Potential implications for rural Scotland of the UK leaving the EU

Trade

A number of studies have explored how different future trade arrangements between the UK and the EU will affect parts of the UK and Scottish economies. In a rural context this has particular negative implications for Scotland's food & drink supply chain, regardless of the scenario.

The range of impacts is driven by the nature of any post-Brexit relationship between the UK and the EU – the stronger the economic integration with the EU, the smaller the negative impact. Under the scenario where World Trade Organisation ( WTO) rules for international trade apply ( i.e. if trade deals cannot be secured with other countries), then the impact is greater. For example, under WTO rules, farmers could face significant increased costs with sheep farms facing >30% tariff on exports; beef farms facing >50% tariff on exports and dairy farms facing >36% tariff on exports.

The EU is currently Scotland's most important overseas regional market for food and drink exports – worth approximately £2 billion annually, and accounting for 39% of Scotland's total overseas food and drink exports (69% of Scotland's total overseas food exports). Atlantic salmon, over 99% of which is farmed in Scotland, is the UK's largest food export with 50% going to the EU. In 2016 Scotland exported £604 million worth of seafood to the EU – 79% of its total seafood exports. It is also an important market for Scotch whisky exports, accounting for almost a third (31%) of Scotch exports (by value). EU tariffs protect Scottish products from cheaper third country competitors often with lower environmental and production standards. Being outside the EU without equivalence in tariffs could negatively impact on the seafood processing sector and impact heavily on the employment in Grampian in particular.

In addition to tariffs, outside of the EU Customs Union, businesses could face a number of non-tariff barriers and/or product quotas, for example the requirement to have a Certificate of Origin ( COO) and an Export Health Certificate ( EHC). Direct costs for the COO and EHC on average are around £100 per shipment (for each unique customer), plus an additional wage cost of around £12 per shipment. Exporters are also concerned that as well as the additional costs, complying with the customs procedures will lead to significant delays in getting their product to market, as the UK ports are not equipped to deal with the volume of declarations.

Any delays in the movement of goods (particularly fresh goods) could result in reductions in the price received by the exporter or removal of that market. The need to demonstrate that products have been produced to equivalent requirements could also make it more difficult or in some cases impossible to export products to the EU. This could result in markets for perishable goods, such as seafood, becoming unviable.

The continued uncertainty is already impacting on those businesses reliant on imports as part of their production process (such as raw materials, ingredients). The current depreciation in Sterling has pushed up import costs and therefore the general costs of production within the economy and so contributing to the general rise in inflation (and subsequent rise in interest rates).

Of course, businesses that rely heavily on exports may be benefitting from the depreciation in Sterling, increasing their competitiveness (or margins). The weakness of Sterling has also benefitted others, with tourism/ hospitality generally benefitting from increased numbers of non- UK visitors.

Post Brexit we should:

• Have a trade deal between the UK and the EU preserving access to the single market and free movement of people.

• Ensure that any changes to UK rules do not add restrictions to UK exports to the EU and that the UK is able to maintain regulatory equivalence with the EU.

• Simplify procurement rules (and state aid rules) to remove constraints on businesses, recognising that there may be a need to adhere to EU rules.

• Enhance provision of high quality, targeted business support, particularly for smaller businesses to increase productivity, profitability, to foster innovation and digital upskilling, e.g. access to skills development, training and mentoring, rural hubs, facilitation of clusters, horizontal/vertical business collaboration.

• Ensure imports of goods, particularly food, complies with Scottish environmental and production standards.

• Ensure Customs procedures meet the needs of rural Scotland's small and micro businesses and ensure that support is available to these businesses, enabling them to deal with new processes / procedures.