK component into
the EU may need to be introduced. The complexities
of such an arrangement are staggering.
16http://uk.businessinsider.com/sturgeon-charles-grant-scotlandbrexit-plans-politically-and-legally-problematic-2016-12
Free Movement of People
First Minister Nicola Sturgeon and the Scottish
Government have consistently emphasised their
support for the freedom of movement within the EU
and their differentiated deal option envisages Scotland
continuing to adhere to the free movement of people
across the EU/EEA, as required by EEA membership,
in contrast to the UK Government.
9
In our view, this would inevitably mean a certain
degree of immigration controls being introduced
between Scotland and England. The Scottish
Government’s Scotland’s Place in Europe paper states the
following:
“People coming into Scotland from other countries – EU or nonEU – would continue to be subject to passport and other security
checks as is the case now. Scotland remaining within the single
market – and the rest of the UK not – would not change that.
It would be open to the UK Government to apply additional visa
requirements for citizens from other EU countries coming into
airports or ports in England, Wales and Northern Ireland.”
An arrangement under which there are different visa
restrictions between Scotland and the rest of the UK
is incompatible with complete freedom of movement
within the Common Travel Area17.
The Scottish Government also acknowledges that there
is an issue with EU migrants using Scotland as an access
route to the rest of the UK. It suggests in response that
immigration controls could be introduced at the point of
employment or when accessing public services in the rest
of the UK. This, however, makes no assessment of the
burden on employers, nor does it address the “shadow
economy” – the unrecorded and illegal activities in the
labour market and the broader economy.
The Scottish Government envisages a continuation of
the Common Travel Area, but it does not acknowledge
that it would fully have to align its immigration policy
with the rest of the UK – as is the case with Ireland.
There has been no indication at present that it would
be willing to do this.
In fact, the SNP have repeatedly emphasised their support
for a fundamentally different immigration policy for
Scotland. Nicola Sturgeon told the Scottish Parliament18:
“The way to deal with and support an ageing population is to
grow the working-age population. How do we do that? We attract
immigration rather than follow the UK Government’s policy.”
Unless the Scottish Government changes its
position on immigration, it is in our view inevitable
that some level of internal UK border controls
would be introduced, fracturing the free movement
of labour – and the domestic market - within the UK.
17
The CTA is a special travel zone between the UK, the Republic of
Ireland, the Isle of Man and the Channel Islands.
18
Scottish Parliament’s Official Report, 26 November 2013
10
This would have significant consequences on Scotland’s
economy. Over the past ten years around 95,000 UK
residents a year have moved into or out of Scotland,
and around 30,000 people travel in and out of Scotland
each day to work19. The impact of lower labour
mobility within the UK would be to increase costs to
businesses and impact on employment opportunities
for people in Scotland. It would also undermine the
social union of the United Kingdom.
b)
A differentiated sectoral deal?
We recognise that there are concerns that have been
raised in certain sectors of the economy – both
regarding tariff and non-tariff barriers and their
impact on their business. Rather than differentiating
by geography, we think the UK government should
pursue a deal based on the needs of the UK domestic
economy as a whole.
This approach recognises that the needs of sectors
across Scotland’s economy – often claimed to be
unique to Scotland by the Scottish Government – are
shared interests across the UK.
The construction sector, for example, imports a large
percentage of materials from the EU, so maintaining
tariff-free trade flows is its priority. This applies to
construction firms on both sides of the border.
For agriculture in Scotland, seasonal migrant labour is vital.
This is as true for farmers in Perthshire as it is for those in
Kent and Herefordshire, which statistics show both had a
higher reliance on seasonal migrant labour than Scotland.
This is a need felt across the United Kingdom.
For financial services across the UK, passporting (or
a deal around equivalence) is an important issue. But
this is an issue that is shared by firms in Edinburgh,
Glasgow as well as the City of London.
This approach, based on UK-wide sectoral needs
rather than geographical dividing lines, recognises that
the interests of Scotland’s industries are shared by the
same industries south of the border and it protects
the integrity of the domestic market that is worth four
times more to Scotland than the EU.
The UK and Scottish Governments should cooperate
closely with these sectors to better understand their
concerns, needs and priorities, consult and engage early,
and pursue solutions that will have a positive impact on
19
Scotland analysis: Business and microeconomic framework, July 2013
industry in Scotland as part of the United Kingdom.
5.
SCOTLAND’S TRADE
a)
International Trade Statistics
Scotland’s international exports outside the EU have grown significantly since 2007, both in absolute terms and
as a proportion of international exports.
