Scotland's Place in Europe

Chapter Three: Protecting Scotland's Interests

95. In this chapter we set out our strategy for protecting Scotland's interests, as defined by the five tests in Chapter One. Primarily, we are seeking to influence the UK Government to maintain membership of the European Single Market for the UK as a whole. If the UK chooses not to take this path we also set out how Scotland could maintain membership while the remainder of the UK leaves. We demonstrate that such a differentiated solution is based on a broad range of other practice from across the EU and we provide options to address the practicalities, including demonstrating how an invisible border for people and goods can be maintained between Scotland and the remainder of the UK.

96. We have shown that Scotland's future membership of the European Single Market, and key areas of co-operation with our European partners, are critical for our economy and to being the kind of outward-facing country we want Scotland to remain. This chapter sets out how we could - within the UK - best mitigate the risks that Brexit poses to Scotland's interests. These are the options we will submit for further discussion with the UK Government through the formal Joint Ministerial Committee framework. This chapter considers:

a) keeping the UK in the European Single Market and the Customs Union; and

b) differentiated solutions for Scotland.

Chapter Four considers the additional powers that will be necessary to implement the differentiated solutions set out for Scotland and to protect our relationship with the EU.

Keeping the UK in the European Single Market

97. The Scottish Government believes that the UK's continued membership of the European Single Market - through the EEA Agreement - and the EU Customs Union is both feasible and desirable. There is no basis whatsoever for the assumption that all of those who voted to leave the EU also wanted to exit the European Single Market. Indeed, it is arguable that quite the opposite was the case - that there is simply no majority support for taking the UK out of the European Single Market or EU Customs Union. Membership of the EU and the European Single Market are, after all, quite distinct propositions.

98. Membership of the European Single Market and EU Customs Union is at one end of a spectrum of options for the future relationship between the UK and the EU. The opposite end of this spectrum is for the UK to leave the European Single Market and the EU Customs Union altogether and develop new trading relationships with countries around the world on the basis of WTO rules. We believe the closer the UK Government's position moves towards the WTO position the more significant the damage will be to the UK and Scottish economy and society.

99. We are advocating that the UK should remain a full member of the European Economic Area ( EEA). This would likely mean the UK joining EFTA in the first instance and, thereafter, retaining - or renewing - its membership of the EEA Agreement or by direct association to the EEA.

100. Although the EFTA members of the European Single Market are required to comply with all European Single Market and related legislation, compliance is managed through the EFTA structures under the EEA Agreement. This could enable the UK Government to address one of the principal red lines set out by the Prime Minister - that the UK Government should not be subject directly to the authority of the Court of Justice of the European Union ( CJEU).

101. Another apparent red line for the UK Government is control of the border. We accept that freedom of movement of people is a strict condition of the European Single Market. However, there are ongoing discussions within the EU about how this principle is implemented in the face of current challenges which may lead to changes in its practical operation. Nonetheless, we believe that the only way to tackle these challenges effectively is through continued collaboration with our EU partners.

102. Membership of the EEA would also entail financial commitments from the UK. There are two kinds of EU expenditure that the EEA EFTA States contribute to - operational and administrative. The EU operational expenditure is the total EU programme budget less the administrative expenditure. A proportionality factor based on the relative size of the gross domestic product ( GDP) figures of the EEA EFTA States, compared to the total GDP of the EEA, is calculated every year. The annual EEA EFTA financial contribution to operational costs is reached by multiplying the proportionality factor with the amount of the relevant EU budget line.

103. Exactly what the UK would contribute if it opted for EEA membership would depend on negotiation over its contributions to poorer areas of the EU, which EU programmes it decided to participate in, and its success in securing funding from those programmes. However, if it contributed and received back the same proportion of national income as Norway, the UK's net contribution would be around £52 per person (£3.3 billion in aggregate) per year compared to a net contribution to the EU budget of £121 per person per year if we remain part of the EU ^[51] .

