SCOTLAND S TRADING FUTURE

Transcription

1 SCOTLAND S TRADING FUTURE February 2017

2 TABLE OF CONTENTS 1. Executive Summary Introduction The United Kingdom and the EU 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? 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 Appendix

3 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

4 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 exit 1. 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 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

5 4 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 below 2 : 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. 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 period

6 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

7 6 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 Union 5 : 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 5 Scottish Government: Scotland in the European Union, November 2013 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 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 ( compared to ). 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 WKb94vmLSM9 7

8 a) A differentiated national deal? Under the Scottish Government s proposed model, it is envisaged that Scotland would join the European Free Trade Association 8 and then become a member of the European Economic Area 9. 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 Sturgeon 39_s_soft_Brexit_plan_for_Scotland quot_highly_unlikely_quot says_her_adviser/ 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

9 8 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. 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 Sturgeon 39_s_idea_of_bespoke_Brexit_deal_for_Scotland/?ref=rl&lp=5

10 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. 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. 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 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. 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. 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. 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. 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

11 10 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 non- EU 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 Area 17. 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 Parliament 18 : 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 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 work 19. 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

12 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 volume.pdf?action=download 11

13 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 website 21, since the data comes from its own Export Statistics Scotland publication, which is based on the Scottish Government s Global Connections Survey 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

14 UK- and EU-owned Enterprises Business statistics in Scotland, collated in the annual Businesses in Scotland 23 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 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 Commission 26 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 Euroepan Commission, European Semester Thematic Fiche: Services, July

15 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 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 Analysis 27 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. 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 Stirling 28. 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: Scotland analysis: Business and microeconomic framework, July Peat, Kelly (2016): Brexit and the Scottish Financial Sector

16 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