Trade: our vision

1. Scotland's Place in Global Trade

The Benefits of Trade

The growth in international trade has contributed to a rapid increase in growth and living standards globally. This has been true throughout human history, but particularly in the last 50 years^[1]. Countries engaging in international trade benefit from faster growth and increased productivity, with higher incomes for workers. Companies which trade internationally tend to be more innovative, productive and competitive. Exporters typically pay higher wages than non-exporters, reflecting their ability to leverage economies of scale and realise productive gains.^[2]

Consumers, especially low-income households, also generally benefit from increased trade as they are able to access cheaper and more varied goods and services^[3]. Recent trends toward protectionism run the risk of undermining the positive impacts that trade can deliver.

Scotland will continue to speak out for free trade and against protectionism. We are clear however that standing against protectionism is compatible with continuing to legitimately regulate in the public interest, balancing economic, social and environmental aims.

Championing Scotland's trade interests does not prevent Scotland from considering how the impacts of trade are experienced by different people, in different sectors and across different geographies. There is substantial evidence that increased openness to trade can have a differentiated impact and create "winners" and "losers" within countries^[4]. Trade policy needs to be pursued and implemented with maturity and using a holistic approach to ensure inclusive outcomes.

Taking action to ensure coherence between trade and climate and environmental objectives, in the context of supporting free trade, will also be necessary if we are to meet our ambitious net zero targets and if our exports are to continue to draw value from their Scottish provenance, by protecting and enhancing our natural assets. By taking a principled approach to trade, we are committed to trade being a lever in delivering sustainable, inclusive growth in line with the National Performance Framework.

Overview of the Scottish Economy – interface with trade

Trade is a significant part of the Scottish economy. International exports of goods and services from Scotland in 2018 – excluding oil and gas – were worth £33.8bn^[5], equivalent to 20.8% of Scotland's Gross Domestic Product (GDP)^[6] and £1 in every £10 spent by consumers is on imports. Our export growth plan, 'A Trading Nation' sets out the detailed actions we are taking to support Scotland's businesses to increase the level of their exports.

Of the £33.8 billion total international exports in 2018, an estimated £16.1 billion were to countries within the European Union (EU) and 8 of our top 10 export markets in 2018 are EEA countries. The importance of the EU as an export destination is partly due to the gravity effect – the propensity to trade with countries that are geographically close – but also the frictionless trade that had existed as a result of our membership of the Single Market and Customs Union. Despite the increased barriers to our trade with Europe as a consequence of the UK-EU new relationship, Europe will remain a significant trading partner for Scotland.

Services dominate the Scottish economy, contributing 75% of Scotland's GVA in 2018. In 2018, over £12.2 billion of Scottish services were exported internationally, which is 36% of all international exports. While goods made up a larger share of exports in 2018 and tariffs often make the headlines on international trade, the importance of trade in services to modern trade flows cannot be overstated – in Scotland the value of services exports has grown by over 60% in ten years.

Scotland has long been renowned for its expertise in engineering and manufacturing, with manufacturing employing 169,000 people in 2019. Industrial goods represent 31% of Scottish international exports, and include sectors such as chemical sciences (including refined petroleum), advanced manufacturing, manufacture of computer, electronic and optical products and transport equipment.

The food and drink industry is a major contributor to Scotland's economy, contributing £5.6 billion in GVA to the Scottish economy in 2018, and employs around 122,000 people in 17,500 businesses, primarily across rural and remote parts of Scotland. Food and drink is Scotland's largest non-energy goods export. Spirits make up the largest part of Scotland's food and drink industry, making up 30% of the UK's drinks manufacturing industry, with UK Scotch whisky exports worth around £5 billion per year. Fisheries and aquaculture are key sectors for Scotland, with seafood accounting for 57% of Scotland's overall food exports with a value of £918 million. Farmed Scottish salmon is the UK's number one food export.

Scotland is the top destination in the UK for foreign direct investment outside London, with Edinburgh, Glasgow and Aberdeen appearing in the top 10 UK cities. Inward investors constitute 3% of Scotland's businesses, yet are responsible for 34% of employment and account for 77% of Scottish exports (£24.2bn).

Our Inward Investment Plan 'Shaping Scotland's Economy' sets out the detailed actions we are taking to increase the contribution inward investment can make to building a strong inclusive wellbeing economy in Scotland.

Trade Trends and Developments

Scotland is committed to sustainable inclusive growth and delivering a wellbeing economy through our international trade agenda. To do so effectively we need to take into consideration global trade trends and developments, the impacts of the UK Government's trade priorities – including the reality of leaving the EU Single Market and Customs Union – and the impacts of COVID-19.