104. Our firm view is that, alongside remaining in the European Single Market, the UK should remain within the EU Customs Union. This would reduce to a degree the disruption of years of negotiating new FTAs, with no evidence that the eventual outcome will be better. If remaining in the EU Customs Union proves unacceptable to the UK Government and it is intent on pursuing its own international trade policy, this should not rule out remaining in the European Single Market. Retaining UK membership of the European Single Market as a non-member state under the terms of the EEA would not require the UK to remain within the EU Customs Union: Norway, Iceland and Liechtenstein are members of the Single Market but are not in the EU Customs Union.

105. In summary, we believe the UK should remain members of the European Single Market and the EU Customs Union, and retain the benefits of co-operative policies with our European partners. We believe this is consistent with the referendum result, that it is strongly in the interests of all parts of the UK and that it provides a strong basis for negotiation. In pursuing this option, we want the UK Government to include these requirements in the Article 50 letter and in its negotiations surrounding its future framework with the EU:

a) a firm intention for the UK as a whole to participate fully as a continuing member of the European Single Market and Customs Union;

b) an explicit intention to co-operate with our EU partners across the range of activities and policies that benefit both Scotland and the wider UK (as articulated in Chapter Two of this paper); and

c) a clear transition plan.

Differentiated solutions for Scotland

Context

106. Despite the overwhelming case for continuing European Single Market membership through the EEA, we are not confident the UK Government will accept this proposition. In particular, the focus on having no external arbitration and no control over free movement of people in statements by the Prime Minister ^[52] make any compromise in this direction seem unlikely.

107. In the event that the UK Government does not pursue the option of retaining membership of the EEA, the Scottish Government is committed to exploring with the UK Government, in the first instance, the mechanisms whereby Scotland can remain within the EEA and the European Single Market even if the rest of the UK chooses to leave. This is essential if we are to ensure Scotland can continue to realise the substantial economic and social benefits from membership of the European Single Market and the "four freedoms" that lie at its core. However, as we set out later, we also consider that the proposal we put forward in this chapter could have benefits, not just for Scotland, but for the UK as a whole and for our European partners.

108. It is important to recognise at the outset that there is already a range of differentiated arrangements within the EU and single market framework, reflecting a willingness on the part of the EU and its member states, throughout its history, to be flexible. For example, Denmark is a member state, but parts of its territory - Greenland and the Faroe Islands - are currently outside the EU and the EEA. Indeed, that situation may become even more asymmetrical in future if the Faroe Islands becomes a member of EFTA, as it is currently considering. The Faroe Islands has asked the Danish Government to support it's application.

109. The Channel Islands are not in the EU but, by virtue of Protocol 3 of the UK Accession Treaty, are in the Customs Union and, for the purposes of trade in goods, are essentially in the European Single Market. Liechtenstein and Switzerland are in a customs unions with each other, even though the former is part of the EEA while the latter is not. A differentiated solution for Scotland would vary in detail to these and the other examples that exist, but the principle would be the same.

110. It should also be borne in mind that the situation the UK has created is an unprecedented situation, including for the EU. Beyond the text of Article 50 there are no set rules for what happens now. There will require to be imagination and flexibility on both sides of the negotiation. Indeed, we already know that there will be a requirement for flexibility in the UK Government's approach to negotiating Brexit. We know that geographical flexibility will be required in relation to Northern Ireland and Gibraltar; and the Mayor of London has indicated that he may seek special arrangements for London, particularly in relation to immigration.

111. In addition, the UK Government has indicated that it may seek different solutions for different sectors of the economy and has anticipated that by its actions in reported assurances, albeit confidential, to Nissan ^[53] . Therefore, in putting forward the proposals in this chapter, we are not asking for unique treatment for Scotland but merely requesting that the UK government shows a willingness to take a flexible approach in relation to Scotland in the way it is already committed to doing for other geographies and sectors.

112. The principle of differentiation is also inherent in the logic and process of devolution and indeed in the establishment of the Union itself. The Act of Union, in preserving the distinctive institutions underpinning the law, the Church and education in Scotland accepted that principle and made it a foundation stone of the United Kingdom. More recently, devolution has allowed policies to diverge across the UK in order to reflect the democratically expressed preferences of the different nations of the UK.

113. It is therefore clear that the proposals for differentiation in this paper can be seen, not just as a further step in the ongoing constitutional reform process that began in 1999 with the re-establishment of the Scottish Parliament, but also as going with the grain of the underpinning constitutional traditions of the UK. These proposals would allow Scotland to retain full participation in the European Single Market and merely confirm rights that already exist. Moreover, there are numerous examples of this sort of differentiation elsewhere across the EEA.

