Scotland's place in Europe: assessment of the revised EU withdrawal agreement and political declaration

3. Revised Political Declaration on the Future Relationship

22. The revised Political Declaration has been altered to provide for a looser relationship between the UK and the EU following the end of the transition period. With the Backstop arrangements no longer applying to Great Britain as well as Northern Ireland via a UK-EU customs arrangement, there is now a significant risk that Great Britain will have far less favourable terms of trade with the EU compared to Northern Ireland following the end of the transition period.

Impact on the economy

23. At the core of the change, is the current UK Government desire to build the future relationship around a free trade agreement. Language in the political declaration has therefore shifted from "as close as possible" to an "ambitious" relationship and references to the single customs territory have been replaced with references to cooperation on VAT. While this political declaration is more explicitly a standard FTA style approach compared to the previous declaration, which sought to suggest ways in which negotiations could seek a closer relationship, the Scottish Government assessment was that in reality Theresa May's proposal would have resulted in similar overall impacts on the economy as an FTA when compared with EU membership. The new deal now explicitly confirms that is the goal of the UK Government.

24. Alongside tariffs in any new FTA (acknowledging that the overall trend in modern FTAs is to eliminate the majority of these) one of the key issues for future trade arrangements is non-tariff barriers. These include divergent regulations, and requirements for businesses to demonstrate compliance with standards in the export market. These can be highly significant in particular for small businesses, in so far as they create significant additional administrative burden and cost. It is more often these barriers which cause the limiting friction in trade. One of the unique features of the European Single Market and Customs Union is that in combination they eliminate all such frictions based on harmonised regulation and shared standards, therefore enabling the complex and dispersed just in time supply chains that are an important feature of our economy.

25. The revised Political Declaration text appears to envisage the possibility of reduced levels of UK-EU regulatory alignment, compared to the previous text which suggested at least some areas of alignment via a Common Rule Book. For example, the removal of a UK commitment to consider aligning with EU rules on Technical Barriers to Trade and Sanitary and Phytosanitary (SPS) matters, in preference now for close alignment in so far as that is designed to achieve a level playing field for businesses, expands the potential for EU and UK regulatory approaches to diverge over time.

26. By 2030, our previous modelling indicates^[17] that, under an FTA, GDP would be around £9 billion lower than if we stayed in the EU, that is equivalent to £1,600 per person in Scotland than if we remained in the EU. The EU is the largest single market for Scotland's international exports, with exports worth £14.9 billion in 2017, supporting directly and indirectly hundreds of thousands of jobs across Scotland. Further to which, in 2017, Scotland exported around £3.6 billion to countries with which the EU has an FTA. This trade accounted for a further 13% of Scotland's international exports.

Figure 1. Destination of Scottish International Exports 2017 (£ Billions)^[18]

Impact on key business sectors

27. In 2018 around 6,900 companies operating in Scotland exported goods to the EU and around 11,000 companies were reliant on imports from the EU.^[19] All will be potentially impacted by a decision to leave the Single Market and Customs Union through higher costs, a loss of competitiveness or production delays. These impacts will in turn feed through to suppliers, jobs and the wider Scottish economy.

28. Overall, the Political Declaration still falls far short of the Scottish Government position, moving further away from frictionless trade and instead suggesting greater focus on regulatory autonomy. The revised Political Declaration makes a strong statement about regulatory autonomy and sovereignty, stating that both parties "will retain their autonomy and ability to regulate economic activity according to the levels of protection each deems appropriate in order to achieve legitimate public policy objectives". The text on regulatory aspects rolls back from 'ensuring' to 'promoting' compatible regulatory approaches, where possible. The old Political Declaration included a commitment by the UK to "consider aligning with EU rules in relevant areas", however this text has been removed in the new Political Declaration. All of this indicates a far more distant economic relationship, which will significantly damage Scotland's trade with the EU.

