Scotland's place in Europe: our way forward

The Future Relationship between the UK and EU

14. The closest the UK Government has come to setting out the detail of its aspiration for the future relationship between the UK and the EU is in the UK Government's Chequers proposal (set out in the July White Paper^[13]). Despite having been substantially criticised by our EU negotiating partners, the UK Government continues to insist this remains the basis for its negotiations on the terms of our future relationship with the EU. This is not a sustainable basis on which to take forward negotiations with the EU.

15. While some of the wider elements of co-operation, (such as in relation to justice and security) are welcome, it is the economic relationship that is the centrepiece of the proposal and will have the most significant effect on the future prosperity and welfare of Scotland and the UK. We firmly believe the UK Government's proposals for a future relationship fall far short of what is required if Scotland is to remain a prosperous country able to provide opportunity to our commercial sector and our citizens while maintaining our social and environmental standards.

16. The Chequers proposal aims to ensure future trade co-operation in goods between the UK and the EU, ensure that there is no hard border on the island of Ireland and also allow the UK to pursue future trade deals, in services, with global partners. However the proposals re-state the UK Government's intention that the UK will leave the European Single Market and Customs Union. It is also clear that the proposal excludes free movement of services, which make up around three quarters of the Scottish economy and which would put at risk a great many jobs in our country. Similarly, the insistence on ending free movement of people will jeopardise the success of many of our key economic sectors - from research-leading universities to our farming and tourist sectors - and could undermine our sometimes fragile rural communities.

17. The Chequers proposals are, however, fundamentally flawed for two reasons. First they violate the negotiating position that the European Council first set out in 2016, and has repeatedly reaffirmed since. The EU is determined to protect the integrity of the European Single Market by ensuring the indivisibility of the four freedoms. The Chequers proposal essentially seeks UK participation in the European Single Market for goods, with the possibility of some limited access to the EU services market. Second although the Chequers proposal is intended to secure (frictionless) free trade in goods, it offers nothing of substance regarding free movement of services or of persons; both of which are vital for Scotland's future economic prosperity.

18. In essence, on those elements of the proposals that relate to the future trade and customs arrangements - even if they were agreed to by the EU and were capable of commanding a House of Commons majority - the proposals fall short of setting a relationship which will deliver frictionless trade in goods and access for services comparable to that of membership of the European Single Market. The Scottish Government's analysis since 2016 has been clear on the extent of the economic damage which a relationship short of this would cause, and the Centre for European Reform recently estimated that the UK economy was already 2.5% smaller as a result of the outcome of the EU referendum^[14].

19. The proposed splitting of goods and services, by retaining alignment to the European Single Market for goods but not for services, poses significant risks to the UK and Scottish economies. The services sector constitutes 80% of the UK economy, and currently accounts for 40% of the UK's exports to the EU worth around £110bn annually^[15]. Work by Eaton and Kortum finds that services trade is affected by geography almost as much as flows in goods^[16]. This finding confirms that it is unrealistic to expect that current EU trade flows could simply be replaced through trade deals with other economies around the world.

20. The Chequers proposal relies upon the questionable assumption that because the European Single Market is less integrated for services than for goods, that regulatory divergence will have a more limited impact on the future of the UK services sector. As Magntorn and Winters note, this ignores key aspects of the European Single Market for services trade, notably a common legal framework and system of enforcement, free movement of persons and mutual recognition of professional qualifications, and harmonised systems of data exchange^[17]. Of these the impact of loss of free mobility of persons, that no EU-FTA has ever come close to replicating, cannot be overestimated. A recent study of the markets for certain professional services in the USA found that "the between-state migration rate for individuals in occupations with state-specific licensing exam requirements is 36 per cent lower relative to members of other occupations" and cited evidence that lower migration was associated with a higher cost of services^[18].

21. Scotland is one of the strongest exporting regions for services in the UK, and over recent years has experienced services export growth rates slightly exceeding 8% per annum with significant growth in construction, ICT, professional/business support, and public administration with an increasing orientation to EU markets. These sectors are all regulation-intensive meaning exiting the European Single Market for services has the potential to have significant ramifications for EU market access. As a consequence of the increasing link between services and manufacturing, services that form part of manufacturing exports constitute an important but under-appreciated kind of services export.

22. In 2017, the value of domestic services inputs into UK manufacturing exports amounted to over £70 billion - close to all direct exports of financial and insurance services combined. Indirect manufacturing linked services exports to the EU has increased markedly for Scotland over recent years in particular in relation to key manufacturing sectors like the Food and Beverages industry^[19]. Scotland needs trade agreements in services - its area of comparative advantage - and in particular with our largest market. The EU-Canada Comprehensive Economic and Trade Agreement (CETA) is the most comprehensive trade agreement on services that the EU has ever signed with a third country. Taking this as a comparison, it is clear that the market liberalisation in services that can be anticipated from a UK EU Free Trade Agreement would result in a significant deterioration in market access compared to European Single Market access^[20].

23. Outside of the strict boundaries of the future economic relationship, the Chequers proposal offers little more than a wish-list of outcomes. It suggests that the UK wants to have the facility to participate in pan-EU programmes in areas such as culture, education, science and research but offers no certainty on this being achieved. In reality agreement on participating in any of these specific EU programmes will be subject to intense negotiations and conditions which may well violate the red lines the UK Government have set out. The UK Government also proposes that UK agencies should continue to participate in key EU regulatory agencies despite being outside the European Single Market.