114. As we set out in more detail later in this chapter, nothing in this proposal prioritises the European Single Market over free movement and free trade within the UK nor places such free movement and free trade on any different footing from presently undertaken. Our proposal would secure for Scotland the benefits of the European single market in addition to - not instead of - free trade across the UK .

115. Indeed, on a visit to Ireland in September the Secretary of State for Exiting the European Union, David Davis, said he was determined to "deepen and strengthen" ^[54] the trading relationship between Ireland and the UK after Brexit. Mr Davis said: " Ireland will not have to choose between having a strong commitment to the EU or to the UK - it can and should have both." It follows that Scotland should also not have to choose. However, as is set out in Chapter Two, leaving the EU and European Single Market will badly damage the UK economy. Therefore, although trade within the UK is important, diversifying Scotland's export opportunities will also be essential to protect Scotland's economy after Brexit.

116. A final and important point to note is that whatever the outcome of Brexit, the way in which goods and services are traded between the UK and other countries will change. As we note above, our preferred option is for Scotland to remain in the EU - for all the reasons we have set out above, but also to avoid the upheaval and complexity we will inevitably face. People and businesses in Scotland, and across the UK, will face different ways of trading with other countries and this will necessarily involve administrative changes and burdens. It could be argued that our proposal is complex and will be difficult to implement - however, the same will be true for any proposal from the UK Government which does not involve the UK's continuing membership of the European Single Market. The proposal we put forward is practical, reasonable and is the least bad option for protecting Scotland's interests in a situation that the majority of the people of Scotland did not vote for.

Our proposal

117. What we propose in this chapter is an integrated solution for Scotland which ensures continued membership of the European Single Market, and collaboration with EU partners on key aspects of policy and participation in EU programmes such as Horizon 2020. This has been described by some as the "Norway option", but properly encompasses all of the EFTA countries which are also party to the EEA Agreement, including Iceland and Liechtenstein. Beyond the common aspects of these relationships (which relate to the implementation of the European Single Market), Scotland would also seek the opportunity to collaborate in a wider range of policy areas such as energy and justice, which would add to our ability to work with European partners beyond a relationship based solely on free trade. Other differentiated options would also be open to Scotland instead of, or in addition to, the one discussed in this chapter, whereby Scotland could seek to remain part of particular EU policies and initiatives (i.e,.Horizon 2020, Erasmus, Europol). Accordingly, in Chapter Four, we discuss the additional powers that would enable the Scottish Parliament to pursue any such options.

118. Two similar options for Scotland that came to prominence soon after the Brexit vote were the "reverse Greenland" proposal and the so-called "Dalriada" model. Although we remain open to considering these and other options - and believe that they have merits as well as significant challenges - we do not consider them in any detail here as we regard them as unlikely to attract the support of the UK Government as both would require the UK formally to remain a Member State of the EU, something that the UK Government has indicated it will not do.

119. The option we consider here does not require the UK to remain in the EU. In this section of the paper we consider the option of Scotland remaining part of the European Economic Area - in other words, Scotland would continue to participate in the European Single Market and uphold the "four freedoms" as part of its law. It is important to stress that this option does not require concessions either from the UK Government or the governments of the EEA Member States to permit Scotland to join the single market. Rather it requires agreement that Scotland should not be required to leave that market against the clear democratic wishes of a majority of our, and the EU's, citizens.

120. While the so called "Norway option" is perhaps the most obvious example of how this kind of relationship could be achieved - by Scotland becoming a full or associate member of EFTA and thereafter becoming party to the EFTA EEA Agreement - there are variants on this model. One such example would be for Scotland, through the UK, to enter a direct association with the EEA. Scotland could also seek associate membership of EFTA and subsequently to become party to the EEA Agreement. The associate member option would share many characteristics with the arrangements agreed for Finland to become an associate member of EFTA in 1961.