Scotland’s largest export destination remains the USA by some distance, accounting for over £4.5bn in exports
– more than France and Germany combined. This has been the same since 2002, the earliest year for which this
particular set of data is available.
Recent trends show the importance of international exports beyond the EU increasing, with the EU gradually
accounting for a smaller share of Scotland’s exports. This, in our view, underlines the opportunity for further
growth following successful international trade deal negotiations. The most valuable export markets for Scotch
Whisky, for example, are the US, Singapore and France, with the fastest growing markets in the last year including
Mexico and Japan.20
20http://www.scotch-whisky.org.uk/media/81807/top_20_exports_value___volume.pdf ?Action=download
11
b)
Domestic Trade Statistics
Scotland’s international exports, however, need to be compared with Scotland’s trade with the rest of the UK.
There the evidence is unequivocal – the rest of the UK has over the last few years been around 4 times more
important to Scotland’s trade than the EU.
Longer term, however, the trends are even more revealing. While Scottish trade with the rest of the UK increased
by 74% since 2002 (from £28.6bn to £49.8bn), it has increased by less than 8% with the EU (from £11.4bn to
£12.3bn). Combining long-term trends for international and rUK trade, it is clear that trade with the EU trails
behind both trade with the rest of the UK and trade with the rest of the world outwith the EU.
Scottish domestic trade statistics have been disputed by some, including a number of SNP parliamentarians.
Mostly this involves questioning the collection of the data or the robustness of it, given the possibility of
Scottish goods being exported (or indeed re-exported) from ports in the rest of the UK. Most of these points
are addressed in the Scottish Government’s own FAQ section of their website21, since the data comes from its
own Export Statistics Scotland publication, which is based on the Scottish Government’s Global Connections
Survey.22
21http://www.gov.scot/Topics/Statistics/Browse/Economy/Exports/ESSFAQ#_Are_Scottish_goods
22 Firstly, goods exported from Scotland are attributed to Scotland regardless of which port they leave the country from – the data is destination-based. That means that if
goods travel to Newcastle first and then are exported, they will be counted as Scottish exports rather than rest of UK figures.
Secondly, this also applies to Scotch Whisky, which is often quoted as somehow unattributed to Scottish statistics. The Scottish Government website makes clear that all Scotch
Whisky exports are attributed to Scotland. The oft-quoted misallocation of Scotch Whisky export duty fails to recognise that there is no such thing as an export duty levied on
any good or service.
Thirdly, there will be cases where goods are exported to the rest of the UK and subsequently re-exported further – either after some time has passed or as part of other
products (where UK businesses have Scottish supply chains). It is not possible to quantify this figure. Looking at the composition of rUK trade, however, 55.3% of trade into
rUK is in services and another 11.6% in utilities (for example electricity trade), which by definition are very unlikely to be exported further.
12
UK- and EU-owned Enterprises
Business statistics in Scotland, collated in the annual
Businesses in Scotland23 publication published by the
Scottish Government, show the number and size of
registered enterprises as well as their turnover and
contribution towards employment. They also, however,
provide a breakdown by country of ownership. While
Scottish-owned enterprises make up the vast majority
of all enterprises in Scotland (97% of the 174,000
total), a small number of primarily larger businesses
owned in the rest of the UK or abroad account for
34.2% of all employment in Scotland.
Breaking this down further, the statistics show that
there are currently 2,790 enterprises registered in
Scotland with ownership in the rest of the UK,
employing over 340,000 people (17.7% of total), with
a turnover of £54 billion (20% of total).
This compares to 1,000 EU enterprises operating in
Scotland, employing 127,000 people (6.6% of total)
and with a turnover of £35 billion (13% of total).
The number of enterprises owned abroad outside of
the EU is 1,300 and accounts for 190,000 employed
people (9.9% of total) and with a turnover of £56.5
billion (21% of total).
In short, in line with trade patterns, the EU represents
a relatively smaller share of businesses owned and
employees than the UK and the rest of the world.
c) A Domestic Market vs. A Single Market
We are concerned that over the last few months there
has been some conflation between the UK and EU
markets, when there is in fact a fundamental difference
between the two.24
Membership of the European single market eliminates
trade barriers for exporters, under aligned regulatory
and legal frameworks. Scotland’s domestic UK market,
however, is not comparable to the EU/EEA. While
the former is a fully integrated market in goods,
services and capital, underpinned by a shared currency
and monetary policy, the latter offers primarily tarifffree trade in goods.
23
Businesses in Scotland 2016
24
In this section, we focus on the economic comparisons between the
two markets, but the difference is of course much more fundamental than that.
