Scotland's place in Europe: assessment of UK Government's proposed future relationship with the EU

2. Why the Scottish Government cannot support the UK Government’s proposed deal

2.1 Continued Uncertainty

6. There is a sense in some quarters that the deal represents a major breakthrough and gives clarity for the future. Nothing could be further from the truth. The agreement may have taken over two years of intense negotiation, but it nevertheless only covers the UK’s divorce from the EU. The political declaration which accompanies the Withdrawal Agreement provides no certainty on the future relationship as so much within the text is conditional upon the obligations the UK Government will accept.

7. Nearly all the difficult decisions which need to be taken about the future of our businesses and society have simply been postponed for another day, to be negotiated by the UK once we have become a third country. We therefore face what is effectively a blindfold Brexit, with several more years of damaging uncertainty for businesses and of UK government still consumed by these negotiations and their own internal divisions. Such uncertainty is likely to lead to businesses postponing or cancelling investment and recruitment plans until the UK’s future economic relationship with the EU becomes clearer. This will depress economic activity and put jobs at risk.

2.2 Overall Economic Impact

8. Based on the Withdrawal Agreement and the political declaration, Scotland will be substantially poorer than it would be if it stayed in the European Union. The UK Government describes the aims of the framework for the future relationship as ‘ambitious’. However the Prime Minister’s red lines, on leaving the European Single Market and Customs Union, ending freedom of movement and ending the jurisdiction of the Court of Justice of the EU, have meant that the proposed future relationship could only be built around a standard free trade agreement which will inevitably weaken our economic ties with the EU.

9. The EU for its part, demonstrated by the graphic below, has been equally clear that the four freedoms are indivisible and cannot be cherry-picked. That free trade agreement is what is now being presented by the UK Government. A briefing from the Institute for Public Policy Research (IPPR^[6]) on the outline political declaration reached a similar conclusion. It argues that “the UK and the EU are still headed for a far more distant economic relationship than the status quo.” It compares the political declaration to something far closer to the type of free trade agreement with the EU that Canada has, and concludes on that basis that, “the future relationship points towards a free trade agreement, which, while ambitious compared to other similar agreements, is inherently constrained and radically different to the current single market arrangements that come with membership of the EU.” The graphic below also demonstrates that UK membership of the Single Market and Customs Union would be an acceptable model.

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10. Scotland’s Place in Europe: People, Jobs and Investment^[8] demonstrated that a comprehensive FTA, which is broadly analogous to the future partnership outlined in the Political Declaration, would introduce trade frictions and non-tariff barriers which would inhibit Scottish companies’ ability to trade with their EU counterparts. It would limit the ability of Scottish companies to attract the workers that our country needs and to fill skill gaps in our economy. Scotland’s ability to attract international investment, and the jobs that it creates, would also be diminished. More broadly, the benefits that single market membership has brought in terms of competition, specialisation, innovation and investment would all be reduced, with a corresponding impact on Scotland’s competitiveness and productivity.^[9]

11. This will ultimately reduce living standards, employment opportunities and earnings for people across Scotland. The Scottish Government’s analysis indicates that under an FTA, business investment could fall by up to 7.7% and that GDP would be 6.1% lower by 2030 compared to remaining in the EU. This is equivalent to £9 billion or £1,600 per person in Scotland. New research by the National Institute for Economic and Social Research (November 2018) finds that a Canada-style Free Trade Agreement with the EU costs £1,100 a year per person by about 2030. The Canada FTA lies between the EEA and FTA modelled by Scottish Government.

2.3 The crucial service sector will be significantly disadvantaged by the deal

12. Services account for three quarters of Scotland’s economic output. We export services outside the UK to the value of £11.6 billion^[10] – 39% of all international exports. At the moment Scottish service providers face relatively limited regulatory barriers when selling their services across the EU - either directly across borders, by travelling to other EU countries, or by establishing a branch in another member state.