121. Notwithstanding the variations available, the principle of a differentiated relationship for Scotland remains the same - continued membership of the EEA and European Single Market for Scotland. We consider that the UK Government - with the appropriate input and assistance from the Scottish Government - should seek to achieve this outcome for Scotland as part of its negotiations with the EU and should make clear its intention to do so when it triggers Article 50.

122. We recognise, of course, that developing a differentiated relationship to the European Single Market for Scotland raises technical, legal and political complexities and challenges. We seek to address each of these challenges later in this chapter. We do so by setting out in principle how each of these challenges could be overcome. However, we recognise that further detailed discussions will be required should this option be pursued and that these discussions should form part of the negotiating process between Scotland and the UK, and between the UK and the EU.

123. We also recognise that the success of this proposal will require compromise on all sides. It will require the UK Government initially and, in due course, other European governments, to be flexible and innovative. It will also require compromise on the part of the Scottish Government. Indeed, we recognise the reality that if Scotland is not an independent country and stays within the UK it will almost certainly have to leave the EU. However, by retaining membership of the European Single Market we can both mitigate the worst damage of leaving the EU and ease the transition to a full independent Member State should the people of Scotland decide to choose that future.

124. Before turning to the benefits and challenges of the "Norway option" it is worth considering some of the key ways in which it would differ from our current position within the EU. Given the situation we now find ourselves in, some of these differences could be turned to at least partial advantage.

Examples of key differences between our proposal and EU membership

125. Influence over EU policy - Scotland would enjoy less influence over EU policy making than is currently exercised by the UK Government. However, we would not be without influence. We would have to accept that, as we would be outside the EU, our influence over European Single Market rules and regulations would not be the same as that of EU member states. While EFTA EEA members do not participate in the formal EU legislative process ^[55] , they can and do exert influence in the development of single market rules and regulations through a decision-shaping process, and the provision of experts to advise the EU on specific policy issues. Arguably, this is a greater level of direct influence than we currently enjoy, working through the UK Government, which adopts policy positions that do not always fully reflect Scotland's needs and sometimes run counter to them.

126. Outside the Customs Union - EFTA EEA countries are not members of the EU Customs Union. Our proposal would mean that (unless the UK Government opts to keep the UK as a whole inside the EU Customs Union as the Scottish Government believes it should), Scotland, like the rest of the UK, would not be in the EU Customs Union. This would clearly have downsides for our businesses that trade within the EU. However, remaining within the single market would give Scottish businesses a comparative advantage over those in other parts of the UK that would be outside both the customs union and the single market. The fact that both Scotland and the rest of the UK would be outside the EU Customs Union (or both within it if the UK Government chooses that option), would mean that the border between Scotland and England would NOT be an external EU customs border, retaining unimpeded customs-free trade within the UK. What is in effect a customs union at present between Scotland and the rest of the UK would continue to mutual benefit.

127. Fisheries and agriculture - EFTA EEA countries are not within the Common Fisheries Policy ( CFP) or the Common Agricultural Policy ( CAP) and most agricultural and fish products traded from EFTA EEA countries to the EU are subject to tariffs. Our proposal would, therefore, give Scotland greater opportunity to develop and administer Scottish specific agricultural and fisheries policies. We set out in Chapter Four our expectation that responsibility for these policies will remain fully devolved to Scotland following the UK's exit from the EU, providing the Scottish Government with much more direct policy-making tools to ensure outcomes appropriate to our needs in these two critical sectors. In particular, we are clear that under this option we would not remain within the Common Fisheries Policy. However, one of the challenges of this differentiated option is the potential application of tariffs to agricultural and fisheries products; and to mitigate this, in the first instance, we would press the UK Government to negotiate for tariff-free access to the European Single Market for those products.

128. External arbitration - EFTA EEA members are subject to the jurisdiction of the EFTA Court and the oversight of the EFTA Surveillance authority rather than the Court of Justice of the European Union and the European Commission.

Benefits and challenges of European Single Market differentiation for Scotland

129. The key benefits of the "Norway option" compared to Scotland being taken completely out of the EU and single market, is that it would allow Scotland to continue to trade in both goods and services within a European Single Market of 500 million people, free of most tariff and non-tariff barriers to trade, while retaining our trading relationship with the rest of the UK.