The UK is a social union and a political union, with deep historical and cultural
ties.
Tariffs are of course not the only barriers to trade.
Non-tariff barriers are just as important to trade –
both within the UK and within the EU. For services in
particular, there is a plethora of non-tariff barriers still
in place which hamper intra-EU trade, whereas these
are virtually non-existent in the UK. Services account
for 55.3% of all of Scotland’s trade with the rest of
the UK, so the emergence of any additional barriers
would have a significant impact on our economy.
Scottish businesses therefore benefit from eliminated
tariff barriers across the EU and the UK, but also
from a lack of non-tariff barriers across their domestic
market – the UK.
Non-Tariff Barriers to Trade in Services
A single market in services across the EU remains an
ambition for some. But its practical realisation is far off.
Services account for 70% of European Union GDP
and for a similar share of jobs, but only 20% of services,
representing 5% of EU GDP, are provided across
borders. This is in contrast to traded manufactured
goods, which account for 17% of EU GDP.25
The primary reason for this discrepancy is the
persistence of a range of non-tariff barriers on
traded services across the EU. Significant barriers
still exist across services ranging from professional or
business services, through tourism or leisure services to
the construction sector. The European Commission26
identified the following key barriers to companies
which want to establish in another member state or
provide services on a temporary cross-border basis:
•
Specific authorisations required from businesses to
offer their services
•
Legal form and shareholding requirements (there is
significant diversity across member states in this area)
•
Legally required professional indemnity insurance
cover (very difficult to obtain for companies offering
professional services or construction services)
•
Lack of mutual recognition in practice (a provider is
asked to comply with domestic requirements despite already
being compliant with equivalent requirements in a different
member state)
•
Lack of clarity in national legislation as to rules that
are applicable to businesses providing services cross-border
on a temporary basis
•
Complex (and diverse) administrative procedures
required to comply with legal obligations for service providers
25
European Parliamentary Research Service, Single Market for Services
Briefing, September 2016
26
Euroepan Commission, European Semester Thematic Fiche:
Services, July 2016
13
Minimal non-tariff barriers exist in the domestic
UK market, with significant cross-border business
in services. In fact, as is clear from the Scottish
Government’s own statistics, services account for
55.3% of all of Scotland’s trade with the rest of the
UK - £27.6 billion.
Non-Tariff Barriers to Trade in Goods
Non-tariff barriers on traded goods range from
health and safety regulation through packaging or
licensing rules to differing VAT or excise duties. Many
of these barriers still exist between EU member states,
although recent years have seen increasing attempts to
harmonise regulation.
On the other hand, the UK domestic market is truly
integrated. As part of the UK, Scotland benefits from
common regulations and institutions, a fully unified
labour market as well the most obvious benefits of
proximity, language and a well-connected infrastructure
network.
The UK Government’s Scotland Analysis27 paper argued:
“As it stands, the UK is a true domestic single market – with free
movement of goods and services, capital and people. Businesses
are able to trade freely across the whole of the UK; consumers
benefit from a greater number and variety of goods and services
at lower prices; and workers are able to access a greater number
of jobs allowing them to maximise their skills and realise their
range of aspirations. It is one market with no internal barriers
to the flow of goods, capital and labour.
A shared business framework underpins this extensive domestic
market. It is based on effective common regulations and
institutions, a unified labour market, a shared knowledge base
and integrated infrastructure.
The UK’s current business framework is a foundation for every
stage in the life of a business – from starting up to hiring
employees; accessing capital at home and abroad; inventing,
developing and patenting new ideas and technologies; moving
products across the UK and beyond; and accessing marketplaces,
whether online or on the high-street.”
27
14
Scotland analysis: Business and microeconomic framework, July 2013
Under the differentiated deal with the EEA as
envisaged by the Scottish Government, coupled with
significant further devolution, many of the nontariff barriers mentioned above would develop
over time, fracturing the fully integrated nature
of the domestic UK market. Regulatory divergence
from the rest of the UK as a result of Scotland’s EEA
membership would be inevitable in the long-term.
The impact would be greatest on businesses that
operate on both sides of the border. The additional
cost of having to comply with two sets of employment
or competition rules and interaction with two sets of
institutions would be considerable. Some of Scotland’s
key industries depend on domestic UK trade – we
looked at Financial Services in particular.
Case Study: Financial Services
Scotland has a world class financial services sector
which is global in outlook and hugely important to
the Scottish economy. The sector provides significant
employment in Scotland both directly and indirectly
via, for example, the professional services sector which
supports it.
