1.8 Brexit
We recognise that Brexit is one of the most significant challenges we face. All the economic analysis, from the UK and Scottish Governments and others, shows that all forms of Brexit will severely impact economic growth. The Scottish Government continues to believe that staying in the EU is the best option for Scotland and the whole of the UK and continues to make the case for this to protect Scotland’s economy, businesses and exports.
Scotland’s Place in Europe, our substantive policy response published in December 2016, makes the case for remaining in the European Single Market and Customs Union as a minimum to protect Scotland’s trade with Europe. Increasing exports is something we recognise is necessary for Scotland’s economic development regardless of Brexit, but the additional hurdles created by leaving the European Single Market and Customs Union – and exiting the third party trading arrangements the EU has already secured with more than 40 other countries – clearly makes our task harder.
If the UK leaves the EU it will need to agree new trading arrangements as part of its development of the Future Economic Partnership with the EU and with countries with which the EU currently has trade deals which the UK would no longer benefit from. The Scottish Government will work to ensure Scottish interests are fully represented and protected in the development of these new trading relationships.
In a situation where the UK leaves the EU without a deal, then the impact on Scottish trade will be immediate. Exporters will face EU most favoured nation tariffs on many products that are exported to the EU. This will have a significant impact on their competitiveness. Exports to non-EU countries will also no longer be able to benefit from preferential trade deals unless the UK government has made its own agreements with these third countries. Tariffs on imports would be set by the UK government, whose temporary tariff regime involves significant elimination and reduction of tariffs from both EU and non-EU countries. This could result in Scottish exporters facing a situation where their goods are less competitive internationally while also being exposed to greater competition in the domestic market from tariff-free non-EU imports.
For services exports, the impact of Brexit is particularly damaging. By leaving the single market, Scottish firms will cease to benefit from the free movement of people and the ability to do business in any country in the EU. Different national requirements regarding work permissions and mutual recognition of qualifications will apply, creating complexity and barriers to trade for businesses exporting to the EU. The most significant barriers to trade in services for Scottish businesses are those which have been removed or addressed in the single market for services in the EU (i.e. establishment, regulatory compliance, restrictions on access, mutual recognition of professional qualifications and restrictions on annual travel). No free trade agreement in the world provides the degree of freedom of movement in services that is lost by leaving the single market and it is difficult to see how such a loss could be made up. With 75% of Scotland’s economy based on services, representing a third of our trade with the EU, Brexit will seriously hamper our ambitions to grow our services exports and the opportunities for businesses to expand and become international players. This makes the shift in focus of our resources towards those businesses most likely to be able to drive growth in exports even more important.
Whilst A Trading Nation was not devised as a direct response to Brexit, it provides a better understanding of likely future demand for our products and services and where we should align our resources to better support our exporters in light of Brexit and other competitive challenges. As yet we still don’t know what Brexit looks like but we recognise that we will continue to have to review and update our priorities and approaches once the UK’s future trading relationships become clearer.