Global trade trends are shifting trade priorities and bringing new challenges.

Global trade had been growing at a faster pace than global annual economic growth^[7], prior to the onset of COVID-19 and its impacts, with trade in services expanding faster than goods^[8]. However, at the same time, the World Trade Organization (WTO) and rules-based multilateral trading system are being challenged by a rise in global trade tensions, protectionism and a stagnation in the conclusion of multilateral agreements, leading to a resurgence in bilateral and plurilateral agreements. Economic fragmentation is emerging, with the distribution of global economic and political power shifting, reduced levels of cooperation and dominance of rivalries that are disrupting the rules-based global trading system.

Trade is also being transformed by technology-driven advances in automation and the digital economy, driving a significant growth in cross-border trade in services, which can be increasingly remotely delivered, as well as a rise in e-commerce. While negotiations on e-commerce are currently underway at the WTO, these developments risk outpacing global governance structures.

Transformations of emerging economies are creating opportunities for partnership but can also increase risks related to labour and environmental standards.

The impact of climate change and the global transition to a net zero emissions economy will impact trade, including changing the nature of goods and services in demand, altering trade routes and changing policy priorities. There is a complex interaction between emissions and trade, including the link to transport emissions. While more efficient than other modes of transport, maritime shipping would be the world's sixth biggest greenhouse gas emitter if it were a country. However local production does not necessarily mean more environmentally friendly production. While the Paris Agreement does not address the link between trade and climate, there are growing efforts from like-minded countries to bring coherence to the trade and climate agenda through plurilateral initiatives, such as the Agreement on Climate Change, Trade and Sustainability^[9].

There is also growing evidence of the crisis in our natural world, with trade a factor in facilitating unsustainable levels of consumption and production. In 2019 a landmark global assessment^[10] concluded that the health of the planet's ecosystems is declining at a rate unprecedented in human history, with a million species at risk of extinction. Tackling the global nature crisis has implications for international trade, including ensuring the commodities we import in Scotland have a sustainable environmental footprint.

EU exit and the UK Government's negotiation of Free Trade Agreements (FTAs) with the rest of the world are rapidly shifting the nature of the UK's trading relationships.

The UK leaving the European Union comes at a time of uncertainty in international trade. No longer having access to the benefits of the Single Market increases barriers to trade at a time when supply and demand are already limited by the impacts of COVID-19, and threatens our recovery from COVID-19's economic impacts. The new trading relationship with the EU negotiated by the UK Government will impact disproportionately on certain sectors across the UK, with the Scottish seafood and aquaculture industry clearly suffering.

The terms of EU exit and the outcome of the UK Government's negotiation of bilateral and plurilateral trade agreements with other countries will create a significant shift in the nature of trading relationships for the UK and Scotland, as the UK Government attempts to shift market access priorities away from the EU and towards the rest of the world. The EU's willingness to continue to trade with the UK and facilitate access to the world's largest Single Market will be strongly informed by the extent to which the UK and the devolved administrations diverge from common environmental, social and labour standards.

Scotland does not support this shift away from the EU given the importance of a country's trade with its nearest developed neighbours, especially those with shared values, and neither does the economic evidence. The exit of the UK from the EU will see Scotland's GDP 6.1% lower by 2030 than it would have been with full EU membership^[11].

COVID-19 has exposed trade to new challenges or has accelerated pre-existing trends.

The COVID-19 pandemic has exposed world trade to changes in levels of demand for goods and services, international supply chain disruption and labour market disruption^[12]. As a result, the WTO is currently forecasting a 9.2% decline in the volume of world merchandise trade for 2020, followed by a 7.2% rise in 2021^[13]. Global trade did not return to its pre-financial crisis growth path after 2007-08 and may not post-COVID-19, with its simultaneous demand and supply shock. Keeping trade open will continue to be crucial to ensure the supply of essential products, including those needed to protect health and to support industries that are heavily integrated into global supply chains, which are an inherent aspect of modern industrial economies.

COVID-19 has accelerated pre-existing trends, such as increased digitalisation, and brought new challenges, for example to global supply networks and services, largely insulated from previous downturns. COVID-19 also risks disproportionately affecting the economically and socially vulnerable – the young, women, low earners and marginalised groups – which has the potential to exacerbate any differential impacts of trade^[14].

To manage the risk of any future crises, it is crucial we learn from recent experience. International cooperation, global knowledge sharing, and supply chain resilience and diversification are all critical to driving a sustainable inclusive economic recovery.