Scotland's role in the development of future UK trade arrangements

Introduction

1. The Scottish Government believes that the best option for the future wellbeing and prosperity of Scotland, and the UK as a whole, is to remain in the EU. That position has been consistent since well before June 2016, when the people of Scotland voted overwhelmingly to remain in the EU.

2. There are many reasons why they did so: for the social, employment and environmental protections the EU offers to its citizens and workers; the opportunities afforded by access to a single market of more than 500 million people; and the firm belief that freedom of movement is a good thing, crucial to the development of Scotland as an inclusive, fair, prosperous and innovative country, important to rural Scotland and our economy as a whole. The arguments for remaining in the EU are strong and practical. From an economic standpoint, Scotland's businesses need to sell their products, make investment decisions and operational plans, and to be able to recruit to support that work. Our analysis, supported by an ever-growing body of evidence, has clearly demonstrated that remaining in the EU is the best option for Scotland's future. The Scottish Government has therefore taken every opportunity to put forward that case and to persuade others to support it.

3. However, if that position, and the considerable and mounting evidence supporting it, continues to remain unheeded, and the UK does withdraw from the EU, the Scottish Government has also been very clear that continued membership of the European Single Market and Customs Union would be the least damaging option for the UK.

4. The Scottish Government publication, Scotland's Place in Europe: People, Jobs and Investment ^[1] , set out our analysis of the implications of leaving the EU, confirming that leaving the Single Market and Customs Union will significantly weaken our economy. It estimated that failure to remain in the Single Market, or to secure a free trade agreement with the EU, would see Scotland's GDP drop £12.7 billion lower by 2030 than it would be under continued EU membership, resulting in a loss equivalent to £2,300 per year for each person in Scotland.

5. More than two years since the EU referendum in June 2016, and with only a matter of months until the UK is due to exit the EU in March 2019, much still remains unclear about the detailed nature of the deal the UK Government wants, how the proposed arrangements will work in practice and how the UK Government intends to achieve it. One thing that is clear however, is its damaging determination to leave the Single Market and Customs Union that have proved so valuable to the economic and social wellbeing of the UK and Scotland, in order, it says, to pursue an independent trade policy. Despite the revised proposals set out by the UK Government on 12 July 2018 in its White Paper The Future Relationship between the United Kingdom and the European Union ^[2] , if it continues to hold its current red lines - in particular around the free movement of people and future trade policy - it effectively has no option but to do so.

6. Whatever label given to it, pursuing the type of Brexit described in the July White Paper would still leave the UK with limited options for how it conducts its trading relationships in the future. The proposals will need to be negotiated and agreed with the European Union and its Member States, with the likely outcomes limited to:

• Membership of some form of customs union, similar to the arrangements applying to Turkey;
• A free trade agreement with the EU, most likely along the lines of one the EU has recently negotiated with Canada, along with a series of bilateral or multilateral trading agreements with 'third countries' outwith the EU; or
• Conducting world trade according to World Trade Organization rules only (a 'no deal' Brexit).

7. As demonstrated in Scotland's Place in Europe: People Jobs and Investment ^[3] , all outcomes short of full EU membership will damage Scotland's economy. By 2030, the Brexit-associated reduction to Scottish GDP would be between 2.7% under the (least damaging) European Economic Area ( EEA) membership option and 8.5% if the UK-EU future relationship is based on WTO terms.

8. Even the most sophisticated and liberal EU free trade agreement - such as the EU-Canada model - largely excludes provisions for eliminating non-tariff barriers and provides nothing like the unfettered access to the European Single Market that we presently enjoy. As Pierre Pettigrew, a former Canadian trade minister, wrote in March 2016 in the Times " Were Canada to trade as much with the EU as we do with the US we would want a much deeper relationship than CETA" ^[4] .

9. The UK and Scotland have benefitted from membership of the Single Market and Customs Union - and the substantial negotiating power of the EU that comes with that membership - for over 40 years. Membership of the EU gives us unfettered access to a market of over 500 million people, as well as the benefits arising from the EU's free trade agreements with more than 50 international trading partners. In 2016, Scottish exports to the EU were worth £12.7 billion, with a further £3.7 billion of exports to countries with which the EU has a trade agreement in place (accounting for a further 12% of Scotland's international exports).