13. From an already unambitious starting point in their White Paper^[11], the UK Government has ceded further ground on services in the Political Declaration. The language in the declaration accepts that there may be exceptions and limitations to the scope of obligations in respect of cross border trade in services and the movement of capital and payments, merely some form of “appropriate” arrangements for recognition of professional qualifications which will be connected to the depth and breadth of the provisions on movement of people. There is little within the Political Declaration that breaks new ground for trade in services and investment in comparison with recent FTAs signed by the EU or other advanced economies.

14. Scotland’s largest EU services export sector is Wholesale, retail trade; repair of motor vehicles^[12] including the wholesale of iconic Scottish fishery and aquaculture products like salmon. Any loss of access to the EU market for these products will have a direct detrimental impact on the sector, and the jobs which the sector creates in rural communities.

15. 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. Scotland’s interests are different, and it is essential that we are fully involved in determining UK negotiating priorities^[13] in the future, which has not happened in these negotiations.

2.4 Loss of Market Access for Key Scottish Exports

16. The EU is the largest single market for Scotland’s international exports, with exports worth £12.7 billion in 2016, supporting directly and indirectly hundreds of thousands of jobs across Scotland. Further to which, in 2015, 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.^[14]

17. Last year, nearly 6,800 companies operating in Scotland exported goods to the EU and over 10,000 companies were reliant on imports from the EU.^[15] 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.

18. The EU is a particularly important destination market for exports from the coke, refined petroleum and chemicals sector, accounting for more than 80% of Scotland’s international exports in that sector. The political declaration links zero-tariff trade to an ongoing commitment on customs and level playing field. Frictionless trade is dependent upon the UK’s continued alignment with EU regulations, and may not be compatible with the development of an independent UK trade policy. The fact that any prospect of complete freedom from tariffs for trade in goods is conditional on the EU being content that there is a level playing field, means that freedom from tariffs cannot be taken for granted.

19. Food and drink exports, including premium iconic Scottish produce like whisky, beef, langoustines and salmon, are as a whole approximately four times more important to the Scottish economy than for the UK as a whole. Given the perishable nature of many food exports, the potential impacts of increased friction at the border are very severe. The political declaration makes clear that border checks and controls will depend on the extent of the UK’s alignment with EU customs and regulatory regimes, therefore even if such a zero tariff agreement were reached frictionless trade at the border is not guaranteed. The EU is the largest regional market for Scotch Whisky exports, accounting for 31% ( £1.37bn) of total Scotch exports in 2017.^[16] While it will not suffer the same tariff issues as most agri-food products, other border checks and excise arrangements would create unnecessary friction for exports.

20. Any delays to exports caused by, for example, increased certification requirements (e.g. Export Health Certificates, Certificates of Origin) or customs inspections would be devastating for many businesses; our fresh, chilled or perishable products (seafood, red meat, poultry meat, fruit, vegetables, and dairy) attract a premium for quality and freshness.

21. Fishing, aquaculture and fish processing employed around 14,700 people in 2016 and contributed £903m in gross value added (GVA) to the Scottish economy. Within this, aquaculture directly employed 2,300 people and generated £216m in GVA^[17]. Around 2,300 people were employed in fishing related businesses across Orkney, Shetland the Western Isles alone. Any new trade barriers to Scottish seafood exports to the EU will have a devastating effect on their competitiveness with knock on implications for livelihoods across some of our most remote rural communities.

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2.5 It trades away the promised ‘sea of opportunity’ for the Scottish fishing industry

22. The political declaration and the Withdrawal Agreement appears to commit the UK and the EU to agreeing a new fisheries agreement on access to waters and quota shares, in time for the end of the transition period. The backstop also involves a link between access to EU markets and access to UK waters, and the commitments in the political declaration are contained within the Economic Partnership section suggesting a link to trade. The specific reference to agreeing shares suggests that the UK Government is gearing up to accept a long-term deal on access and quota shares, before any annual access and quota coastal state negotiations take place. This would be in direct contradiction to the position set out in the UK Government’s White Paper on Fisheries which set out a position that such arrangements would be a matter for annual negotiation once the UK is an independent coastal state, and that there should be no link between access to UK waters and access to EU markets.^[19] By brigading aquaculture with fisheries in making this link, the withdrawal agreement has placed Scotland’s farmed fish and shellfish sectors at the mercy of whatever is agreed in the Fisheries Agreement, effectively setting up one vital Scottish interest against another.

