Scotland's place in Europe: our way forward

The Scottish Government's Plan

49. The core of our proposal is the same one the Scottish Government set out in December 2016 and the evidence for it has been reinforced with the passage of time. We believe that the best outcome, short of continued EU membership, is for the UK as a whole to remain within the European Single Market and the Customs Union.

50. If the UK Government adopted these proposals, it could:

• End the current impasse in negotiations on the future relationship by using a credible and well understood model.
• Provide certainty for EU citizens in the UK and UK citizens in the EU.
• Remove the need for the EU backstop to be implemented on the Irish border by ensuring the continuation of border free trade and travel between the Republic of Ireland and the UK without the introduction of a border in the Irish Sea.
• Remove the need for a period of further uncertainty during potentially protracted trade negotiations from March 2019.
• Remove the risk of a chaotic 'no-deal' Brexit.

51. The immediate adoption of our proposals by the UK Government would, in addition to the benefits set out above, minimise the costs incurred by Brexit. A wealth of evidence, as set out in Scotland's Place in Europe in December 2016 and elsewhere, has further reinforced the case for our proposals. For example, the recent report by the Migration Advisory Committee provided clear evidence on the positive impact of EEA citizens who have come to the UK by virtue of free movement.

52. European Single Market membership has had a beneficial impact on the development of our society and the range of rights and protections that the people of Scotland take for granted - such as consumer protection and anti-discrimination. Collaboration and sharing of good practice with EU partners has been a cornerstone of the ability of independent countries to tackle shared challenges from the domestic to the global, for example tackling organised crime that does not respect boundaries, action on climate change and space exploration to name a few. In a significant number of cases, Scottish and UK institutions have been the lead partner on joint projects such as Horizon 2020 - as part of which Scottish organisations have headed more than 350 European research and innovation consortia to date.

53. Establishing a Customs Union between the UK and EU is necessary to secure frictionless trade with the EU. It will eliminate the need for customs checks on goods exported to (and imported from) the EU that otherwise will be necessary to ensure compliance with the UK and EU respective 'rules of origin'. Membership of a Customs Union will also deliver frictionless trade for our vital exports of perishable goods, and will protect the interests of the many Scottish-based companies whose products form part of complex global and EU supply chains.

54. Membership of the European Single Market and the Customs Union would also ensure that the UK kept pace with further regulatory changes in response to innovations in the marketplace, such as the emergence of new digital business models.

55. Scottish Government analysis has shown the significant detrimental economic impact of any options that fall short of European Single Market and Customs Union membership. For example, should the negotiations deliver an FTA style relationship (which we believe the Chequers proposal will be little better than), the damage would be significant: Scotland's GDP would be around 6.1%, or £9 billion (in 2016 cash terms), lower by 2030, compared to continued full EU membership. Should the UK remain in the European Single Market by joining the EEA this impact could be significantly mitigated, with Scottish GDP estimated to be around 2.7% (or £4 billion) lower.

56. Recent analyses of the UK Government's White Paper proposal have also demonstrated the economic costs that would be likely to arise from the Chequers proposal, compared to continued membership of the European Single Market. For example NIESR (National Institute of Economic and Social Research)^[35] conclude that the Chequers proposals would result in a trade intensity that is more comparable to a Switzerland or Canada style Free Trade Agreement (FTA) than a Norway Style EEA arrangement. NIESR's review also included an impact analysis incorporating information from the White Paper into their economic forecasts for the UK suggesting that EU exit represents a material risk to UK growth prospects.

57. A range of further evidence since the publication of Scottish Government analysis in January 2018 has also demonstrated very similar levels of economic impact. These studies include the UK Government's Brexit impact assessments^[36] that benchmarked very closely to our analysis. It set out that the 'no-deal' scenario, that would see the UK revert to World Trade Organization (WTO) rules, would reduce growth by 8% over that period. The softest Brexit option of continued single-market access through membership of the European Economic Area would, in the longer term, still lower growth by 2%."^[37] Even Theresa May's so-called Chequers deal would see GDP take a 4.13% hit, research carried out by the National Institute of Economic and Social Research (NIESR) suggests^[38] The European Parliament^[39] has also published numerous impact studies that demonstrate the impact across a wide range of sectors of the UK's exit from the EU in a range of scenarios. For example when considering consumer protections the report concludes that "from the perspective of consumers in the EU28, an EEA membership of the UK is the most favourable Brexit scenario. It would ensure the application of the high European consumer protection standards for consumers in the EU27 and in the UK to a very large extent"^[40].

