Scotland's Vision for Trade: annual report - March 2022

1. Assessment of policy development and outputs, using Scottish Government levers

The list of Scottish Government levers that we set out in the Vision are the tools that we can draw on as we navigate the complex trading environment. In this first year of implementation we identified an initial set of priorities from this list. Our prioritisation drew on:

• Stakeholder feedback.
• Opportunities or challenges created by changes within the trading environment, as a result of the negotiation of new trading arrangements by the UK Government, or global trends in trade.
• Our wider governmental objectives and priorities – in line with our Programme for Government.
• Previous progress made in each policy area. In some areas we were able to build on previous work or evidence; in others, work has focussed on building our evidence base.

This section sets out the key highlights from our first year of implementation in using Scottish Government levers. These are the areas in which we were able to make the most tangible progress, building on previous work, towards net zero and improving the trading environment for business.

This section then takes a wider look at the other levers we prioritised in this first year, across a range of trade issues.

1.1 Key highlights from the first year of implementation

Key highlights this year have been using trade as a lever to increase progress towards net zero, and actions taken to improve the trading environment for businesses.

1.1.1 Using trade as a lever to increase progress towards net zero

As the Vision makes clear, trade policy can and should support our ambitions to deliver a sustainable net-zero economy. Our work this year has demonstrated how this can be put into practice effectively.

Ending overseas trade support and promotion activities solely focused on fossil fuel goods and services by COP26

In close collaboration with Scottish Development International, we met our commitment in the Vision to end all Scottish Government overseas trade support and promotion activities solely focused on fossil fuel goods and services by COP26 (informed by industry feedback, small and medium sized enterprises (SMEs) have continued to receive such support until 31 March 2022).

We have now refocused our overseas trade support in this area towards products and services that align with the energy transition. Scottish Government advice published in October 2021 on trade promotion support for the fossil fuel energy sector overseas will inform the assessment of potential projects and their suitability for support by our trade support and promotion agencies and networks.^[1]

Scottish Development International has reflected this increased focus on the low carbon transition into its operating model and in its operating plan for 2022/23. In June 2021, Scottish Enterprise published its Net zero framework for action, setting out how it will align its trade and investment activities and operations, delivered through Scottish Development International, to support delivery of the Vision.

Aligning trade support with climate priorities in this way is a key step towards trade operating as a lever to support net-zero targets. We are therefore pleased that, in line with the Scottish Government's ambitions, the US, Canada and eighteen other countries made their own commitments at COP26 to stop public financing for fossil fuel projects abroad by the end of 2022 and steer spending into clean energy.

Engaging internationally on climate, trade and investment at COP26

COP26 was a significant moment in the global effort to address the climate emergency. The Scottish Government, working in collaboration with Scottish Enterprise and Scottish Development International, took the opportunity presented by COP26 to demonstrate how trade can contribute to net zero.

• We delivered an ambitious Scottish Government-led programme, with over 140 events and engagements focused on aligning our economic priorities with climate ambition, through partnerships with our Enterprise Agencies, the Scottish National Investment Bank, Glasgow City Chambers of Commerce, Association of British Insurers, City of London, and Global Ethical Finance Initiative, among others.
• Scottish Ministers engaged with business leaders from around the world to explore opportunities in the green economy for Scotland.
• We promoted our Green Investment Portfolio of low carbon or renewable initiatives, now worth £2 billion. We also showcased the mission-led approach of the Scottish National Investment Bank, which will contribute to net zero.
• We positioned Scotland as leader in green finance, recognising that the financial sector needs to act now to achieve climate targets and seize opportunities in green and sustainable financial services.

We built on the momentum from and connections made at COP26 at Dubai EXPO 2020, where we were able to raise the profile of Scotland's net zero trade and investment ambitions and strengths, including by showcasing Scotland's growing hydrogen expertise and use of innovative climate technology in agriculture and food industries.

Facilitating trade in environmental goods and services

In the Vision, we committed to developing our competitive advantages in areas with positive environmental and economic impact. Trade in environmental goods and services is a key means of doing this and for trade to support progress towards net‑zero targets.

The Scottish Government and our agencies have enhanced our understanding of Scotland's export strengths and priorities in environmental goods and services, helping us to develop a trade policy response that supports Scotland's green businesses to export more.

Informed by this understanding of Scotland's strengths, we are embedding trade into relevant Scottish Government policies relating to environmental goods and services, such as policies on hydrogen and the Just Transition. A Renewable Sector Export Growth Plan is also currently under development.

