Modelling impacts of free trade agreements on the Scottish economy

Discussion

This section summarises key findings from the analysis presented in earlier chapters.

TCA is a big economic shock compared to the non-EU FTAs considered in this analysis

As shown in this analysis and other publications^[25] the departure of the UK from the EU represents a large negative economic shock for the Scottish and UK economies. The impact of trade agreements with the four non-EU partners considered is significantly outweighed by the impact of increased trade barriers under the UK–EU TCA. It is expected that the cumulative impact of the four deals analysed in this report combined with trade agreements with other non-EU partners, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), New Zealand, and others, would still likely be outweighed by the negative impact from the UK–EU TCA.^[26]

Impact on GDP

This analysis shows that under the UK–EU TCA and with four non-EU trade agreements 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 alone are estimated to increase Scotland’s GDP by only 0.2% (or by £0.4 billion) in the long run. Note that these estimates only reflect changes in trade barriers^[27] and do not account for any other channels of impact. For example, any impacts on productivity or investment under the UK’s departure from the EU are not reflected in this modelling and can be significant. 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 channels. For simplicity and comparability, this analysis only focuses on changes in trade costs across the two scenarios.

Impact on trade

As a result of UK trade policy changes considered in this assessment – the UK–EU TCA and non-EU trade agreements – international exports could be 7.2% lower (or £3 billion using values in 2023) and international imports could be 8.8% lower (or £4 billion), compared to the baseline of continued EU membership. In contrast, the four non-EU trade agreements considered in this analysis could together increase both international exports and imports by roughly 1% (or £0.5 billion using 2023 values). This reflects the nature and scale of trade that happens currently with these non-EU partners, who, in comparison to the EU, represent a much smaller market for the UK and are geographically more distant and more costly to trade with.

This report 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. 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).^[28] Imports could increase by 51%, 49%, 23%, and 7% respectively. The four non-EU FTAs alone could lead to an increase in total exports to the four countries of 29%^[29], and an increase in imports of 23%. Because of data availability, it is not possible to calculate cash terms increases in imports.

Non-EU FTAs (Scenario 1) – Sectoral Impact

This analysis estimates that the four non-EU FTAs could increase employment across all sectors of the economy, with the largest increase estimated for the Metals and products sector which is also a sector that is estimated to see the largest increase in output. In general, tradeable sectors become relatively more important in the economy due to the removal of trade barriers with non-EU partners, which drives reallocation of resources towards those sectors and changes slightly the structure of the economy.

However, because the Scotland-specific analysis is at a fairly high level of aggregation, it can hide a more complicated picture. UK-level granular analysis of the agri-food sector finds the output of Prepared animal feeds increasing by 0.3% or £34 million, and that of processing and preserving of meat decreasing by 0.1% or £26 million. Similarly, UK-level granular analysis of textiles finds the output of industries such as “tanning & dressing of leather” and “textile fibre preparation & weaving” increasing by over 0.3%, and “made up textiles except apparel” decreasing by 0.6%, driven primarily by the impact of the trade deal with India which is still being negotiated at the time of this analysis. 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 but broad implications for Scotland, at this sub-sectoral level, are likely to be similar revealing a pattern of winners and losers.

TCA plus non-EU FTAs (Scenario 2) – Sectoral Impact

This analysis shows that the UK–EU TCA represents a large negative economic shock for all sectors of the Scottish economy which significantly outweighs the positive impact of the four non-EU FTAs modelled. The largest decreases in employment are estimated for Chemicals and Pharmaceuticals, Computer and electronics, Food and Drink, and Professional Services. More broadly, tradeable sectors become relatively less important in the economy with the increased trade frictions under TCA significantly outweighing reduced barriers with non-EU partners. 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). International exports and imports are also estimated to be lower across all sectors, with the largest decreases in Other services sectors, Chemicals and Pharmaceuticals, and Textiles across both exports and imports.

Limitations

One of the key assumptions driving the results of this analysis is that changes in trade costs with each partner country or the EU as a whole would reflect an impact of an average trade deal, as estimated in a sectoral gravity model using historical data. It is not possible to accurately measure changes in trade barriers that will take several decades to fully affect the economy.

Moreover, three out of the four non-EU FTAs are still under negotiation, which means these estimates are highly illustrative. In general, using an average trade deal to approximate trade costs is a well-established approach in the literature but also means the estimated impacts are highly uncertain. Sensitivity analysis is used to explore some of this uncertainty in trade costs – see Annex E.

Furthermore, the economic impact of the foregone EU membership may be larger than the impact estimated in this report. For simplicity, this analysis only considers changes in trade barriers associated with an average trade deal and does not account for other channels of economic impact which will be important for this scenario.

Finally, this analysis provides an indication of 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.