Trade policy: response to UK Government consultation on future free trade agreements

Chapter 1: Scottish Government Approach

1. This paper provides the Scottish Government’s initial response to the issues raised in the UK Government’s three consultations on the UK’s future trade relationships with Australia, New Zealand, and the United States of America, and the possible UK accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

2. The paper considers the following main issues:

• Scotland’s interests in relation to future trade arrangements generally, including the Scottish Government’s approach to the content and conduct of trade deals and trade policy (i.e. both what and how we want to trade); and
• The potential impact of pursuing bilateral trade deals with these particular countries, and of joining the CPTPP (a trade agreement between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam, expected to partially enter into force from 30 December 2018).

Importance of International Trade and Investment to Scotland

3. Scotland is a trading nation, an outward looking country operating in a global and ever changing marketplace. For centuries, our businesses have sought to find and develop new markets, recognising the crucial importance of international trade and investment to our economic wellbeing, creating new economic opportunities, boosting employment, and fostering innovation. Exporters are amongst our most productive and innovative businesses.

4. However, the potential benefits of trade are about more than economics. How we trade tells us much about the country we are and the values we hold. Our ability to create a more productive and fairer Scotland depends more than ever on trading with the rest of the world, and on attracting investment into our economy, our businesses and our assets. We want more businesses across Scotland to sell more goods and services to more markets. We want existing investors to develop, grow and expand in Scotland. And we want new investors to see Scotland as a place where they can thrive and contribute to a stronger and more inclusive economy and fairer world

5. The Scottish Government is fully committed to providing leadership in the face of global challenges, delivering the United Nations’ 2030 Agenda for Sustainable Development^[1]. We believe that international trade can promote inclusive economic growth both for Scotland and its trading partners, and act as a vehicle to help address global challenges such as poverty and climate change.

Benefits of EU Membership

6. The Scottish Government continues to believe 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. They did so for powerful social and economic reasons: 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.

7. The benefits of EU membership to Scotland from an economic and trading perspective are clear. The EU is the largest single market for Scotland’s international exports, with exports worth £12.7 billion in 2016, supporting directly and indirectly hundreds of thousands of jobs across Scotland. This represents 43% of our total international exports, more than exports to the USA, Asia, South America and the Middle East combined. A further 12% of Scotland’s international exports - £3.7 billion - were to countries with which the EU has a trade agreement.

8. The EU already has a number of existing trade arrangements in force relating to the countries in this consultation. These include the 2008 EU-Australia Partnership Framework, 2017 EU New Zealand Partnership Agreement, the Comprehensive Economic and Trade Agreement with Canada (CETA), the 2002 EU Chile Association Agreement, the 1997 EU Global Agreement with Mexico, and the 2013 Comprehensive Trade Agreement with Peru. Free Trade Agreements with other CPTPP countries, Japan and Singapore, are pending ratification with the European Parliament, agreement in principle has been reached on a trade agreement with Vietnam and on modernisation of the existing Mexico Agreement, negotiations are ongoing with Australia and New Zealand, and a technical scoping exercise is in process for a trade agreement with the USA.

Table 1: Top 20 Export Destinations, 2016 (£million)

Rank	Destination	Total Exports (£m)	% of Total	Rank	Destination	Total Exports (£m)	% of Total
1	USA	4,775	16.0	11	Belgium	760	2.5
2	Netherlands	2,115	7.1	12	Italy	715	2.4
3	France	1,960	6.6	13	UAE	705	2.4
4	Germany	1,910	6.4	14	Australia	650	2.0
5	Norway	1,365	4.6	15	Canada	610	2.0
6	Ireland	1,025	3.4	16	Sweden	565	1.9
7	Denmark	995	3.3	17	China	555	1.9
8	Spain	855	2.9	18	Singapore	525	1.8
9	Switzerland	795	2.7	19	Japan	460	1.5
10	Brazil	770	2.6	20	South Korea	435	1.5

Source: Exports Statistics Scotland (2018)^[2]

Chart 1: Scottish International Exports by Destination and Sector

Source: Export Statistics Scotland

9. The UK Government suggests – including in these consultations – that leaving the EU, Single Market and Customs Union will create opportunities to greatly expand trade further afield. However, most economists and businesses agree that the so called ‘gravity effect’ in trading relationships – the tendency for countries to trade most with markets closest to them – is likely to prevail, making it harder to establish and grow markets further afield, such as Australia and New Zealand.