29. There are a number of avenues by which Brexit is anticipated to impact Scotland's vital food and drink sector. These can be both direct (e.g. increased costs to trade and £ depreciation) and indirect (e.g. supply chain and delayed transportation). One of the key drivers for growth in the food and drink industry has been trade. In 2018 overseas exports of food from Scotland were values at around £1.6 billion, of which £1.1 billion (around 2/3rd) went to countries within the European Union. Likewise, the EU represents the largest single regional export market for Scotch whisky, valued at around £1.4 billion in 2018 - equivalent to around 30% of total scotch exports. Food and drink processing employed around 44,200 people in 2017 and contributed £3.6 billion in gross value added (GVA) to the Scottish economy.

30. Seafood accounts for 57% of Scotland's overall food exports and has a value of £916 million. Whereas seafood exports from England only account for 6% of their overall food exports (valued at £567 million) - as such, seafood exports as a proportion of food exports is also almost 10 times higher in Scotland than England. Any disruption to the flow of seafood products is therefore going to have a much greater impact on our economy and food industry.

31. Like the previous Political Declaration there is a commitment to agreeing a new fisheries agreement between the UK and the EU, including provisions on access to waters and quota shares, by the end of the transition period. This is explicitly connected to the wider economic relationship, suggesting a link between such an agreement and market access. This remains therefore a key risk to Scottish interests, and undermines the UK Government's claim that such arrangements would be a matter for annual negotiation once the UK is an independent coastal state, and that there will be no link between access to UK waters and access to EU markets.

32. Marine Scotland seafood trade modelling published in 2018^[20] included a scenario in which the UK enjoyed free trade agreements with the whole world, which while highly implausible, highlighted that the UK and Scotland were more or less already maximising trade opportunities in relation to seafood - in other words membership of the EU is not preventing the UK from accessing major markets such as the USA or China because tariffs on seafood products we export are generally low.

33. With regards to trade in services and digital trade in the Political Declaration there is no change to the text of these provisions compared to the previous agreement. However the overall approach has been revised to be based on only a "Free Trade Agreement", with weaker language on the closeness of the relationship. The same shortfalls with regards to trade in services in the previous agreement still apply. In addition, considering that barriers to trade in services typically arise from domestic regulation in other countries - and the experience of free trade agreements is that they only reduce some of these barriers rather than eliminate them - reference to a free trade agreement as the basis of the relationship limits the scope for trade in services. For example, rights of establishment, regulatory compliance, mobility and mutual recognition of professional qualifications are barriers only partially addressed in recent FTAs, even those considered until now 'best in class'.

34. There are significant risks for Scotland to this approach for trade in services, considering the importance of the EU as an export destination for services, worth £5 billion to Scotland in 2017 and that services make up 75% of the Scottish economy.

35. The majority of services trade by Member States is carried out within the Single Market, which presents additional risks for Scottish service suppliers. 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.

36. While the Political Declaration speaks of facilitating eCommerce without "unjustified barriers", there remains an absence of detail about how this could be achieved, with the UK operating outside of the digital single market. It remains unclear to what extent there would be divergence from the EU, for example, in relation to eCommerce, the Country of Origin principle and on geo-blocking. As the digital economy expands, the Scottish Government's priority is to ensure greater access for Scottish businesses and consumers to European markets. In 2017, Scottish exports of Technology, Digital and Media services represented 9.6% of our total exports to the EU, resulting in over £1.4 billion of trade. As Scotland's total international export of Technology, Digital and Media services was £3.3 billion, the EU represented over 42% of our total trade for the sector. It is vitally important that our high-exporting tech sector has continued Single Market access, regulatory certainty and access to high-skilled digital talent from EU countries. Scotland must continue to be an attractive destination for locating, growing and investing in tech companies.

Level Playing Field

37. The new Political Declaration maintains the question of the so called 'grand bargain' still very much at the centre of the future relationship in relation to the Level Playing Field: "The precise nature of commitments should be commensurate with the scope and depth of the future relationship and the economic connectedness of the Parties." However, the fact that the text now talks about an FTA suggests that the level of economic integration envisaged would be lower than before, and therefore will entail a commensurately lower requirement on the Level Playing Field (LPF) front by reference to international principles and rules rather than an aspiration to dynamic alignment between the EU and UK.