The financial services industry in Scotland contributes
around £8 billion a year to the Scottish economy and
employs around 90,000 people directly and a further
90,000 indirectly - roughly a twelfth of the total Scottish
workforce. The principal centres of employment are
Edinburgh and Glasgow and there are also significant
operations in Aberdeen, Dundee, Perth and Stirling28.
The financial services sector in Scotland includes
banking, asset management and insurance activity.
It has Scottish domiciled businesses (e.g. Standard
Life, RBS, Aberdeen Asset Management), as well as
a strong representation of large global players (e.g.
Morgan Stanley, State Street, Franklin Templeton).
Financial services are not homogenous and different
kinds of services will be impacted to differing extents
by differing regulatory regimes. Peat and Kelly (2016)
provide a useful summary of the sector:
28
Peat, Kelly (2016): Brexit and the Scottish Financial Sector
29
While it is obvious that different kinds of financial
services will be affected differently, the conclusion
drawn by Peat and Kelly are very clear:
“The uncertainties for the sector following independence look even
greater than those following a sharp BREXIT.”
Almost three quarters of the financial services industry
employment in Scotland is in the banking and investment
sub-sectors, drawing on the pool of skilled labour and
enjoying cheaper costs than the City of London. As
we have seen above, these sub-sectors rely on the UK
market for business significantly more than the EU
market. Furthermore, financial services in Scotland are
reliant on close links and regulatory alignment with the
City of London, which helps with attracting investment
as well as skills and experience sharing.
Whilst passporting requirements or a deal around
equivalence will be a key part of the upcoming
negotiations, the integrity of the UK market is vastly
more important to the Scottish financial services
sector and should take priority.
29
Regional Contribution of UK Financial and Professional Services,
The City UK, January 2013
15
6.
FUTURE OPPORTUNITIES
The UK’s departure from the European Union presents
policy-makers with opportunities to reduce or indeed
eliminate tariff and non-tariff barriers for international
trade in overseas markets. Other opportunities could
also arise from a tailored regulatory framework.30
The role of this group was to identify some of the
steps that the Scottish Government could take to
ensure that these opportunities can be taken advantage
of. We cover these in the last section of this chapter.
Domestic Policy
While there are considerable areas of regulation where
continued cooperation between the EU and UK will
benefit businesses on both sides, there are some short term
and long term opportunities to adjust (or indeed design
from scratch) the regulatory framework in specific sectors.
For example, opportunities in the agricultural sector
have already been highlighted. The design of the
Common Agricultural Policy, despite some moves
towards regionalisation, has frustrated the agricultural
sector. The NFUS, in their written submission to the
Scottish Parliament, said that Brexit:
“could present an opportunity to develop a regulatory system
that is more appropriate or sensitive to the Scottish context
which encompasses a range of production practices. Examples
of where EU regulations could be applied more sensibly to the
Scottish context would be sheep tagging requirements for hefted
flocks; or CAP greening, which could be altered for much better
environmental gains.”
More broadly, beyond the CAP, the quality, grading,
weight, sizing, packaging, wrapping, storage, transport,
presentation, origin and labelling of agricultural
products is currently regulated by the EU.31 Some
harmonisation of these with EU norms will be
desirable, and we cannot pre-judge the outcome of
negotiations, but a lighter approach to some aspects
of regulation could benefit the sector.
Another area of domestic policy that has the potential
to transform the nature of government support is state
aid. State aid rules set financial limits and conditions
for direct grant support by governments. They are
30
CBI – Making a Success of Brexit, December 2016
31Ibid.
16
enforced across the single market to ensure a level
playing competitive playing field for all EU businesses.
All areas of government policy are affected by state aid
rules and there have been numerous high-profile court
case throughout the years in relation to this – ranging
from Spanish tax breaks for indigenous companies
to Dutch or Irish arrangements with multi-national
companies.
Again, it will be the outcome of the negotiations that
will determine the shape of things to come. EU/EEA
membership would be incompatible with an opt-out
from state aid rules, which creates serious difficulties
for the Scottish Government’s differentiated deal
approach, as discussed above. A free trade agreement,
however, would likely allow a bespoke set of measures
which could see the UK and Scottish governments
freer to operate as they see fit.
Future Trade Agreements
The UK’s departure from the Common External
Tariff means that it can in the future negotiate its
own free trade or preferential trade agreements with
third countries, including those which have already
concluded negotiations with the EU more aligned
to UK trading interests. These agreements have the
potential to significantly increase trade flows and
provide a boost to GDP to both sides. They are
complex – TTIP and CETA are some of the most
high profile examples – but it needs to be emphasised
that it is significantly easier to negotiate one on one
than it is to negotiate as one of 28.