23. That such an agreement could be arrived at without any engagement with Scottish Government, or, to our knowledge, an assessment of its impact on Scotland, shows the UK Government’s complete disregard for vital Scottish interests. Furthermore it would be a betrayal of the promise made to Scottish fishers and a demonstration that there is indeed no ‘sea of opportunity’ awaiting us outside the European Union, while also creating severe uncertainty for our aquaculture sector. As we have long feared, it would appear that Scottish seafood and catching sector interests are being treated as expendable in the Brexit negotiations.

2.6 Loss of freedom of movement will have strong negative consequences

24. The UK Government has publicly committed to ending freedom of movement. Yet inward migration has helped to turn Scotland from a nation of emigration with a declining population into a culturally diverse, outward looking nation with a growing population to sustain our rural communities and our public services. It has brought benefits and opportunities for people born in Scotland. The recent report from the Migration Advisory Committee confirmed that EEA nationals contribute more to public services and finances than they take out. Any reduction in EU migration could have a serious effect on Scotland’s population growth and its demographic composition. In Scotland, all of the projected increase in our population over the next 25 years is due to migration. The Scottish Fiscal Commission judged that, given the changing relationship between the UK and the EU, a 50% less future EU migration variant of the population projections was appropriate for planning assumptions. In that scenario the working age population would decline by almost 1% rather than the current projection of growing by 1.1% and the proportion of children would decline by 4.3%.

25. Latest data shows that there are an estimated 235,000 EU citizens living in Scotland, alongside an estimated 142,000 other international migrants. Together these individuals represent 7% of Scotland’s population. These EU citizens are making a vital contribution to Scotland’s economy. They are driving our population growth and ensuring that we have workers to meet the needs of businesses and the public sector.

26. In the political declaration, mobility forms part of the economic partnership. Yet the social and cultural aspects of migration are important: migration has been particularly important in our rural communities and in the care sector. Research by the James Hutton Institute estimates that Scotland’s sparsely populated areas are at risk of losing more than a quarter of their population by 2046 if current demographic trends are left unchanged. Earlier this year, we set out the case for Scotland to have greater control over migration policy reflecting the clear differences between Scotland’s needs and those of elsewhere in the UK.^[20]

2.7 Damaging implications for the Health and Social Care Sector

27. The Care Sector is very reliant on EU citizens. 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.

28. A survey published mid-2018 produced robust evidence showing that 5.6% of people employed within adult social care and childcare are non-UK EU nationals, equivalent to 9,830 workers. A November 2018 British Medical Association survey of 1,527 EEA-trained doctors across the UK found that 78% are unconvinced by the promises that have been made that their rights will be protected in the event of a no-deal Brexit, 37% were unaware of the Westminster Government’s settled status scheme and 35% are considering moving abroad.

29. Figures published in November 2018 by the Nursing and Midwifery Council show that the dramatic decline seen in the number of applicants from the EEA for UK registration in the year after the EU referendum (an 87% year on year drop) has slowed but not stopped. In fact, it has been compounded by the loss of almost 2,500 experienced EEA nurses and midwives across the UK in the past year. In exit surveys, many EEA registrants gave continuing uncertainty about their future lives and careers as a significant factor in deciding to leave the register and the UK.

30. Curtailment of free movement will also negatively impact the free movement of medical researchers between Scotland and other EU countries and it could affect the ability of our academic institutions to attract medical students to come here to study and train, impacting on the provision of health care.

31. Uncertainty about continued participation of the UK in European research and innovation programmes as a result of Brexit is leading to diminished international competitiveness and influence of the Scottish health research sector, coupled with increasing exclusion from collaborative funding bids with others in the EU. This in turn may reduce the attraction of Scotland to potential collaborative partners outside the EU.

32. EU Exit will also mean the loss of UK membership of the European Medicines Agency, which could result in patients in Scotland having slower, more costly, or reduced access to new medicines.