38. There is a risk that there are divergent interpretations of the Political Declaration on this front between the UK and the EU, the UK Government consider that they are seeking an FTA and therefore FTA-style commitments to non-regression in level playing field areas, in essence aspects of those policy areas that bear a strong causal link to competitiveness in trade and investment. The EU however considers the UK is a large economy, in close geographical proximity to the EU and may require therefore more robust than standard LPF commitments for the same level of trade offer that a more distant third country might be offered.

39. This reinforces the point that talks to secure a future trade relationship are likely to be difficult with a high possibility of either a breakdown (and therefore a "No Deal" outcome at the end of 2020) or an extension to the transition period. As a third country the UK will be in a weaker negotiating position than it is now as a member of the EU. This further emphasises that there is no sense that approving the Withdrawal Agreement means "getting Brexit done".

40. The Political Declaration commits both parties to maintaining the existing standards as the basis for future negotiations. The range of LPF measures remains the same "state aid, competition, social and employment standards, environment, climate change, and relevant tax matters." However, those LPF commitments are explicitly linked to distortion of competition, as would be expected in an FTA, and the bar for negotiations is set high. We should expect a lot of emphasis to be placed on the mechanisms by which each party implements and enforces its commitments.

41. Removing the binding commitments on environmental protection from the Protocol on Northern Ireland in the Withdrawal Agreement, and now restricting them to the non-binding Political Declaration only, potentially opens the door to UK Government divergence from EU standards, as well divergence from Northern Ireland, who will be bound to continue to dynamically align with certain areas of EU environmental regulation under the protocol arrangements. The Political Declaration also remains disappointingly weak in relation to Human Rights, and in particular fails to pay sufficiently explicit regard to the importance of continuing UK compliance with, as opposed to respect for, the European Convention on Human Rights (ECHR). ECHR rights are central to the EU legal order and directly inform the Charter of Fundamental Rights, which provides valuable concrete enforcement mechanisms. As such they are essential features of any future "level playing field", including in relation to international trade deals. Compliance will be a necessary pre-requisite for future co-operation.

42. It also remains unsatisfactory that there is no explicit reference to human rights in the general introductory commitment "to safeguard the rules-based international order, the rule of law and promotion of democracy, and high standards of free and fair trade and workers' rights, consumer and environmental protection". While human rights is acknowledged as a shared value, normal practice would be to include human rights alongside democracy and the rule of law as primary values which inform both domestic systems and international relations. The omission must therefore be regarded as significant.

43. In sum, set against the Prime Minister's comments about 'taking back control' and recent statements by UK Government Ministers that they wish to seek areas to reduce 'red tape', there is a concern that this statement of intent for the future relationship points towards the UK Government seeking a weakening of the international obligations on the UK as an objective standard. Instead it paves the way for a deregulation agenda by the UK Government, although the Scottish Government can - and has committed to - unilaterally maintain and where possible exceed such standards within areas of devolved competence.

Population Impacts

44. The section on 'mobility' is identical in wording to the same section of the November 2018 Political Declaration, including the reference to the UK Government choosing to end free movement. The Scottish Government's previous assessment was that when compared to mobility provisions in existing free trade agreements, what the UK Government and EU have agreed to consider does go beyond any previous FTA with a third country, outside the European Economic Area and European Free Trade Area. However, it is still far short of what we gain from free movement in the single market, even in terms of the concept of short-term mobility. That remains the case.

45. Inward migration has made an overwhelmingly positive contribution to Scotland's economy and society, but this deal does not take account of Scotland's distinct needs on migration. In a scenario of 50% less EU migration, the working age population would decline by 1.9% rather than the current projection of declining by 0.2% and the proportion of children would decline by 12.8% in the next twenty-five years.