Future GDP growth in emerging and developing
markets is projected to be around 4.6% in 2017,
compared to 1.5% in the Euro area. Specifically,
growth in China is forecast to be 6.2% in 2017, and
7.6% in India32. We believe that there are significant
gains to be made if deals can be concluded with some
of these developing markets, as well as more developed
economies and UK’s geopolitical partners.
Looking at the USA more specifically, despite a
close trading relationship, British companies still pay
around $1 billion to the US in tariffs every year. For
some industries, these tariffs are particularly high. For
example, US tariffs on UK sportswear are 32%, for
synthetic women’s coats 16%, hotel tableware 28%,
and – bizarrely - slippers 26%.
32
Scottish Parliament Economy, Jobs and Fair Work Committee:
Report on the Economic Impact of Leaving the European Union, February
2017
Tariff elimination between the EU and US has been
estimated cumulatively to be worth 1-3% of each side’s
GDP33. Even if a part of that came to be attained, the
economy, companies and consumers would benefit from it.
However, it is the regulatory dimension from where
80% of the benefits of any FTA deal are predicted
to emanate. Future trade negotiations across the
globe should aim to find ways of avoiding regulatory
duplication and double testing and certification in cases
where the UK and other markets have compatible
standards currently achieved through different means.
The aim of such an approach would be to spare
companies the added cost of having to comply with
regulations that provide the same protection twice.
Such duplication of testing is burdensome for even the
largest of companies, but it can make the difference
between there being a strong business case for exporting
or no business case at all for many small and medium
sized enterprises (SMEs). Future trade agreements along
the lines described above could have a big impact on
SMEs’ capability to expand their business, adding jobs
and growth to our local economies.
Much of the debate has so far focused on trade in goods,
but we believe that a future focus on services exports
could bring significant gains too for Scotland and
the UK. TheCityUK – the financial and professional
services industry’s membership body - campaigned on
the Remain side in the EU referendum. Since then,
however, it has been making the case for a refocused
trade and investment strategy – one aimed at building
on the UK’s renowned services sector. They argue that:
“Post-Brexit, there will be an unrivalled opportunity to
recalibrate and repurpose UK trade and investment policy in
the interests of UK jobs and growth, against the background of
emerging global trends”34
33
34
SNABC written submision to EERC
TheCityUK: Future UK Trade and Investment Policy, January 2017
TheCityUK makes a series of recommendations on how
to improve international service commerce, ranging
from better data gathering, international monitoring,
regulatory alignment, shared approaches to improving
online data security and others. Considering that 38%
of Scotland’s international exports are in services,
a new focus on enhanced services trade and investment
could allow us to grow the Scottish/UK sector even
further.
Looking at international exports alone, we make
some projections on possible alternative scenarios
in Scotland’s post-Brexit future. The Scottish
Government currently has a National Indicator target
to increase the value of Scottish International Exports
in nominal terms by 50% between 2010 and 2017.
Based on latest estimates, if international exports keep
growing by an annual average of the last 10 years, the
Scottish Government won’t hit their target until 2020.
If the UK Government’s focus on establishing new
trade deals is successful and if the Scottish Government
can increase its focus on export support through a range
of measures outlined below, we believe that the rate
of growth in rest of world exports could be doubled
following the UK’s exit from the EU. The impact of this
on Scottish exports would depend on the future trading
relationships between the EU and UK and we outline
three scenarios below – continued EU export growth,
flat EU exports and a drop in EU exports.
Latest figures suggest that rest of the world exports
from Scotland are already 34% more valuable than EU
exports. If the annual growth trend over the last 10
years continues, rest of the world exports will be
two thirds more valuable than our EU exports by
2025.
17
This growth in RoW exports alone could compensate
for any loss of EU exports following the UK’s
departure from the EU. If, however, Scotland can
capitalise on the potential opportunities from Brexit,
whilst maintaining its average EU export growth in the
future, rest of the world exports could be over double
our EU exports and be worth £10bn more than under
a no-change scenario.
The most optimistic of these estimates is based on
Scotland’s EU exports continuing to grow at a steady
rate post-Brexit. We cannot forecast the outcome of
the negotiations, and there are various scenarios that
will influence Scotland’s trade relationships with the
EU. Maintaining free trade for goods and services
has been highlighted as a key objective for future
negotiations and continued export growth is in our
judgement a likely outcome. However, we do recognise
that other estimates exist suggesting a negative impact
on Scotland’s exports under various scenarios.
that there are steps the Scottish Government could
take now to focus on rest of world export growth –
we discuss these below.
