Discussion/analysis of the LSE report on trade, Brexit and Scottish independence: FOI release

Information requested

All Scottish Government discussion/analysis of the report published on 3rd February 2021 by the LSE's Centre for Economic Performance, Disunited Kingdom? Brexit, Trade and Scottish Independence, (including comments by Ministers, Civil Servants, and Special Advisers). Please restrict the search to dates between 3rd February 2021 and 18th November 2022.

Response

The information that you requested is reprinted in the annex to this document.

ANNEX

3rd February 2021 Extract from Ministerial Briefing note

EXTRACT BEGINS
3 February: London School of Economics report “Disunited Kingdom? Brexit, Trade and Scottish Independence” estimates the combined effect of Brexit and Scottish independence would reduce income per capita by 6.3% to 8.7% - equivalent to an income loss of £2,000 to £2,800 per person.

The report also finds that the impact of Scottish Independence would hit Scottish economy around 2 to 3 times harder than Brexit and that re-joining the EU would do little to mitigate the costs.

Background to the Report
The study was undertaken by Centre for Economic Performance affiliated to the London School of Economics.

The (CEP) trade model, was initially developed to study Brexit.
This model was used in a number of studies on Brexit including a report on the Brexit Deal published by UK in A Changing Europe (2019).

The analysis is restricted to trade effects. The model analyses how estimated changes in trade costs due to independence and Brexit affect Scotland and the rest of the UK.

The analysis is restricted to trade effects and the conclusions around independence being around 2 to 3 times more significant than EU Exit reflect the scale of Scottish – with rUK trade being around 3 times the scale of Scottish EU trade.

EXTRACT ENDS

15 February 2021 Extract From Ministerial Briefing Note

EXTRACT BEGINS
3 February: London School of Economics and Political Science (LSE) publish report “Disunited Kingdom? Brexit, Trade and Scottish Independence” which estimates the combined effect of Brexit and Scottish independence would reduce income per capita by 6.3% to 8.7% - equivalent to an income loss of £2,000 to £2,800 per person. This puts the losses at between £11bn and £15.4bn per year. The report also finds that the impact of Scottish Independence would hit the Scottish economy around 2 to 3 times harder than Brexit and that re-joining the EU would do little to mitigate the costs.

The LSE study assumes that Scotland would make the same policy choices as the rest of the UK – this isn’t necessarily the case.

The study is also clear that it takes no account of any changes in policy levers on independence, such as migration policy, inward investment or any economic levers the Scottish Government could use to boost the economy in an independent Scotland.

The analysis is restricted to trade effects.

The authors are completely upfront about the limits of their study saying on Page 2 that they have not looked at QUOTE: “potentially important economic effects of Scottish independence, such as changes in investment flows into and out of Scotland, whether Scotland continues to use sterling as its currency and the fiscal implications of independence.”

EXTRACT ENDS

17th February 2021 Extract from Analytical note

EXTRACTS BEGIN

• LSE use the Centre for Economic Performance (CEP), a general equilibrium trade model with many countries, many sectors, intermediate input trade and input-output linkages. They draw on estimates of the potential increases in trade costs founded in the gravity model literature.
• LSE modelling approach is broadly analogous to the approach used the majority of academic papers looking at the economic implications of EU Exit including by NIESR, previous LSE work, the OECD and the IMF as well as in Scotland’s Place in Europe and in the UK Government’s analysis of EU Exit.

The LSE study shows that re-joining the EU does not alter significantly the negative impact on income per capita from Brexit and Independence.
LSE

Consider four scenarios:

• Brexit
• Independent Scotland, no Brexit
• Brexit and independent Scotland which remains in the common market with the UK
• Brexit and independent Scotland that re-joins the EU

For Brexit scenarios assume an increase in non-tariff barriers between the UK and the EU arising from customs checks, product standards, regulations and other costs of cross-border trade. A 5.5% increase in trade costs for goods (which is 50% of reducible barriers on goods from the US-EU trade) and 7.3% for services (75% of reducible barriers).