130. Moreover it would mean that - as we would remain committed to upholding the "four freedoms" - Scottish people would retain the right to travel, live, work and study in other EU and EEA countries, with the same social, economic, health and consumer protections that EU citizens would continue to enjoy here. We would also have a continued assurance that, regardless of the policies of the government of the day, minimum employment, social, environmental and consumer rights would be guaranteed. Remaining within the single market would also provide the best platform for seeking continued co-operation with the EU in a range of other areas, for example Horizon 2020, Erasmus, Europol and wider initiatives to tackle climate change.

131. It would not just be Scotland that would potentially benefit from such a solution. We consider that there would also be economic advantages to the UK as a whole in having at least part of its territory still within the European Single Market and able to retain and attract indigenous and inward investment on that basis. It would be of benefit to the EU, both economically and through broader policy collaboration, to retain part of the UK within the European Single Market and as an enthusiastic contributor to European co-operation.

132. However, there are a number of questions that will be asked about the feasibility of Scotland remaining with the European Single Market while the rest of the UK leaves. Some of these are practical questions relating to free trade and movement within the UK. Others are legal considerations and involve the capacity of Scotland to operate within the single market framework without being an independent country.

133. In the remainder of this chapter, we set out - as high-level considerations at this stage - how each could be dealt with. We consider status, legislative and regulatory compliance, free movement of people within the UK and continued free trade within the UK. Further detailed discussion will be required with the UK Government on each of these issues.

134. In order for Scotland to continue in membership of the European Single Market the Scottish Government would require to make financial contributions to the administrative and operational expenditure of the EU, just as other EFTA EEA countries do. The amount of such contributions would be a matter for negotiation in due course but they could be met from Scotland's pro-rata share of current UK contributions to the EU if - as would seem entirely reasonable - this money was available to the Scottish Government when the UK leaves the EU. These would be less than our current contributions as a Member State, and would depend on the degree of our collaboration in programmes such as Horizon 2020.

Addressing the challenges

Status

135. If Scotland were independent there would be no domestic legal impediment to us joining EFTA and becoming party to the EEA Agreement. However, as long as Scotland remains part of the UK there will need to be some form of sponsorship for any Scottish membership of EFTA. That is because membership of both the EFTA Treaty and the EEA Agreement is - formally - open only to "states". For example, 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." ^[56]

136. It should be pointed out, however, that the Faroe Islands, not an independent state, is currently exploring the possibility of joining EFTA - a possibility that is under consideration ^[57] . It is envisaged that Denmark would "sponsor" the Faroe Islands membership of EFTA. This shows that a sub-state may enter into international agreements. In similar circumstances, and with its own legal system and strong administrative capabilities, Scotland would be well placed to meet those requirements.

137. We argue in the next chapter that a reconsideration of the devolution settlement should involve giving the Scottish Parliament power to enter international agreements in our areas of responsibility a power that already exists for some other sub-state entities. Even if such a power was not sufficient to enable Scotland, while remaining part of the UK, to maintain membership of EFTA and the EEA in our own right, we consider that our membership could be "sponsored" by the UK. Therefore, we put forward two broad options for further consideration.

138. Firstly, the UK Government could seek to maintain its current EEA membership, through an application for EFTA membership, but then seek a territorial exemption so that this membership would only apply to Scotland (unless other devolved administrations also requested it). There is precedent for territorial exemptions in the EFTA Agreement. For example, Svalbard, which forms part of Norway's EFTA membership, has elements of the EFTA agreement dis-applied to recognise its unique geographic and trading position. Unlike the "reverse Greenland" proposition, this option would be consistent with the referendum outcome, since it would only require formal UK membership of the EEA, and not of the EU.

139. Secondly, Scotland, directly or through the UK, could seek full or associate membership of EFTA and subsequently the EEA Agreement.

140. It is accepted that these options will require full and detailed discussion between the Scottish and UK Governments and, in due course, between the UK Government and other EFTA EEA member states.

Legislative and regulatory compliance

141. Membership of the European Single Market under the terms of the EEA Agreement would require the Scottish Parliament and the Scottish Government to have competence to legislate in the policy areas covered by the EEA Agreement in order to uphold the core principles of the European Single Market; namely the free movement of goods, services, capital and persons. In Chapter Four we set out in more detail the additional competences that would need to be devolved to the Scottish Parliament and Scottish Government. In essence, these involve legislative and regulatory powers to ensure we are able to comply with the obligations of European Single Market membership.