A range of factors will influence Scottish export
growth in the future, including currency strength,
labour market flows, productivity improvements as
well as the nature of future trade deals themselves. The
above estimates are also broad and do not take into
account sectoral differences. We do, however, consider
18
Grasping Opportunities
Negotiations with the EU will be conducted by
the member state – the United Kingdom. Since
international relations are an area reserved in the
Scotland Act, any future free or preferential trade
agreements will also be struck by the United Kingdom
Government. However, this does not mean that the
Scottish Government does not have a role to play in
export policy, within the expressly reserved powers on
international trade policy.
The Scottish Parliament’s Economy, Jobs and Fair
Work Committee has a few weeks ago published a
report35 following several evidence sessions examining
the impact of leaving the EU on the Scottish economy.
The final report is very clear in its conclusions:
“It is clear from evidence received that more needs to be done to
support and encourage Scottish businesses, especially SMEs, to
export both to the EU and beyond.”
Witnesses quoted in the report suggested that many
Scottish companies do not export internationally due
to lack of access to finance, awareness of opportunities
and international mentality. This is despite many
companies trading with England and other parts of the
UK, which already requires packaging and logistics. The
role of governments is therefore not only to provide
financial support, but also to increase awareness of
the support that’s already available as well as providing
easily accessible advice on internationalisation.
Another challenge lies in the profile of our exporting
companies. At the moment, over 50% of Scottish
exports are generated by 50 companies. The challenges
with growing small and medium sized businesses into
larger ones have been well documented in the past.
While businesses recognise that Scotland has a very
generous package of support for small businesses, we
lag behind in dedicated support encouraging individual
business growth, putting the balance of this support in
question.
Scottish Development International – Scotland’s
trade promotion agency – is an important part of the
Scottish Government’s export support. However, the
criteria used to set up new SDI offices are unclear.
For example, as part of the Scottish Government’s
response to the referendum result, it decided to double
the number of SDI staff across Europe from 20 to 40.
This is despite the fact that there is only one SDI office
in all of Latin America – one of the most important
growth markets for Scotch Whisky, Scotland’s most
valuable net export.
Helping with market access is another area of export
policy where more could be done. The government
could, for example, work with business groups to
build on the kind of international certification services
which are being delivered by Glasgow Chamber of
Commerce and other Chambers. It could also facilitate
further sectoral collaboration as well as cross-sector
collaboration through round tables, conferences and
other networking events.
35
Scottish Parliament Economy, Jobs and Fair Work Committee:
Report on the Economic Impact of Leaving the European Union, February
2017
Scotland has a number of very experienced exporters
which can help with best practice sharing and
expertise to other industries. There are examples of
this happening already – Scotch Whisky has in the
past collaborated with the rest of the food and drink
industry and with Harris Tweed to enter international
markets.
Case Study: Scotch Whisky
The Scotch Whisky industry is one of the most
important contributors to the Scottish and UK
economy. The statistics on the industry are very clear
– Scotch Whisky36:
•
Supports over 40,000 jobs, including 7,000 in
the rural economy
•
Provides up to 2/3 of direct employment in
less accessible areas
•
Adds over £5bn overall to the UK economy,
95% of which is in Scotland
•
Is the biggest net contributor to UK trade in
goods
•
Invests £1.7bn a year in its supply chain
•
Supports salaries worth £1.4bn to UK workers.
In the weeks and months following the EU referendum
result, the industry has been proactive in highlighting
its priorities for the future, identifying the key
challenges to be overcome, but also emphasising the
opportunities following the UK’s withdrawal from the
European Union.
The Scotch Whisky Association (SWA) is confident
about certain tariff arrangements not changing
regardless of the outcome of the negotiation. For
example, Scotch Whisky will not face a tariff on
exports to the EU. 0% is the current EU tariff and
World Trade Organisation (WTO) rules mean it won’t
change.
In many other markets Scotch Whisky will also continue
to benefit from existing zero tariffs, for example in
the US, Canada, and Mexico, as these are offered to
all countries already. Latest Scotch export statistics
show that EU and North American exports accounted
for approximately 55% of all Scotch exports in both
volume and value37.
36
SWA – Budget Submission 2017
37http://www.scotch-whisky.org.uk/news-publications/publications/
documents/scotch-export-analysis-first-half-2016/#.WDgn7PmLSM8
19
The SWA is also clear, however, that current agreements
struck as part of the EU’s free trade agreements (for
example South Korea) should be grandfathered as they
could potentially impact on around 10% of Scotch
Whisky exports.