58. The IMF recently also suggested that Brexit would have a negative impact on the UK economy, imposing significant costs. Speaking in London^[41] Christine Lagarde said "Any deal will not be as good as the smooth process under which goods, services, people and capital move around between the EU and the UK without impediments and obstacles". A no-deal outcome would affect other EU economies "to a lesser extent".

59. Similarly, Professor Jonathan Portes^[42] has argued that, under a Chequers scenario, trade in goods could be deemed to be free of both tariff and non-tariff barriers, while trade in services could be viewed as equivalent to falling back to an FTA scenario. Consequently Portes argues that the impact of the Chequers proposal would still be significant, and would lie in between the EEA and FTA scenarios modelled in cross - UK Government analysis.

60. Taking into account the growing importance of services to the Scottish economy, and Scottish exports, the implications of falling back to an FTA scenario are stark. Services currently make up around three quarters of the Scottish economy and account for an increasing proportion of Scotland's exports to the EU, rising from 22% of total EU exports in 2002 to 33% of total exports in 2016^[43]. Moving towards an FTA could have significant implications for sectors.

61. Micro, small and medium-sized enterprises are significant parts of the Scottish economy. The UK Government's suggested Facilitated Customs Arrangement (FCA) proposals will have a disproportionately negative impact on these firms which have less resilience/capacity to respond to increased administrative burden. The Scottish Government is concerned about the risk that increased customs complexity may limit the international ambition of SMEs and start-ups^[44]. In addition to this there are particular sectors in Scotland, such as agriculture and foodstuffs, which are highly sensitive to any delays at the border.

62. There is also a tangible risk, already evident, of loss of talent and associated collaboration opportunities that poses a significant threat to Scotland's innovation agenda and the growth of priority economic sectors such as Fintech/Insurance tech (both sectors that provide support to the financial services industry and which are significant growth sectors in Scotland). The most recent report published by Deloitte demonstrates the foundations for growth in this sector in Scotland^[45].

63. Our analysis has shown that an FCA will not deliver the expected benefits and fall well short of membership of the EU Customs Union. The perceived benefits of pursuing an external trade policy outside a Customs Union do not stand up to scrutiny. It has been argued by the UK Government's Global Britain Strategy^[46] that the UK would offset any decline in trade with the EU from being outside of the European Single Market by exporting more to other countries. However, fully replacing the value of EU trade will be challenging, as illustrated by trade flows with emerging economies such as Brazil, Russia, India, China and South Africa (known as the BRICS countries). These nations account for around £2.1bn (7%) of Scotland's exports. In comparison, the EU accounts for £12.3bn (43%) of Scotland's exports. Even small proportionate losses in trade (or lost growth in trade) with the EU would require dramatic increases in trade with such countries. In addition to this, the UK would also lose access to EU negotiated FTAs, with no evidence that these could be replicated or improved upon post-Brexit.

64. In addition to the potential shortfalls of any replacement Free Trade Agreements, the FCA will also introduce significant additional bureaucracy (including rules of origin), disrupting trade flows and introducing delays that will impact Scotland disproportionately to other parts of the UK.

65. It has been demonstrated in this section that there is a viable alternative to the Chequers proposal, and the Scottish Government's proposal would address the challenges that have taken the UK Government's negotiations with the EU to their current impasse. Beyond this, as the evidence demonstrates, our proposals would also be the best outcome for the future economic and social prosperity.

66. Our proposal would also provide the best foundation - short of continued EU membership - should, in future, Scotland choose to be independent and seek to re-join the EU. Equally, we believe that our plan would provide a solid foundation for the UK's future relationship with the EU and would ensure that should the UK as a whole decide to seek to re-join the EU in future, this transition would be more easily achieved. In particular as a result of existing regulatory alignment, the continued requirement for EU compliant regulators and shared social and environmental standards the transition back to EU membership in the future could be more easily managed. The dynamic nature of the relationship between UK and EU policy, that the EEA would create, would also ensure that the UK would have kept pace with further innovations within EU policy making, minimising any gap in policy terms.