142. If Scotland achieved differentiated access to the European Single Market, the Scottish Government would need to participate in the compliance machinery that currently mediates relations between the EFTA State parties to the EEA Agreement.

143. Under the EEA Agreement the EFTA Surveillance Authority effectively functions as a dispute resolution mechanism and also ensures that EFTA state parties to the EEA Agreement implement the necessary EU laws and regulations. As far as the EEA EFTA states are concerned, it is the key authority in the institutional structure, and ensures that those states incorporate EU internal market rules into their domestic law, and apply the rules correctly. It performs a similar enforcement role to the EU Commission for the EU Member States.

144. The EFTA Court has jurisdiction with regard to the three EEA EFTA States and is competent to deal with infringement actions brought by the EFTA Surveillance Authority against an EEA EFTA State with regard to the implementation, application or interpretation of the rules. Scotland would need to demonstrate it has the necessary domestic regulatory structures for single market access. All of these requirements are currently being met by either Scottish institutions (for example, Food Standards Scotland), or through the current UK regulatory regime (for example, UK Borders and Immigration, the Financial Conduct Authority, and the Competition and Markets Authority, HM Revenue & Customs).

145. The extent to which these existing regulatory authorities will continue to ensure compliance with European Single Market requirements will depend, in part, on the nature of the post-Brexit relationship between the UK and the EU. However, clearly there would be scope for policy divergence to emerge between the Scottish and rest of the UK position. This may be particularly true with regard to competition, procurement and state aid rules, where Scotland will continue to be bound by EU regulations. In such instances it would be necessary for the Scottish Government to demonstrate compliance with EU rules, and be empowered to represent its position in any dispute resolution procedures to which it may be party.

146. There could also be instances where the Scottish Government would need to establish new regulatory capacity in particular sectors of the economy in order to meet the requirements of single market membership. Elsewhere it may be possible, and more practical, to continue to share regulatory capacity with the UK Government. However, in a number of sectors Scotland already has free-standing regulatory organisations that are quite distinct from the remainder of the UK.

Free movement of goods and services within the UK

147. The proposal within this paper is predicated on maintaining Scotland's place in the European Single Market, in addition to - not instead of - free trade across the UK. This proposal reflects existing relationships elsewhere in Europe. For example, people feel little practical effect of crossing between Sweden and Norway, two countries with different relationships to the EU; or between Switzerland and Liechtenstein, two countries with different relationships to the European Single Market but in a customs union with each other.

148. The enhanced UK system to administer international trade flows that will be required post-Brexit in any event could be adapted to ensure compatibility for the differentiated relationship between Scotland, the remainder of the UK and the EEA. Most obviously this will involve adjustments to account for differences in tariff schedules and rules of origin between the UK and the EEA, although if the UK Government achieves its stated objectives regarding the UK's post-Brexit third country trade relations (including with the EU) these would not be significant.

149. This administrative system would manage the different conditions of sale of goods and services originating in, or destined for, the European Single Market within two parts of the UK, namely Scotland and the remainder of the UK. Therefore an open border would be maintained between Scotland and the remainder of the UK. The EU will also need to decide how to manage the import and export of goods to and from the UK under this model, accepting that the current system will change irrespective of the future solution for Scotland and the UK once they are no longer EU members.

150. In relation to both free movement of goods and services and free movement of people, the UK Government has been very clear in its belief that, despite Brexit, the invisible border between Northern Ireland and the Republic of Ireland can be maintained. We strongly support efforts to keep this invisible border between the Republic of Ireland, which is a member of the customs union, and the UK, which (we assume) will not be. This also means there are no good grounds for suggesting that a border will be required between Scotland and England which - under this proposal - would share a common position in relation to the EU Customs Union.