1.1.2 Improving the trading environment, while prioritising public interests

In addition to the ongoing delivery of A Trading Nation, Scotland's export growth plan, the Vision identified a number of ways in which we can improve the trading environment for businesses, while applying our core principles. We have made tangible progress in two key aspects of this in particular: in relation to market access barriers; and in demonstrating transparency and accountability in developing regulation, through our Business and Regulatory Impact Assessment Process and through compliance with WTO obligations.

Market access barrier prioritisation

The Vision considered how we could best influence the trading environment to maximise our competitive advantages in goods and services. One means of doing so is through addressing market access barriers that are not, or are only partially, addressed through trade agreements.

While doing so can be challenging, evidence suggests that the economic benefits of removing market access barriers far exceed those conferred by FTAs, particularly for small and medium-sized enterprises (which make up much of Scotland's private sector).^[2] Overcoming such barriers would improve trading conditions and increase access to international markets for Scottish goods and services sectors.

In the past year, we have developed a methodology to identify and prioritise the most significant market access barriers affecting Scottish trade, an essential step towards improving the trading environment for businesses in Scotland.

Under that methodology, barriers to trade will be given a priority rating using qualitative and quantitative sources of information. Those sources include the UK Digital Market Access Service (DMAS) database, statistical sector and country data, Scottish Government policy frameworks, information from other Scottish Government and public sector (e.g. Scottish Development International) officials, and international data sources (e.g. WTO Trade Policy Reviews).

Action plans will then be developed for addressing priority barriers, in collaboration with stakeholders, and based on an assessment of the potential for successful action.

This methodology was presented to a range of external stakeholders at a roundtable in December 2021 and the process is being refined based on positive and helpful feedback.

Increasing regulatory transparency and accountability through the Business and Regulatory Impact Assessment process

The Vision recognised the importance of good regulatory practices in international trade. It committed to improving the quality and transparency of our regulation through using good regulatory practices in our Better Regulation framework.^[3] This approach supports proportionate regulation by reducing costs for business, which supports business growth, but does so within the context of regulating in the public interest.

Better Regulation is supported by a range of measures, including Business and Regulatory Impact Assessments (BRIAs). The BRIA process helps assess the likely costs, benefits and risks of any proposed primary or secondary legislation, voluntary regulation, codes of practice, guidance, or policy changes that may have an impact on the public, private or third sector. The goal is to use evidence to identify the proposal that best achieves policy objectives while minimising costs and burdens.

The Vision identified the addition of questions on the impact of international trade to the Scottish Government's Business and Regulatory Impact Assessments (BRIA) template as an opportunity to reduce barriers to trade.

We have therefore added questions on whether a proposed measure impacts international trade and whether the options under consideration relate to relevant international standards.

These questions provide a means to consider the impact of regulation on the ability of Scottish businesses to trade overseas and of overseas businesses to export to Scotland, as well as whether foreign investors or companies operating in Scotland could be impacted differently from UK-owned companies or investors.

This helps meet our obligations under FTAs (including the TCA) and WTO agreements, by ensuring that we develop regulation in a transparent way that takes the international aspects of trade into consideration. It also underpins opportunities for international regulatory cooperation.

Increasing regulatory transparency and accountability through compliance with WTO obligations

The Vision recognised the importance of strong global governance in providing collective solutions to transnational challenges. It also recognised that effective global governance can only be achieved through international cooperation. The rules-based system of the WTO is a core part of this, driving up standards in good governance.

To apply good governance to our international trade decisions, we need to act in accordance with the rule of law, with transparency and accountability. This means, for example, notifying other WTO members of measures being introduced which may have an impact on trade and giving them the opportunity to comment. However, we also need to ensure we continue to regulate legitimately in the public interest, balancing our economic, social and environmental aims.

This year we struck this balance by notifying the Scottish Government's Environmental Protection (Single-use Plastics Products) (Scotland) Regulations 2021 to the WTO's Technical Barriers to Trade Committee, in line with the Technical Barriers to Trade Agreement. The regulation, implementing a ban on problematic single-use plastic items in line with Article 5 of the EU Single-Use Plastics Directive (EU) 2019/904, will ban the 10 single-use plastic items that account for approximately 70% of marine litter products found on European beaches.