Looking ahead, the SWA argues that the UK should
negotiate its own FTA network, with the UK having
the maximum influence on its own trade policy.
Priorities for whisky include:
•
Major markets with long-term potential, such
as India, China, and Brazil
•
Fast-growing markets with potential, including
Kenya, Nigeria, Burma, and Vietnam
•
Established markets where further growth is
possible, such as Australia and Thailand.
India in particular has been highlighted as a market with
significant potential for export expansion. Currently,
India levies a 150% Basic Customs Duty, which is a
clear barrier to growth. The SWA says38:
“once the UK is in a position to negotiate bilaterally, an
ambitious UK-India Free Trade Agreement which would
substantially reduce or eliminate the tariff would help Scotch to
quickly grow to an estimated 5% of the market – up from
£85m in 2015 to over £400m annually. This would
represent around 10% of current global trade in Scotch.”
Other opportunities have been highlighted in a more
flexible domestic policy approach in areas where there
is currently EU regulatory constraint – ranging from
agriculture to taxation. For example, alcohol taxation
currently has to be set within the parameters of the
EU excise structures directive and the SWA argues that
with 16 separate tax bands covering alcoholic drinks,
the current UK excise duty system is ripe for reform.39
38
SWA – Budget Submission 2017
39Ibid.
20
7.CONCLUSION
The purpose of this paper is threefold.
Firstly, to analyse the consequences for Scotland, in
terms of freedom of movement of goods, services,
capital and people, of the Scottish Government’s
differentiated deal proposal under which Scotland, but
not the rest of the UK, would remain a member of
the EEA.
Secondly, to assess the relative importance of the
EU single market and the UK domestic market to
Scotland’s economy.
And thirdly, to highlight opportunities for Scotland’s
trading future outside the EU/EEA and outline some
of the steps the Scottish Government could take to
capitalise on these.
On the differentiated deal option for Scotland, our work
leads us to conclude that a range of legal, technical and
political obstacles make it undeliverable. Furthermore,
the evidence shows it would also be to the detriment
of Scotland. A differentiated deal would break the
domestic UK market, with serious consequences for
the Scottish economy and to flows of goods, services,
capital and people between Scotland and the rest of
the UK.
of the UK. An EU single market in services simply
does not exist at present.
Scotland’s trade patterns show that both rest of the
UK and rest of the world trade has become more
important to the economy than EU trade over the last
ten years. We conclude that Scotland could capitalise
on the opportunities of future free trade deals with
the EU and third countries and have identified
several policy steps it could take in preparation now.
The Scotch Whisky case study highlights significant
potential for a boost in exports under free trade deals
geared to addressing UK trade interests with its growth
markets.
The Scottish Government’s proposals have helped
highlight issues for debate and scrutiny, but they
seriously underestimate the economic consequences
of a differentiated deal for Scotland and the primary
importance to Scotland of the UK domestic market.
Scotland’s two governments are not far apart in their
post-referendum aims. Both the Scottish and UK
governments want to maximise free trade with the
European single market and both want to advance
the interests of key sectors of the economy. We
conclude that the Scottish Government should work
constructively with the UK Government in pursuit
of the best possible deal with the EU that works for
the whole of the UK and all its economic sectors,
recognising the economic opportunities that increasing
trade with the rest of the world will bring to the UK
and Scotland.
Even outside the EU customs union and in the
absence of tariffs between Scotland and the rest of the
UK, a differentiated deal based on EEA membership
would require a level of border control over the flow
of goods, and possibly people - unless the Scottish
Government changes its position on immigration.
Furthermore, the requirement on Scotland to comply
fully with the body of EU law would inevitably lead
to regulatory divergence over time, breaking the UK
domestic market.
We do not examine the political and social union
aspects of the United Kingdom, but focusing on trade
alone, we conclude that the UK domestic market is
immeasurably more important to Scotland than EU
single market. The UK’s aligned legal and regulatory
system means that there are virtually no nontariff barriers to trade within the domestic market.
This benefits both trade in goods and services but
particularly underscores the services sector which
accounts for over half of Scottish trade with the rest
21
8.APPENDIX
ALLAN HOGARTH
Allan Hogarth is director of AH Strategies Ltd .
Advisory Group Membership
Prior to this, he was director of Public Affairs for
a leading consultancy and spent 8 years with CBI
Scotland, latterly as Head of Media and Public Affairs.
IAN DUNCAN MEP
He also worked as the director of the British Lung
Foundation in Scotland, establishing it as a leading
medical research charity.
Ian was elected to the European Parliament in May
2014.