151. In order to continue our membership of the European Single Market through the EEA, Scotland would continue to meet the obligations of the EU Acquis as set out in the EEA Agreement regarding the free movement of traded goods and services, as well as the associated flanking measures, as is currently the case. Scotland would not be part of the EU Customs Union, but would remain inside the UK customs union (unless the UK itself opts to be in the EU Customs Union) and goods and services could continue to be traded freely within the UK. The border between Scotland and England would not be an external EU customs border, this will be the external UK border. There will of course be disadvantages for Scottish (and UK) businesses if the UK Government does opt to be outside the EU Customs Union. However, these disadvantages will be minimised - and indeed a comparative advantage achieved relative to businesses in the rest of the UK - if Scottish businesses can still operate within the European Single Market.

152. 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. For instance, a manufacturer based in Scotland with customers throughout the remainder of the UK would continue to be able to trade freely. We see no reason why the principle of mutual recognition of standards should not continue to apply under this proposal. If the manufacturer also conducts business within the European Single Market they would be required to continue to demonstrate that their products complied with the requirements of relevant EU Directives and Regulations. In essence, this involves applying the principle of "parallel marketability" ^[58] whereby goods and services originating in Scotland may be legally marketed in both the UK and the EEA.

Imports from the European Single Market

153. Goods entering the UK from the European Single Market would be subject to the import regulations appropriate to either jurisdiction (Scotland or the remainder of the UK). The appropriate regulations would be determined by the point at which the goods are to be sold.

154. If the point of sale is Scotland, then there will be no tariff payable due to our EEA membership. If the goods are to be sold in the remainder of the UK they will be subject to whatever regulations apply and tariff is payable under the remainder of the UK's arrangements with the single market and/or EFTA states. To the extent that any import from the single market is not covered by Scotland's EEA membership then the relevant regulations and tariff under Scottish and/or r UK law (depending on the devolution settlement in place) will apply.

155. When a consignment contains goods bound for sale in both Scotland and the remainder of the UK, if there is no difference in the treatment of that good (for example, if it is tariff-free) between Scotland and the remainder of the UK, then no additional process is required. Where there is a difference, on entering the UK the point of sale for the relevant proportion of the goods will need to be declared and the relevant tariff paid and regulations followed. If the point of sale is in the remainder of the UK, then the UK-wide regulations and any UK tariff would apply.

Exports to the European Single Market

156. Goods and services could also continue to be exported from Scotland and the UK under different conditions when accessing the European Single Market. Goods and services produced in Scotland, and complying with all relevant EU regulations, would be exported freely to the European Single Market, whilst those from elsewhere in the UK would be required to comply with the terms of the UK's new trading relationship with the EU.

Imports and exports outwith the European Single Market or not covered by the EEA

157. These arrangements would only be necessary for those elements of trade between the UK and the European Single Market, and only to those products covered by the EEA. It would, therefore, exclude agricultural and fisheries products. Similarly, as Scotland would remain within the UK-wide customs union, there would be no impact on goods and services traded between the UK and third countries.

158. It is worth stressing that insofar as the UK succeeds in its stated aim of negotiating a free trade agreement with the EU, and replicating with non- EU countries the terms of its present trade relations, the administrative burden associated with managing rules of origin will be minimised even further.

Maintaining current free movement for people within the UK

159. The free movement of people is one of the essential four pillars of being in the European Single Market and Chapter Two outlines the significant benefits to the economy of Scotland, as well as providing the opportunity for thousands of Scots who work, study or travel across the European Union. Limiting free movement of people has the potential to seriously harm Scotland's long-term economic future.

160. Indeed, regardless of the outcome of the Scottish Government's efforts to keep Scotland in the European Single Market in line with the proposal in this chapter, there is a strong and increasingly urgent case for greater flexibilities on immigration for different parts of the UK. It is increasingly clear that a one-size-fits-all approach is not in the best interests of Scotland. For these reasons, Scotland needs to explore a distinctive approach, whatever its future relationship with the single market turns out to be.

161. There is, of course, past precedent for differentiation in Scotland. We have already pioneered approaches suited to our particular circumstances such as the introduction of "Fresh Talent" in 2005 which allowed international students to work in Scotland, contributing to our economy and communities for two years after graduation. There is also strong support for future differentiation - with our partners in the university and business sectors, the Scottish Government has consistently made the case for the re-introduction of a post study work route which would allow talented graduates to stay in Scotland after completing their studies and continue to make a valuable contribution to the country.