In notifying this regulation to the WTO, we have signalled that we are transparent and open to the scrutiny that comes with effective global governance and promoting regulatory cooperation. By providing clear justification on the grounds of protecting the environment, we have also ensured that the rules on trade do not prevent Scotland from meeting ambitious environmental targets, in line with our principles of sustainability and net zero.

1.2 Summary of progress and future plans in using other policy levers

We have also prioritised work on a range of other levers to address trade issues currently facing our economy, people, and the planet. This work has largely involved building up our evidence base, or laying the ground-work for future policy development.

1.2.1 Progress in using the range of available policy levers

Our main progress over this period relates to work to:

• Improve the trading environment for Scottish businesses.
• Promote proportionate and transparent regulation, while prioritising public interest.
• Ensure consideration of the impacts of trade on individuals, consumers and our health.
• Use trade as a net-zero lever.
• Ensure good governance and good global citizenship.

Improving the trading environment for Scottish businesses

Since the publication of the Vision, we have taken steps to improve trading conditions for Scottish businesses. In addition to our work on market access prioritisation (highlighted above), we have also made connections across the Scottish Government and its agencies – particularly Scottish Development International – to leverage our overseas network and in-market specialists. This is already showing results with Trade Envoys now playing a role in reporting market access barriers.

We have taken steps to understand better Scotland's role within Global Value Chains. Outputs to date in building our evidence base on Trade In Value Added are included in section 3.2. We also identified in the Vision the potential role of the Supply Chain Development Programme in assisting Scottish suppliers to grow and compete globally within global value chains.^[4] We have supported the Supply Chain Development Programme to identify risks and opportunities related to international trade, including the impact of shortages of conformity assessment bodies on supply chains.

In the Vision we identified the opportunity to apply our trade principles by adapting the UK's Freeport model to Scotland's values and priorities. The Green Freeport model in Scotland adapts the UK Government's Freeport model to fit the distinct needs and interests of the Scottish economy. This will help deliver a net-zero economy and a Fair Work First approach, while supporting innovation, trade and inclusive growth.

We engaged over this period with a wide range of stakeholders to improve the trading environment for Scottish services. Our relationship with the Law Society of Scotland, for example, has allowed us to gather intelligence on priorities for the mutual recognition of professional qualifications, the potential for co-operation with regulators in other countries, alongside consequences for the services sectors of leaving the EU under the terms of the TCA. Our engagement with the Institute of Chartered Accountants of Scotland has enabled us to learn from their experience of negotiating the mutual recognition of professional qualifications with their US counterparts. This stakeholder intelligence has informed our engagement with the UK Government and has laid the groundwork for using other available levers to support trade in services, including the planned establishment of a Scottish services trade forum with stakeholders.

On digital trade, we have focused on improving the coherence between digital trade and broader domestic digital policy. Our new digital strategy, A changing nation: how Scotland will thrive in a digital world, along with Scotland's AI Strategy (both published in March 2021), highlight the role of the Vision in maintaining Scotland's reputation as an ethical place to do business and being recognised internationally as an ethical and secure digital nation. We have also reviewed the range of Scottish Government strategies and action plans related to digital policy to identify opportunities to cooperate and ensure coherent approaches. To improve our evidence base, we are reviewing available data on digital trade flows in and out of Scotland and are strengthening relationships with our agencies and external stakeholders, such as TechUK, Which?, University of Edinburgh and the Competition and Markets Authority.

Promoting proportionate and transparent regulation, while prioritising public interest

The update to the BRIA, as detailed above, sits within our wider work on the domestic application of Good Regulatory Practices. We have developed an approach to implementing the obligations of the Good Regulatory Practices and Regulatory Cooperation chapter of the UK-EU Trade and Cooperation Agreement. This approach, in conjunction with the BRIA, will help ensure we develop regulation transparently and in consideration of the international environment, underpinning opportunities for voluntary international regulatory cooperation, whilst meeting FTA obligations.

The Vision recognised the role that international standards play in enabling trade and international competitiveness. We have therefore increased our engagement with the British Standards Institution (BSI), the national standards body for the UK, over this period. Our joint aim is to increase opportunities for Scottish participation in the development of standards at domestic, European and international level. In line with this, we have taken opportunities to collaborate and increase awareness within and outwith the Scottish Government on standards:

• We have worked with BSI to raise awareness within the Scottish Government of the benefits of international standards, particularly where they can help to facilitate trade.
• During COP26, BSI and the Scottish Government jointly delivered two panel sessions on sustainable finance and industrial biotechnology, with the participation of the Minister for Business, Trade, Tourism and Enterprise, Ivan McKee MSP, alongside representatives from BSI; Green Investment Group; Royal London; the Financial Conduct Authority; Economics for the Environment; and the International Organization for Standardisation.

