Modelling impacts of free trade agreements on the Scottish economy

Executive Summary

Background

This report explores the modelled impact of several free trade agreements (FTAs) on the Scottish economy. It considers the impact on the economy as a whole, as well as at a sectoral level.

The trade agreements covered in this analysis include Australia, India, Switzerland, Türkiye, and the UK–EU Trade and Cooperation (TCA) agreement. These were chosen to represent the diversity of UK trade agreements post the UK’s decision to leave the EU and to inform the Scottish Government’s engagement on the UK FTA programme.

This report utilises two modelling methodologies in parallel: gravity modelling and Computable General Equilibrium (CGE). Using both frameworks provides greater confidence in the estimated results. This analysis does not attempt to model the exact impact of the trade agreements as signed between the UK and other partners. However, it uses a well-established approach in trade literature to develop assumptions to approximate changes in trade barriers and explore the magnitude of potential economic effects.

Macroeconomic Impact

The UK’s departure from the EU represents a large negative economic shock for the Scottish and UK economies. The impact of the trade agreements with non-EU partners considered in this assessment is significantly outweighed by the impact of increased trade barriers under the UK–EU TCA. Under the UK–EU TCA and non-EU FTAs Scotland’s GDP is estimated to be at least 2% lower (or at least £4 billion lower when measured in today’s GDP) in the long run compared to the baseline of continued EU membership. In contrast, the four non-EU trade agreements alone are estimated to increase Scotland’s GDP by 0.2% (or by £0.4 billion) in the long run. Other studies have shown that liberalisation between the UK and non-EU partners is likely to be significantly outweighed by the negative impact from the UK–EU TCA relative to full EU membership.

Note that these estimates only reflect changes in trade barriers^[1] and do not account for any other channels of impact such as changes in productivity or investment. For example, recent modelling by the National Institute of Economic and Social Research showed that compared to EU membership, UK GDP could be 5.7% lower by 2035 when accounting for wider economic effects. This is larger than the 2% impact of this modelling which focusses only on changes in trade barriers and, in particular, changes in trade costs across the two scenarios.

As a result of UK trade policy changes considered in this assessment, the UK–EU TCA and several non-EU FTAs, international exports could be 7.2% lower (or £3 billion using values in 2023) and international imports 8.8% lower (or £4 billion), compared to the baseline of continued EU membership. In contrast, the four non-EU trade agreements together could increase both international exports and imports by roughly 1% (or £0.5 billion) each. This report also shows that exports to Australia and India could increase by around 40% each, and exports to Switzerland and Türkiye could increase by around 6% each. However, in comparison to the EU, these represent smaller markets, which are geographically more distant and with higher trade costs. This means that large increases in trade with individual non-EU partners could have a very limited impact on overall trade.

Sectoral and Differential Impacts

The TCA represents a large negative economic shock for all sectors of the Scottish economy, which significantly outweighs the positive impact of non-EU FTAs modelled. The largest reductions in output are estimated for Chemicals and pharmaceuticals (-9.1% or £424 million), Computer, electronic and electrical equipment (-7.7% or £296 million), Textiles, wood and paper (-5.9% or £289 million), Metals (-5.9% or £240 million), and Agrifood (-4.9% or £827 million).

While being significantly outweighed by the negative employment effect of the UK–EU TCA, this analysis estimates that the four non-EU FTAs could increase employment across all sectors of the economy. The largest increase in employment and output is estimated to be in the Metals sector.

However, because the Scotland-specific analysis is at a fairly high level of aggregation, it can hide a more complicated picture within sectors. UK-level granular analysis of impacts of the UK–India and UK–Australia FTAs on the agri-food sector finds the output of some industries increasing and others decreasing. The largest increase is found to be prepared animal feeds (+0.3% or £34 million) and the largest decrease is processing & preserving of meat (-0.1% or £26 million). A reduction in output of the meat industry is consistent with findings from other studies looking at the impact of non-EU FTAs on the agrifood sector. Similarly, UK-level granular analysis of impacts of the UK–India and UK–Australia FTAs on the textiles sector finds a pattern of winners and losers, driven primarily by the impact of the trade deal with India which is still being negotiated. It should be noted that these estimates are informed by analysis of sectors at a more granular level using data for the UK as a whole. However, this can provide broad insights for Scotland, where at this sub-sectoral level, there is likely to be a similar pattern of winners and losers.

This report also explores differential impacts of trade changes, showing that sectors with a larger proportion of female workers may see lower gains in employment resulting from the non-EU FTAs than sectors with a large proportion of male workers. Conversely, industries with a large proportion of male workers may experience a greater adverse effect of the UK–EU TCA. It also shows some limited regional variation in impacts: all regions experience an increase in employment under the non-EU FTAs and all regions experience a decrease in employment when the TCA is included, though impacts in the North East of Scotland are more significant.

Finally, this analysis provides an indication of the magnitude of the potential long-term impact on the economy under different scenarios; it does not provide a forecast of the future path for the economy. As such, it does not consider any other future changes in the domestic and global economy that may affect the interpretation of findings.

Related documents

A policy summary has been written to accompany this report. Its purpose is to provide a non-technical narrative and put the key findings in the context of the Scottish Government’s approach to trade, in line with our Vision for Trade^[2], and our engagement with the UK Government on its programme of Free Trade Agreements.

The policy summary can be found online: Modelling impacts of Free Trade Agreements on the Scottish economy - Policy Summary