24. Other vital questions similarly go unanswered, for example on issues such as whether the UK's proposals can deliver continued use of the European Arrest Warrant in the absence of agreement to continued jurisdiction of the Court of Justice of the EU; how far the proposed common rule book will extend in relation to trade in agri-food products where the UK Government's proposals are for a smaller set of common rules in this area and greater regulatory freedom; whether the UK Government can overcome the EU position of linking access to waters for fishing and access to markets; or whether there will be a price to pay in respect of access to markets for fisheries products.

25. There is also no information in the White Paper^[21] about future mobility arrangements for students, and not enough detail on what is proposed, for example, for scientists and researchers, where mobility and collaboration is a key concern. There is no sense the UK Government proposal to leave the Digital Single Market is coherent and deliverable, falling back on a desire to negotiate global deals in this field. Important detail is also lacking in respect of proposals on road freight and passenger transport services; the UK Government's plan is to explore options to ensure reciprocal access in this area.

26. The Chequers proposal also fails to include any provisions to respond to the dynamism of the European Single Market. More broadly, in relation to goods and services, the proposal does not include any detail on how the UK would take account of evolutions in the laws and regulations of the European Single Market, including flanking measures such as environmental protections and employment rights, and the consequent market access.

27. The UK Government has not managed to convince the people of the UK of their Chequers proposal. In early September, in one (YouGov) poll just 11% of people in Britain said they thought the Chequers proposal would be good for Britain (40% said it would not be good; 49% didn't know). In a further UK-wide (Survation) poll, it was the least popular potential outcome of the Brexit negotiations.

28. Overall, the Scottish Government is clear that the Chequers proposal is high on aspiration, limited in scope and would not protect our interests sufficiently in relation to either our future economic or social prosperity. As we have repeatedly stated there is a viable alternative to the Chequers proposal which is to commit to remaining in the European Single Market and to conclude a Customs Union agreement with the EU. This is the only course of action that will minimise the costs of Brexit and for which negotiations could be concluded by the end of the proposed transition period. The Scottish Government reiterates its position that while the UK public did vote to exit the EU, they did not vote to leave the European Single Market or Customs Union with all that entails regarding their future prosperity and opportunity. We do not consider the Chequers proposal as reflecting a consensus position in the country at large.

Response of the EU to the Chequers Plan

29. In addition to the damaging nature of the Chequers proposal the EU have been clear that there are elements which they consider simply to be unacceptable or unworkable. Donald Tusk, President of the European Council, said of the proposal in Salzburg that "It must be clear that there are some issues where we are not ready to compromise and first of all this is our fundamental freedoms and single market and this is why we remain sceptical and critical when it comes to this part of the Chequers proposals"^[22].

30. Evidence given by Michel Barnier, EU Chief Negotiator, to a UK Parliament select committee^[23] demonstrated the extent of this scepticism in more detail. For example, in relation to the proposed facilitated customs arrangement under which the UK would collect customs duties on behalf of the EU, he said; "We have two major problems, two issues that we cannot accept. Our customs union, our customs system, as it works, is a fully integrated system that cannot be undermined and we cannot split up the four freedoms of the single market."^[24] Other recent comments by Michel Barnier underlined this point by setting out that there is not a case for a future bespoke arrangement for the UK on financial services. It is reckless for the UK Government to base their negotiating strategy for the future relationship with the EU on a set of principles that the EU have so clearly rejected. This threatens the future success of the negotiations.

31. The EU's response also makes clear that the Chequers proposal does not remove the requirement for a legally binding backstop to ensure that there is no re‑introduction of a hard border on the island of Ireland. Scotland recognises the distinctiveness of the situation concerning the border on the island of Ireland and is fully supportive of a solution of a frictionless border that respects the Good Friday Agreement. It is increasingly likely that there will be an element of differentiation for Northern Ireland in their relationship with the EU compared to the rest of the UK. In particular it seems Northern Ireland will have the option of remaining within the European Single Market, at least for goods and for some cross-border trade in services.

32. This demonstrates that the UK Government is willing to consider the principle of differentiation within the UK after Brexit. Consequently the Scottish Government believes that the UK Government should reconsider the proposals we put forward in 2016 that provided a credible plan for Scotland to have a future relationship with the EU that meets our particular needs. Such flexibility by the UK Government across the whole of the UK would also ensure that the democratic wishes of the people of Scotland, who are EU citizens, and voted overwhelmingly to remain within the EU in 2016 could be taken into account in the UK's future relationship with Europe.

33. It has become clear that the weakness of the Chequers proposal stems from the fact that it attempts to reconcile a series of red lines unnecessarily imposed on the negotiations by the UK Government, while at the same time seeking to maintain frictionless access to the European Single Market, at least for goods. As we have already noted, the European Union have made clear, this approach cannot be reconciled with the founding principles of the European Single Market. The proposals put forward by the Scottish Government do not create the same challenges. By using a credible and well understood model - UK membership of the EEA and Customs Union - we would expect the EU and other EEA members to support such an application and for a speedy conclusion of negotiations. EEA and Customs Union membership, while less advantageous than full EU membership, nonetheless gives access to shared institutional structures that would minimise the likely deficit in our influence over EU policy that otherwise seems unavoidable.