Ensuring consideration of the impacts of trade on individuals, consumers and our health

The Vision recognised that there are winners and losers from international trade. It committed us to identifying these differential impacts in Scotland, and options to address them. Our work in the past year has focussed on building an evidence base, including through reviewing existing international approaches to understanding and addressing the differential impacts of trade.

In the Vision we also recognised the links between trade, nutrition and health, alongside the differential impact of trade on public service users, and we are considering these links across the Scottish Government.

We have also started work to build links between trade and domestic policies in support of gender equity. The breadth of the Scottish Government's policy development on gender equity provides a range of opportunities to do this. Our initial work has also identified that global efforts to improve gender equality through trade, such as by the OECD and the WTOs Informal Working Group on Trade and Gender, align closely with our own policy commitments (e.g. Scottish Government policies aimed at women in agriculture, and the 2021–2022 Programme for Government commitment to establish a Women's Business Centre).

We recognise in the Vision that trade policy should protect, serve and empower consumers, as well as supporting producers. To build our evidence base and improve consultation and engagement with consumers, we engaged with stakeholder organisations which represent and serve consumers, including BSI and Which?

Trade as a net-zero lever

The Vision recognised that our approach to trade should build coherence between our climate, environment and trade policies. In addition to our work to end overseas trade support and promotion activities solely focused on fossil fuel goods and services (highlighted above), work continues across the Scottish Government to ensure trade is embedded into wider climate policies. For example, since the Vision's publication:

• Scotland's indicative Nationally Determined Contribution (NDC) to the Paris Agreement was published, committing to using trade as a lever to increase progress to net-zero globally. We consider that there is great potential to incorporate trade measures in NDCs globally to support net-zero targets.
• Interactions with trade were included in the draft Hydrogen Action Plan, published in November 2021, such as in relation to regulation, international standards, international collaboration and increasing export potential in collaboration with SDI and overseas offices.
• Our recently published progress report on the Environment Strategy included consideration of the role of trade in the Scottish Government's efforts to improve the sustainability of our international footprint.

We have also commissioned research from ClimateXchange to understand the impacts of Emission Trading Systems and Carbon Border Adjustment Mechanisms on Scottish business. The outputs of this research will be published shortly.

Good governance and good global citizenship

The Vision recognised that strengthening, reforming and enhancing the WTO is a priority, identifying ways for the Scottish Government to strengthen its role at the WTO and demonstrate its commitment to the rules-based system. Doing so provides an opportunity to ensure that the interests of Scottish people and businesses are reflected in the rules by which trade is governed globally.

We have built capacity across the Scottish Government on the WTO, to ensure our policies are compliant with its rules. We have also influenced the UK Government's input into the WTO Trade Policy Review process, contributing to seven Trade Policy Reviews, by raising questions of importance for businesses and people in Scotland, for example on manufacturing, fisheries and seafood, investment, the environment, services and digital trade, amongst others.

We have strengthened our pre-existing relationships with the WTO's committee structure, working collaboratively with the UK Government on issues important to Scotland, for example where international regulatory barriers have been identified by industry. This has had tangible benefits, helping to clarify the scope and impact of regulatory barriers, providing certainty for Scottish producers.

The Vision recognises that human rights must be a central consideration in our trade policy, and we are considering how to build connections between human rights and Scottish Government activity related to trade. As part of this work, we have sought to raise awareness of, and support adherence to, the UN Guiding Principles on Business and Human Rights. These principles make clear that businesses have a responsibility to ensure their activities do not have adverse human rights impacts. In line with this, we issued a note to all public bodies to remind them of due diligence procedures in relation to services procured from organisations identified by the UN as being involved in certain activities relating to settlements in the Occupied Palestine Territories.

The Vision also recognises the integral link between trade and international development, and we are contributing to Policy Coherence for Sustainable Development, by building on these links. To do this, we identified the interactions between trade and international development in the Scottish Government's Review of our International Development Programme in March 2021.

In the Vision we identified continued support to fair trade as an opportunity to increase the coherence of trade and international development. Over the last year the Scottish Government has continued to provide core funding to the Scottish Fair Trade Forum. This support helps ensure that farmers and producers in the global south achieve a fair price for the goods they produce.