Chart 2 - Non-UK nationals as a percentage of all sector employment in Scotland, 2018^[21]

46. Among other sectors which are highly reliant on EU migrant workers, as we have previously highlighted the Care Sector is very reliant on EU citizens^[22]. In 2018 the UK Migration Advisory Committee concluded that EEA migrants contribute more to the health service and the provision of social care in financial resources and through work than they consume in services. They accepted that the care sector would face even more serious problems if EEA migration was restricted. Yet this is precisely the scenario that this sector faces. In seeking to revise the Political Declaration, the current UK Government has done nothing to revise that approach and take account of Scotland's needs.

47. The latest 2018-based National Population Projections were published in October 2019 and project how the population of Scotland may change in the next twenty-five years, based on past trends. Free movement has enabled people from across the EU to live, work and study in different countries. Scotland has benefitted economically and culturally from the people who have chosen to make their home here and to make a positive contribution.

48. The UK population is projected to grow faster than Scotland's in the principal projection and in both of the additional EU migration variants. In the scenario of 50% less EU migration, the UK population would grow by 7.7% over the next 25 years, compared to 1.0% for Scotland. The Scottish Fiscal Commission uses the 50% less EU migration variant projection in their economic and fiscal forecasts. The Commission has warned of the specific risk to Scotland of reduced migration on the size of the tax-paying working age population repeatedly in their forecasts, stating:

"The size of the population aged 16 to 64, which makes up most of the working age population, is very important for the economy and the public finances. These individuals are more likely to be working and will be generating the highest tax receipts, for example, in income tax."

Other Impacts

49. The majority of the revised Political Declaration is unchanged, and therefore our assessment produced in November 2018 continues to apply^[23]. This includes the relationship with the EU on security, justice and policing, where the Scottish Government is concerned at the likely gap and loss of operational capability which will emerge as a result of UK Government red lines, and the fact that leaving behind membership of the EU necessarily involves a different relationship with the EU's tools and agencies.

50. As we have said previously, we acknowledge that this is an area where the UK Government and the EU have a shared interest in as close a relationship as possible. However, it is also clear that the future relationship in the area of policing, security and justice cooperation will reflect the extent of commitments to EU rules, and the degree of oversight of the Court of Justice of the EU (CJEU), which the UK is prepared to make.

51. The revised Political Declaration reinforces our concern at the likelihood of loss of access to a wide range of security, law enforcement and criminal justice tools and databases such as the Schengen Information System (SIS II) the live alert system for missing or wanted people (which includes those subject to a European Arrest Warrant), and the European Criminal Records Information System (ECRIS), used daily by Police Scotland for the reciprocal sharing of information with EU member states.

52. Neither of these are referenced in the revised text despite our concerns having been raised regarding their omission in the first Political Declaration. Scottish operational partners benefit from direct links to their EU partners in Europol and Eurojust, both of which have been vital for the rapid exchange of information to fight cross border crime. The UK Government's red lines remain significant obstacles to maintaining the access and capability afforded by EU membership. There continues to be no mention in the political declaration of the importance of recognising the Scottish specific considerations including Scotland's separate criminal justice system as well as the role and functions of the Lord Advocate.

53. Furthermore that assessment in 2018 also highlighted that the political declaration provides little comfort that the opportunities and benefits afforded by participation in EU competitive funding and collaboration programmes will be maintained at current levels as part of the future relationship. Scotland has a strong track record in attracting over 11% of all EU funding won competitively by UK organisations through the current funding programme for research, science and innovation - Horizon 2020.

54. Scotland also regularly secures around 12% of the UK total of Erasmus+ funding, a programme supporting over 4 million Europeans to study, train, gain experience and volunteer abroad, while both sending and receiving proportionally more students through the scheme than any other country in the UK. While the Political Declaration still indicates that these programmes, and their successors, are to be open to the UK to continue to participate, there are no guarantees of the UK's terms of access. Decision making could rest solely in the hands of the UK Government, based on their willingness at future stages to pay into the funds on yet to be agreed terms.