10. In addition, the argument that any decline in trade with the EU from being outside the Single Market and Customs Union could be offset by exporting more to other countries has been consistently rebutted by a range of experts, including Sir Martin Donnelly, former Permanent Secretary in the UK Department for International Trade, who concluded in his speech at Kings College London in February 2018 that:

“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.”^[3]

11. As Scotland’s Place in Europe: People, Jobs and Investment^[4] demonstrated, even if the UK signed agreements with the ten biggest non-EEA single country trading partners (including USA, China and Canada) – a process that would take many years – this would only cover 37% of Scotland’s current exports compared to 43% of current exports going to the EU.

12. Imports are also a vital part of the trade picture. Allowing cross-border flows of goods and services increases the range of goods and services available to both businesses and consumers, and enables businesses and the public sector to have access to a cheaper and wider range of raw materials, parts, components and services from multiple countries, allowing them to form global value chains. From the perspective of prospective trading partners, the attractiveness of the UK as a trading partner immediately diminishes if it is no longer able to operate as a gateway to Europe for third countries. That is particularly true in respect of regulated trade, where any derogation from EU single market standards is likely to adversely affect the attractiveness of the UK market.

13. In addition, trade and investment in an increasingly service-based economy is tied closely to the mobility of skills and labour. No model of international partnership will provide anything close to the same benefits as the EU’s free movement of people, goods, services and capital. It is clear that any benefits from the ability to pursue new trade deals would be far outweighed by being outside the Single Market and Customs Union and being unable to automatically benefit from reciprocal entitlements under EU free trade agreements and related benefits, such as the cumulation principle for rules of origin.

14. Protecting our economy and our trading relationship with the world is one of the many reasons that we have argued that remaining in the Single Market and Customs Union would be the least damaging option for a UK outside of the EU. There is clear and substantial evidence that such membership would help to protect businesses, communities and individuals from some of the inevitable damage that Brexit will cause. We will continue to make the case for continued membership of the Single Market and Customs Union and encourage others to support us.

15. However, and especially with the UK’s future trading relationship with the EU still so uncertain, it is right that the Scottish Government, as a responsible government, makes preparations for all exit possibilities, in order to protect Scottish interests as far as possible. Our recently published paper, Scotland’s Role in the Development of Future UK Trade Arrangements^[5] (discussed below), opened that discussion, by considering the processes that should be put in place to allow the development of future trade arrangements that work to the benefit of all nations of the UK. In arguing for change, it recognised that Scotland’s policy and sectoral interests and priorities will at times differ from those of the rest of the UK. This paper considers what those interests and priorities are in the context of the current consultations and potential new trading arrangements.

Scotland’s Role in the Development of Future UK Trade Arrangements

16. The Scottish Government’s recent discussion paper on this issue sought to open a conversation on Scotland’s role in the development of the UK’s future trade arrangements, to ensure that the interests of consumers, businesses, civic Scotland and others are taken into account in the negotiation and agreement of future trade deals and that such trade arrangements respect devolved competencies, including the right to regulate.

17. As the paper – and indeed these consultations – acknowledge, trade agreements have changed considerably in the last 40 years, and now affect a wide range of devolved interests, which impact on the interests and daily lives of Scotland’s businesses and citizens. The conduct and content of trade policy and agreements therefore have, and will continue to have, very important implications for Scotland.

18. If the UK leaves the EU and Customs Union, it will become solely responsible for negotiating trade deals. As our response to these consultations demonstrates, Scotland and the rest of the UK will sometimes have very different interests in some negotiations, both in terms of our sectoral priorities, and the value we place on particular social, environmental, ethical or other concerns. Those differences would be best addressed before reaching the negotiating table, not least to reassure our trading partners that any agreements reached will have broad support and will endure. Our discussion paper argued therefore that it is essential to put in place a decision-making process that protects Scotland’s economic and social interests. Such a process would require a radical overhaul of the existing, inadequate, arrangements within the UK for developing, scrutinising and agreeing trade deals. That overhaul is required even if the UK continues as an EU Member state and a member of the Customs Union, but becomes particularly urgent in the context of the ‘hard Brexit’ envisaged in these consultations.