10. The UK Government has suggested that any decline in trade with the EU from being outside of the Single Market could be offset by exporting more to other countries – boosting trade with 'old friends and new allies'. However, fully replacing the value of EU trade will be challenging, as illustrated by trade flows with emerging economies such as the so called BRICS countries (Brazil, Russia, India, China and South Africa). Scotland's Place in Europe: People, Jobs and Investment showed that these nations accounted for 7% of Scotland's exports:

" In comparison, the EU accounts for 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. To replace a 5% reduction in Scotland's EU exports with increased trade from the BRICS economies would require a 30% increase in exports to those economies. Even if the UK signed agreements with the ten biggest non- EEA single country trading partners (including USA, China and Canada) - a process which would take many years - this would only cover 37% of Scotland's current exports compared to 43% of current exports that go to the EU." ^[5]

11. As Sir Martin Donnelly, former Permanent Secretary in the UK Department for International Trade said in his speech to Kings College in February 2018:

" Even implausibly favourable market access deals with some third countries are arithmetically unable to make up for the loss of unrestricted access to more local EU markets in which so many UK producers are currently integrated. On current trade flows, a tripling of total services trade with China would not equal a fifth of the UK's current services exports to the single market. Germany already does more than four times as much trade with China as the UK." ^[6]

12. It is clear that any benefits accruing from the ability to pursue new trade deals would be far outweighed by being outside of the Single Market and Customs Union. Trade and Investment in an increasingly service-based economy is tied closely to the mobility of skills and labour. No model of international partnership could give anywhere near the same benefit as does the free movement of people, goods, services and capital. Yet that is exactly where the UK Government is leading the UK and Scotland.

13. Scotland voted overwhelmingly to remain in the EU, including the Single Market and Customs Union. The Scottish Government will therefore continue making the case for that position to be respected. Exiting the European Union does not mean that Scotland or the UK must, or should, exit our largest and most secure international marketplace. The UK position should reflect the interests of all parts of the UK, either by keeping the whole of the UK in the Single Market and Customs Union, or by establishing differentiated arrangements for Scotland.

14. Remaining in the Customs Union would help protect businesses, communities and individuals from some of the damage that will be sustained from leaving the EU. It would also obviate the need to negotiate a multiplicity of new international trade agreements, when productive and mutually beneficial deals already exist. The Scottish Government will therefore continue making the evidence-based case for the UK to remain in the Customs Union.

15. However, that position notwithstanding, it is also right that the Scottish Government makes preparations for all exit possibilities, in order to protect Scottish interests as far as possible.

16. For more than 40 years, the negotiation of trade agreements has been the exclusive competence of the European Union. If the UK, including Scotland, leaves the Single Market and Customs Union, the way in which the UK and devolved administrations approach international trade policy and international trade agreements will have to change radically to reflect a very different, and more challenging, context. The UK will have to negotiate new trading arrangements with the EU and with a number of other 'third' countries before moving on to other agreements. Recent experience in the development of trade agreements suggests that the scope and coverage of any future UK agreements will inevitably mean that the agreements will impact more and more on devolved interests, necessitating a much stronger role for the devolved administrations at all stages.

17. The current arrangements for developing trade policy across the UK, and scrutinising, ratifying and monitoring international trade deals, set out in this paper, are already out of date and not fit for purpose in a situation where the UK is a member of the EU. While successive UK Governments have claimed to be acting in the interests of the whole of the UK, there has been little or no opportunity for the devolved administrations and legislatures to examine this claim. Even at Westminster, any scrutiny in the House of Commons or House of Lords has been cursory and rushed. Existing arrangements are under strain and in need of an urgent and substantial overhaul. Even if the UK and Scotland were to remain within the EU, or within a customs union with the EU, those arrangements should be reviewed and enhanced now to ensure proper and transparent consideration and scrutiny of trade arrangements. The circumstances and challenges facing the UK if it leaves the EU, Single Market and Customs Union makes that need for review more urgent.

18. If the UK leaves the Single Market and Customs Union, the current arrangements and infrastructure for scrutiny and democratic engagement will need to be replaced. In those changed circumstances, it will be important that those closest to the impact of trade deals across the UK have a role to play in their development and agreement. At present, this role is largely confined to the UK Government, with limited involvement from the UK Parliament.

19. This paper therefore discusses what the future role of the Scottish Government, Scottish Parliament and others should be in the development of future UK trade arrangements, to help ensure that our economic and other interests can be protected and enhanced if the UK and Scotland leave the EU (or indeed if the UK remains a member). In doing so, it focusses on the decision-making processes that should underpin the development and agreement of the UK's future trading arrangements. The Scottish Government's approach to future trade policy and its updated export promotion strategy will be set out in detail in the next few months.

20. In particular, the paper argues that the Scottish Government and Scottish Parliament must have a guaranteed role in all stages of the formulation, negotiation, agreement and implementation of all future trade deals to help industries, protect devolved public services and ensure the highest standards of social, environmental and consumer protection in Scotland and across the UK. That approach will benefit the UK and its future trading partners.

21. The UK Government has said that a future trade policy for the UK must be in the interests of all parts of the UK. That will not happen without changes to the way trade policy and agreements are developed. This paper opens a dialogue and seeks to develop a consensus on what those changes should be, as well as suggesting some specific areas where further influence or powers will enable the Scottish Government to more fully protect and promote Scotland's interests.