Ian Duncan was for seven years the Head of the
Scottish Parliament’s European Office in Brussels,
responsible for relations between the Holyrood
Parliament and the EU institutions. He later served
as European Advisor to the Parliament and Clerk to
the European & External Relations Committee. He
resigned his position in February 2013 to seek the
election to the European Parliament.
RHONA IRVING
Prior to joining the Scottish Parliament, Ian held
a number of high profile public affairs positions
in Scotland, including Secretary of the Scottish
Fishermen’s Federation and Head of Policy &
Communications with the Scottish Refugee Council.
Ian began his career as a researcher with BP focusing
upon Eastern Europe and the former Soviet Republics.
Rhona graduated from Edinburgh University with
a First Class BSc (Hons) in Mathematics and then
qualified as a Chartered Tax Practitioner before
becoming a partner in PwC.
Rhona Irving is a retired partner from PwC where
she specialised in corporate and international taxes
and had roles leading the firm’s Scottish tax practice
and the learning and development programme for the
UK tax practice. She currently chairs the board of the
School for Social Entrepreneurs in Scotland.
SIR IAIN MCMILLAN CBE
GAVIN HEWITT CMG
Long British Diplomatic Service career culminating
with Ambassadorships in Croatia, Finland and Belgium
(1970 to 2003).
Extensive multilateral and bilateral EU and
international trade policy experience, including at
Brussels and Geneva.
Chief Executive of the Scotch Whisky Association
(2003 to 2013). Remains active in the Scotch Whisky
industry.
Sir Iain McMillan spent twenty-three years with the
TSB Group prior to joining the Confederation of
British Industry (CBI) in 1993. He held the position
of Director, CBI Scotland for nineteen years until his
retirement in 2014. Sir Iain holds a number of Board
positions in the business and charitable sectors. He is
currently Chairman of SkillForce and the University
of Strathclyde Business School Advisory Board,
Honorary Patron of the Scottish North American
Business Council (SNABC) and a Trustee of The
Carnegie Trust for the Universities of Scotland. In
2009, Sir Iain was appointed Honorary Air Commodore
of 602 (City of Glasgow) Squadron, Royal Auxiliary
Air Force.
Other appointments have included Membership of
the Boards of the Scottish Qualifications Authority,
the Scottish Ambulance Service, the British American
Business Council and the Teaching Awards Trust.
Over the years, he has served on other Boards and
public policy groups, including the Commission on
22
Scottish Devolution (Calman Commission). He also
chaired the Independent Commission for Competitive
and Fair Taxation in Scotland. In 2003, Sir Iain was
appointed CBE for services to the business community
and lifelong learning in Scotland. In 2015, Sir Iain was
knighted for services to the Scottish economy.
ALEXANDER STEWART MBE MSP
leader Annabel Goldie a deal that will see significant
new powers coming to Holyrood.
After the general election the Secretary of State for
Scotland, David Mundell MP, appointed Adam as
constitutional adviser to the Scotland Office, helping
the ministerial team at the Scotland Office and their
officials to steer the Scotland Bill onto the statute
book, delivering the Smith Commission Agreement in
full and on time. He was elected Conservative MSP for
Glasgow in May 2016.
Alexander Stewart was first elected as a Member of
the Scottish Parliament for Mid Scotland and Fife in
the May 2016 election. He is the Scottish Conservative
and Unionist Party’s Shadow Minister for International
Development and External Affairs.
Prior to his election to Holyrood, Alexander worked as
a management professional in the hospitality, housing
and retail sectors and, for a time, ran his own fashionretail business in Crieff. More recently, he worked as
a support worker at ARK Housing, which provides
help and support to adults with learning difficulties.
In 1999, Alexander became a local councillor on Perth
& Kinross Council and was subsequently re-elected
on three occasions. During his time on the council, he
has served in a number of senior positions, including
Leader of the Opposition and Convener of the
Scrutiny and of the Housing and Health Committees.
Outside of business and politics, he has been involved
in much charity work and with many voluntary
organisations, including Rotary International, Perth
Access Cars and Stepping Stones Theatre Company.
In the 2016 New Year Honours List, he was appointed
a Member of the Order of the British Empire by Her
Majesty The Queen.
PROF ADAM TOMKINS MSP
Adam has taught constitutional law at the University
of Glasgow since 2003. Aged 46, he is married with
four young children.
Adam played a high-profile role in the Better Together
campaign, with frequent media appearances and press
articles, often based on his blog, Notes from North Britain.
After the referendum Adam was one of the
Scottish Conservatives’ two nominees on the Smith
Commission, negotiating along with former party
23