2.8 Undermining cooperation in Security, Justice and Law Enforcement

33. While this is an area in which both the EU and the UK Government have significantly aligned interests in as close a relationship as possible, the EU are nevertheless clear that future arrangements will reflect the commitments the UK is willing to make. Cooperation to the degree we currently benefit depends on being willing to respect the EU rules and the role of the Court of Justice of the EU (CJEU) in interpreting EU law, as well as continued adherence to the European Convention on Human Rights and adequate protections for personal data. The political declaration also highlights that arrangements should reflect both the EU and Member States’ commitment to the Charter of Fundamental Rights.

34. The Scottish Government wishes to have as close a relationship with EU as is possible and maintain access to as much of the existing security, law enforcement and criminal justice tools and databases as possible to ensure our police and operational partners can rapidly prevent and detect cross border crime. We remain 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.

35. The Withdrawal Agreement states that there will be access to a wide variety of EU tools and databases during the transition period, which will enable our law enforcement partners to operate effectively during this time. However, the Scottish Government is concerned about the potential reduced effectiveness of the European Arrest Warrant through member states being permitted to operate constitutional bans on extraditing their own citizens in the transition period. Furthermore, whilst extradition is reserved, there is little detail in the political declaration about how the proposed “effective arrangements” will enable “efficient and expeditious” surrender, nor how extradition arrangements will work and impact on our operational partners.

36. This impacts on Scotland’s separate criminal justice system as well as the role and functions of the Lord Advocate. There is no mention in the political declaration of the importance of recognising the Scottish specific considerations. Scottish operational partners currently benefit from having direct links to their EU partners in Europol and Eurojust, which is vital for the rapid exchange of information to fight cross border crime. Instead the UK and the EU will “work together to identify the terms for the UK’s cooperation via Europol and Eurojust”.

37. Nor are there references to the Schengen Information System (SIS II) database and the European Criminal Records Information System in the political declaration. Instead there is only a broad reference to the Uk and the EU considering further arrangements appropriate to the UK’s future status for data exchange, such as “exchange of information on wanted or missing persons and objects and of criminal records” The limits of these arrangements are “so far as is technically and legally possible, and considered necessary and in both Parties’ interests”. As the political declaration sets out, the future relationship will take into account “the fact that the United Kingdom will be a non-Schengen third country”. All of which suggests that we may lose access to those specific measures after transition. This is of concern to Police Scotland and will be to other operational partners given how fundamental both of these tools are for fighting crime and keeping our people safe.

2.9 Diminution in Participation in EU Funding Programmes and Collaborations

38. The EU is not only an economic relationship, it is a close partnership that has enhanced many areas of our lives. Through its funding programmes and initiatives the EU has supported collaboration across science and innovation projects, provided for education and researcher exchanges, and generated cultural networks supporting our creative industries.^[21] The political declaration provides little comfort that these opportunities and benefits will be maintained at current levels as part of the future relationship. Under the “Areas of Shared Interest” section in the declaration, the terms for the UK’s continued participation in EU programmes will be the same as any other third country, although there may be some additional agreement on general principles in the future relationship. There is no mention of the so called ‘cooperative accords’ providing programme participation and deep collaboration, which the UK Government proposed in its July 2018 White Paper.^[22]

39. Scotland has been particularly successful in attracting over 11% of all funding won competitively by UK organisations through the current funding programme for research, science and innovation - Horizon 2020 - reflecting the excellent leading international edge of our research base. In addition to which Scotland regularly secures around 12% of the UK total of Erasmus+ funding. The Erasmus+ programme aspires to provide opportunities for over 4 million Europeans to study, train, gain experience and volunteer abroad. Erasmus+ raises the profile of Scotland as a place to live, work and study in key overseas markets and showcases the best of Scottish education. Creative Europe is the principle EU funding programme focused on the culture and creative industries sectors. It’s impact is significantly wider than the funding it provides. The programme’s non-financial benefits - job creation, exports and leveraging additional funding, internationalisation and networks - being highlighted as being of at least as much importance.

40. While the political declaration indicates that these programmes, and their successors, are to be open to the UK to continue to participate in as a third country, the decisions on participation will be taken following our exit by the UK Government, on the basis of the normal options open to third countries. There are no guarantees meaning that we would be leaving the EU in March 2019 with no certainty.