1.2.2 Look ahead

Over the coming year, we will build on the progress outlined in this report across all trade issues currently facing our economy, people, and the planet.

Economy. We will take action to improve the trading environment for Scottish businesses, while applying our principles to ensure that we find the right balance between competing priorities, including by:

• Monitoring the effectiveness of, and refining, our market access barrier prioritisation methodology. To do this, we will run pilots with real market barrier data from DMAS, then apply it to all identified market access barriers, ensuring we focus our resources on eliminating barriers that most benefit Scottish businesses, while respecting our principles.
• Using this data to inform a coherent approach to addressing market access barriers. Recognising that resolving market access barriers can be a complex and lengthy process, we will look to develop a toolkit of levers that have been effective in removing or reducing their effect, making it easier to take on similar barriers in the future. We will also take all opportunities to engage and coordinate with the UK Government in analysing and removing barriers.
• Continuing to support the Supply Chain Development Programme to identify risks and opportunities related to international trade and further building our evidence base on Trade in Value Added for use in policy development on global value chains.
• Widening our engagement with standards bodies on Scottish interests, by continuing to build our relationship with BSI to explore the role of standards in support of trade policy.
• Continuing to develop an approach to regulation that links adoption of international standards, regulatory cooperation and EU alignment.
• Working with key services stakeholders to identify opportunities to improve the trading environment for trade in services, including as part of a Scottish services trade forum. As part of this we will explore opportunities to address barriers to trade in services using regulator-to-regulator agreements.
• Continuing to position Scotland to take advantage of the opportunities from digital trade, by building coherence with domestic digital policy. As part of this, we will aim to increase access to information and support for businesses to maximise opportunities from digital trade, such as through existing funds to support the digital transformation of individual businesses (e.g. DigitalBoost).
• Identifying opportunities to influence the international debate on regulation of emerging technologies, and position Scotland as an ethical digital nation, for example through exploring interactions between digital trade and the AI Strategy for Scotland.

People. We will take action to advance more equal access to the gains and opportunities from international trade for people in Scotland, including by:

• Continuing our work to address the differential impacts of trade, by building our evidence base further and engaging with stakeholders, as well as further building links and coherence with relevant policy areas across the Scottish Government.
• Using the global momentum on gender and trade to identify domestic policy ambitions that interact with the international trade agenda on improving gender equality. This will include identifying opportunities where domestic policy can also help to make trade more inclusive for women.
• Identifying opportunities to further embed fair work in our trade policy.
• Continuing to examine the impacts of trade on health and nutrition and identifying levers that the Scottish Government can use to address or mitigate any negative impacts.
• Continuing to build our evidence base on consumers, in collaboration with key stakeholders and by facilitating the connections between domestic consumer policy and trade policy.

Planet. We will take action to use trade to contribute to addressing global challenges, such as tackling the climate and nature crises, reducing global inequalities and building international cooperation, including by:

• Continuing to support coherence between our climate, environment and trade ambitions, including referencing trade, where relevant, in Scottish Government net-zero plans and strategies and supporting the integration of net zero into all Scottish Government trade and investment activity.
• Further building our evidence base on the impacts of trade on climate change and on Scotland's international footprint.
• Monitoring our policy of ending overseas trade support for fossil fuel goods and services. We will also engage with UK Government and international partners on the fossil fuel subsidy reform agenda.
• Continuing to develop our understanding of the strengths and opportunities presented by Scotland's environmental goods and services sectors. We will also identify opportunities to embed trade into wider Scottish Government policy in relation to these sectors, e.g. on hydrogen.
• Taking opportunities to engage on the global stage with like-minded countries, organisations and businesses on a principled approach to trade. We will build on the legacy of COP26 and develop a high impact programme for COP27.
• Strengthening the role of Scotland at the WTO. This includes continuing to use the WTO Trade Policy Review process to raise market access barrier issues. We will also explore how best to use our and the UK's engagement with the WTO to promote Scotland's policy objectives, including through an external stakeholder roundtable in the first half of 2022.
• Further building capacity across Scottish Government on compliance with WTO obligations.
• Continuing to work across the Scottish Government to develop and monitor the connections between human rights and trade. We will benchmark ourselves against developments within the EU, for example, proposals for sustainable corporate due diligence.
• Continuing to support policy coherence for sustainable development by building connections between trade and our International Development Programme, such as through engaging with the proposed Global South Programme Panel and through a reconstituted Ministerial Working Group on Policy Coherence for Sustainable Development.