162. However, it is not just Scotland that would benefit from a more flexible approach to immigration to the UK. The Mayor of London has also called for greater flexibility. A report published in October 2016 ^[59] identified different parts of the UK with different immigration needs and proposed potential models for further consideration. One such example is the possibility of a system of "regional visas" for non- UK nationals being explored by the City of London Corporation.

163. It is worth noting that in other parts of the world, Canada and Australia for example, there are already successful examples of differentiated immigration systems. These allow Provinces in Canada and Territories and States in Australia to identify and address their own specific population challenges by flexing the requirements of the national immigration system. These systems do not create borders or barriers between provinces or states.

164. It is therefore likely that whatever the outcome of Brexit in relation to Scotland, the UK Government will in future require to deal with different immigration arrangements in different parts of the UK, while ensuring free movement within the UK. However, the remainder of this chapter considers the situation whereby Scotland is in the single market - upholding the principle of free movement of people - and the rest of the UK is not. Chapter Four makes clear that, in such a scenario, Scotland would require powers over immigration to be devolved.

165. 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.

166. Free movement within the UK would continue to be facilitated by the Common Travel Area ( CTA) as it is now. The CTA operates across the UK, the Isle of Man, the Channel Islands and the Republic of Ireland. The UK Government has stressed that the CTA pre-dates its membership of the EU and that it will continue to operate after it leaves the EU. If the CTA can continue to operate between the UK and Ireland, a country that is a member of the EU, with its own rules on immigration, then there can be no reason whatsoever that it could not continue to operate between Scotland and the rest of the UK, even if Scotland is in the single market and the rest of the UK is not. In addition, UK citizens would continue to have the right to live and work in any part of the UK as they do now. People living in Scotland would have the right to free movement across the EU, while people in other parts of the UK would not. It is suggested that domicile would be the determinant of those rights.

167. The main issue that would have to be addressed is the prospect of people from other European countries with the right to live and work in Scotland seeking to use Scotland as an access route to living and working in the rest of the UK. There will, however, be immigration rules applied in the rest of UK that will deal with that issue, which, as the Prime Minister has set out, are likely to be based on checks at the point of employment ^[60] . Anyone from outside the UK seeking to find work or housing or access social security or public services in the rest of the UK would be subject to whatever rules and standards of proof the UK Government decides upon. That arrangement applies in many other jurisdictions including, as noted, Canada and Australia.

168. As we have indicated in an earlier chapter, free movement of people is not only necessary for our economy, it is desirable for the cultural and social benefits it brings and the opportunities it affords to us all. If the UK Government gives up membership of the European Single Market and the commitment to free movement of people, examples from around the world and within the UK show that we can make a differentiated approach work.

Conclusion

169. We believe our proposals on differentiation offer a feasible way to reconcile what now appears to be the UK's current position to exit the EU and the Single Market with the democratic wishes of a majority of the Scottish electorate and their elected politicians, and will best mitigate the risks that Brexit poses to our economic and social interests. We further believe that an acceptance of the need for, and the case for, differentiation would be the first step towards detailed, constructive discussion of these options and others.

170. Our proposal would require very detailed discussion and negotiation. But we believe this option is capable of meeting our requirements for continued trade within the European Single Market, adherence to the "four freedoms" and implementation of the range of "flanking" policies which support and complement the operation of the European Single Market, while providing a feasible structure for continued free trade and movement across the UK. The proposal complements and builds on the existing relationships.

171. It appears increasingly unlikely that the UK Government will choose to retain membership of the European Single Market through the EEA. It may also decide to leave the EU Customs Union. We will therefore call on the UK Government, through the mechanism of the Joint Ministerial Committee structure, to:

a) Explore - openly, constructively and in good faith - options for a differentiated solution for Scotland that enables us to remain in the EEA while the rest of the UK leaves.

b) Include any necessary commitment in the Article 50 letter to pursue a differentiated solution for Scotland that enables Scotland to remain within the European Single Market as the rest of the UK leaves.

c) Discuss, negotiate in the appropriate forums, and conclude the practical solutions and shared administrative arrangements we would need to put in place to make a differentiated solution work effectively.