Modelling impacts of free trade agreements on the Scottish economy: policy summary

Key Findings

Moving from EU membership to trading with the EU under the terms of the TCA has a significant negative economic impact, far outweighing the smaller benefits expected from the four non-EU FTAs included in this analysis.

This analysis supports the conclusions of other publications; that the departure of the UK from the EU represents a large negative economic shock to the Scottish and UK economies.^[6] The positive impact of the four non-EU trade agreements is significantly outweighed by the impact of increased trade barriers under the UK-EU TCA.

The report shows that, in a scenario where the UK-EU TCA and the four non-EU trade agreements considered here have been implemented, Scotland’s GDP is estimated to be at least 2% lower (or at least £4 billion lower using the 2023 value of GDP) in the long run compared to the baseline of continued EU membership.

In contrast, the four non-EU trade agreements combined are estimated to increase Scotland’s GDP by approximately 0.2% (or by £0.4 billion) in the long run.^[7]

Some studies have shown higher impacts than this analysis. These studies however also consider wider changes to productivity and investment as a result of EU-exit, whereas this latest analysis considers trade barriers in isolation. 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.^[8]

Scotland’s imports and exports are estimated to be significantly lower under the TCA. The results of the analysis show that compared to continued EU membership, Scotland’s international exports could be 7.2% lower (or £3 billion using values in 2023) and international imports 8.8% lower (or £4 billion). International exports and imports are estimated to be lower across all sectors.

Exports to the four non-EU FTA partners are estimated to increase but the impact on overall trade is marginal.

The four new UK trade agreements analysed could together increase both Scotland’s international exports and imports by roughly 1% (or £0.5 billion) each. Exports to Australia and India could increase by around 40%, and exports to Switzerland and Türkiye could increase by around 6% as a result of UK FTAs with each partner. This corresponds to £200 million in increased exports to Australia, £120 million to India, £55 million to Switzerland, and £10 million to Türkiye (based on the latest available values for exports to these countries which is for 2021).

While representing significant increases in trade with these FTA partners, in terms of total trade these increases only marginally improve upon the negative impacts of EU-exit and the TCA. This is because of the relatively small base level of trade to which the percentage increases apply. For example, a 40% modelled increase in exports to Australia, when applied to the current (2021) level of exports to Australia, is worth £200 million whereas Scotland’s total exports to the EU were worth £15 billion.

Employment and output is estimated to be lower across almost all Scottish sectors following the UK-EU TCA, these impacts are only marginally improved by the four new FTAs.

The largest decreases in employment are estimated to be in Chemicals and Pharmaceuticals, Computer and electronics, Food and Drink and Professional Services sectors (with estimated decreases of between 3.5% and 2.4% across these sectors). More broadly, tradeable sectors make up a small share of the economy with the increased trade frictions under TCA outweighing reduced barriers with non-EU partners.

The largest percentage reductions in output are estimated to be in the sectors of 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).

FTAs with India and Australia are estimated to support employment and exports across manufacturing sectors, while agreements with Türkiye and Switzerland are expected to lead to small benefits for some services sectors.

Combined, the four non-EU FTAs could lead to small increases in employment across most sectors of the economy, with the largest increase in employment estimated for manufacturing sectors including metals, food and drink and chemicals. Analysis also shows some relatively small benefits to services sectors as a result of FTAs with Türkiye and Switzerland, notably for professional and scientific services, finance and insurance.

However, sectoral results can mask more complicated pictures of winners and losers at a sub-sectoral level, for example in the agri-food sector.

It is particularly important to understand the detail of any impact on the agri-food sector as this sector makes up a larger share of Scotland’s economy compared to the UK as a whole. Agri-food industries are also particularly sensitive to international trade changes. As a large and diverse sector these impacts can often vary greatly across different producers and sub-sectors, broadly positive results under the umbrella of ‘Agriculture’ or ‘Food and Drink’, can mask more extreme outcomes for specific areas. This analysis therefore undertook more granular UK-level analysis of impacts of the UK-India and UK-Australia FTAs on the agri-food sector.

The analysis finds the output of some agri-food sub-sectors increasing and others decreasing as a result of FTAs with Australia and India. 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. However it should be noted that, as explained in the primary report, this analysis uses the well-established approach of assessing the impact of an average FTA between trading partners, rather than impact of the specific terms of a given FTA. For this reason the results must be interpreted with caution where an FTA includes particularly impactful provisions for a specific sector – such as, arguably, for the agri-food sector under the UK-Australia FTA.

These results complement analysis produced on behalf of the Scottish Government by The Andersons Centre examining the Impact of Future UK FTA Scenarios on Scotland’s Agricultural Food and Drink Sector.^[9] This analysis also looks at impacts of a UK-Australia FTA, as well as three other non-EU FTAs, on selected Scottish agricultural sectors, therefore supporting understanding of the impacts of a wider range of FTAs and providing further Scottish-level analysis for this area.

The TCA and non-EU FTAs impact male and female workers differently and affect some regions of Scotland more than others.

This analysis also explores the differential impacts of trade changes. This recognises that sectoral impacts can also extend to workers in industries affected and the regions in which those industries are located. In Scotland’s Vision for Trade, the Scottish Government commits to improving our understanding of impacts of trade in Scotland, including any disproportionate impacts according to gender and regional location, among other factors. These impacts are challenging to assess, particularly at a Scotland-specific level, and this analysis therefore represents a significant step forward.

The analysis finds that sectors with a large 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.

These results align with international evidence, which demonstrates that broadly speaking, male dominated agricultural and manufacturing industries tend to be most vulnerable to changing international trade dynamics. Women are disproportionately employed in non-tradeable services sectors which, while being less likely to experience negative effects, also provide less access to the opportunities of international trade.^[10]

The report also shows some differences in impacts for different regions in Scotland. All regions experience a decrease in employment as a result of the TCA, though impacts for the north-east of Scotland and some rural areas are more pronounced (illustrative expected decreases in employment in the North-East are around 1.5%). These impacts are marginally improved by an increase in employment for all regions as a result of non-EU FTAs.