For Scotland-rUK trade costs the study looks at a low (15%) and high (30%) scenario to capture potential increases in trade costs following independence. This is justified on the basis of the wide range of estimates available for trade costs.

Results

Scenario	CEP LSE
Brexit	Income per capita Scotland: -2% rUK: -3%
Brexit + Independence	Income per capita Low Scotland: -6.5% (-4.5pp) rUK: -3.2% (-0.2pp) High Scotland: -8.7% (-6.7pp) rUK: -3.4% (-0.4pp)
Brexit + Independence + Scotland re-joining the EU	Income per capita Low Scotland: -6.3% (+0.2pp) rUK: -3.4% (-0.2pp) High Scotland: -7.5% (+1.2pp) rUK: -3.5% (-0.1pp)

The CEP LSE study assumes different trade costs for trade between Scotland and rUK arising from the Scottish Independence and trade between the UK and the EU under Brexit

• The assumption around Scotland-rUK trade costs represents a stylised low (15%) and high (30%) scenario informed by literature estimates.
• The authors note a number of studies that informed these scenarios, including a 48% increase in trade costs for Canada-USA trade due to border and a 31% increase in Ireland-UK trade costs. [1]
• The assumed increase in trade costs for UK-EU trade, following the UK’s withdrawal from the EU Single Market, is 5%-7%, [2]
• The LSE CEP paper estimate this dataset using bilateral trade data from the World Input-Output Database and applying a range of assumptions around trade with EU and Non-EU countries as well as trade with rUK. The final dataset used in the gravity model estimation consists of 44 countries and one year of data (2014).

EXTRACTS END

1 March 2022 Extract From Overview Slides

EXTRACT BEGINS

• Use LSE CEP general equilibrium trade model which has been previously used for Brexit analysis and is standard approach for trade policy analysis.
• Construct own dataset/SAM with SC and rUK as separate blocks to underpin the model – compare to the available statistics.

Trade costs

Brexit:

• SC-EU & rUK-EU trade costs increase by 5.5% for goods and 7.3% for services (informed by the US-EU trade deal analysis); potentially some adjustment to account for declining intra-EU costs over time

Brexit + Ind:

• In addition to Brexit costs, SC-rUK trade costs increase by 15% (low) or 30% (high).
• Stylised assumptions, informed to some extent by a 48% increase in trade costs for Canada-USA trade due to border (a well-researched topic) and a 31% increase in Ireland-UK trade costs (paper by Comerford and Rodriguez Mora, Edinburgh/Strathclyde).

Brexit + Ind + Rejoin EU: cumulative costs

• Essentially, assume a higher increase in costs for SC-rUK trade than changes in trade costs for SC-EU trade, which is linked to available estimates from the literature on border effects (i.e. trade costs between countries are higher than between regions within the same country)
• This, together with initial position (SC-rUK vs SC-ROW trade), may explain why re-joining the EU doesn’t offset any losses from Ind.
• Direct costs are important but the overall impact is also driven by general equilibrium effects – if trading with one partner is costly then domestic production and trade with other partners responds (model structure/parametrisation is important here).

 

	CEP LSE
Model	Bespoke CEP general equilibrium trade model
Dataset type	2014 World Input-Output Database (WIOD) as the main source – use SC/UK stats to split UK data into two blocks
Aggregation	27 sectors, 4 regions (SC, rUK, EU and Non-EU)

EXTRACT ENDS

[1]    The authors note that Anderson and Van Wincoop (2003) estimate that the US-Canada border effect is equivalent to a 48% increase in trade costs, while HMG (2013) estimates that Scottish independence would reduce Scotland’s trade with RUK by roughly 80% after 30 years. In addition, a study by Comerford and Rodriguez Mora (2019) compared Scotland-rUK trade with Ireland-UK trade, they estimate that independence would increase trade costs between Scotland and RUK by 31%.
[2]    Informed by previous analysis of the potential EU-USA deal.

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