Modelling impacts of free trade agreements on the Scottish economy

Introduction

Following departure from the European Union, the UK regained powers to conduct an independent international trade policy, including the negotiation of free trade agreements (FTAs) with partners around the world. The UK is currently in the process of updating some of those agreements inherited from its time as an EU member state, negotiating completely new trade agreements with several countries and has already secured agreements with others.

This report explores the modelled impact of several free trade agreements (FTAs) on the Scottish economy. The trade agreements covered in this analysis include Australia, India, Switzerland, Türkiye, and the UK–EU Trade and Cooperation Agreement (TCA). These were chosen to represent the diversity of UK trade agreements post the UK’s decision to leave the EU and to provide insights to guide Scottish Government policy and engagement with UK trade negotiators:

• The UK–EU TCA – Tade and Cooperation Agreement established following the UK’s exit from the EU.
• UK–Australia FTA – A new FTA, signed in 2021 and entering into force in May 2023.
• UK–India FTA – A new FTA, which remains under negotiation at the time of this analysis.
• UK–Türkiye FTA – An enhancement of an existing FTA, which remains under negotiation at the time of this analysis.
• UK–Switzerland FTA – An enhancement of an existing FTA, which remains under negotiation at the time of this analysis.

Following the General Election in July 2024, new UK Ministers inherited those ongoing FTA negotiations which were begun under the previous Government. In late July 2024 Secretary of State for Business and Trade Jonathan Reynolds confirmed the continuation of negotiations across a number of agreements, including those analysed here.^[3]

The UK Government have already provided impact/scoping assessments^[4][5][6][7] for the non-EU FTAs noted above, considering impacts on the UK as a whole with limited regional breakdowns. While an estimate is provided of the impact on the Scottish economy as a whole in those assessments, impacts on specific sectors, regions, and groups within Scotland are not considered. This work aims to close this gap in the evidence base for Scotland.

This report provides an economic assessment of the impact of the above trade policy scenarios on the Scottish economy, considering impacts on aggregate variables such as GDP, employment, and trade, as well as at a sectoral level.

It is generally accepted that international trade can lead to greater economic prosperity for countries, through improved specialisation, higher productivity, and higher levels of economic activity. In turn, it can also generate benefits to consumers and workers through lower prices, better quality and greater variety of goods and services available, and through higher incomes.

At the same time, trade policy changes cause a restructuring in the economy, through which some areas gain and others lose with associated implications for workers and businesses. There is evidence that the opportunities of international trade are often not evenly distributed, and that any negative impacts tend to be concentrated among particular industries, regions or societal groups. For that reason, the report also explores differential impacts of trade changes by gender and geography. This focus aligns with commitments in the Scottish Government’s trade policy strategy, the Vision for Trade^[8], to better understand the role and impact of trade in Scotland’s economy.

Finally, this analysis is based on enhanced investment in Scottish Government’s trade modelling capacity building – within the Chief Economist Directorate – which required new in-house models and datasets.^[9] This means that the Scottish Government can now undertake a more rigorous assessment of how trade policy changes can affect the economy.