19. There is broad agreement – including in the Scottish Parliament – that the way trade agreements are developed within the UK cannot remain the same. Scotland wants to be a constructive partner to the other nations of UK and a fair trading partner to countries around the world. However, the UK Government’s approach so far does not appear to be keeping pace with the scale of change required. In particular, there has been very little direct engagement with stakeholders and other interest groups across the UK. What consultation there has been appears to place the interests and involvement of the devolved nations on a par with sectoral interests.

20. This approach must change if we are to ensure proper democratic engagement in the development of trade deals and that the interests and priorities of all in the UK are properly represented, protected and promoted. As we argued in our discussion paper^[6], the Scottish Government and Scottish Parliament must have a guaranteed role in all stages of the formulation, negotiation, agreement and implementation of future trade deals and future trade policy. That must start with proper involvement in the assessment of the desirability of new trade deals, including the identification of target countries or blocs for new agreements.

Summary of Scottish Government approach to Trade Deals

21. Our response to these consultations sets out the Scottish Government’s initial views on the direction and content of future trade policy generally, and on the markets specifically being consulted on. In doing so, it highlights - through reference to current trade flows - particular sectors and transversal interests which the Scottish Government would wish to see protected or promoted in future trade deals. Recognising the ever widening scope of modern trade agreements, it also sets out those aspects of trade deals where the Scottish Government would wish to see a particular approach taken to protect and promote a range of social, environmental, ethical and other goals, i.e. how we want to trade, as well as what we want to trade.

22. Membership of the EU, Single Market and Customs Union has given the UK a strong framework for protecting and advancing individual and collective rights, as well as a range of broader societal interests. Not only do they protect the interests of workers through a variety of measures, and adopt strategies for promoting greater inclusion for Small and Medium Enterprises (SMEs) and under-represented groups, they also ensure a high level of environmental protection, measures to combat climate change, and high regulatory and animal welfare standards. It is vital that, if the UK leaves the EU, these protections are not lost or traded away in the interests of securing a trade deal.

23. Responding to these concerns, the UK Government has made a number of explicit commitments that future trade deals will not affect the governance of the health service, will not lead to a reduction in existing food safety, and animal health and welfare standards, and will not threaten our ability to pursue domestic public policy objectives. We welcome those commitments, but they must be adhered to throughout the course of what may be difficult negotiations. Future trade deals must not be at the expense of our vital public services, taking into account the specific characteristics of the Scottish NHS, or result in any lowering of standards.

24. Through our approach to trading, we can promote human rights and environmental standards, challenge corruption and share knowledge, skills and technical expertise for global good. Sustainability and inclusion must lie at the core of our future trade policy.

25. Modern EU and international trade policy reflects these values, notably through negotiations on Trade and Sustainable Development by reference to global standards, and recent developments to promote gender equality through trade. We must take a robust approach to monitoring trade and sustainable development considerations at all stages of the negotiation and implementation process that is at least as comprehensive as the European Commission’s Sustainability Impact Assessment approach.

26. Future trade agreements must reflect our wider international ambitions, maintaining and promoting our existing environmental and social protections, and avoiding jeopardising our commitment to social democracy in pursuit of pure economic gain. Our place in the world depends in part on the relations we build through trade. It is vital that Scotland’s voice and priorities are heard in the selection and development of future trade deals.

Next Steps

27. In formulating this response to the UK Government’s four consultations, we have considered Scotland’s existing trading relationships with the countries in question, focussing in particular on where Scotland’s interests and negotiating priorities may differ from those of the UK in relation to the four potential trade deals specifically. This response also considers the Scottish Government’s priorities in relation to trade deals more generally, by looking at both specific sectors of the Scottish economy and specific elements of modern trade deals. That analysis underlines the central importance of prioritising the preservation and promotion of our trading relationship with the EU.

28. This paper should be seen as the first stage in setting out the Scottish Government’s views on and approach to trade deals generally, and as the beginning of our involvement in developing the UK’s position on the four specific potential trade deals. We will continue to undertake more detailed analysis of Scotland’s sectoral interests and the potential effect of new trade agreements on existing trade flows. In line with the proposals set out in Scotland’s Role in the Development of Future UK Trade Arrangements^[7], that ongoing analysis should form part of the Scottish Government’s continuing contribution to the development of negotiating mandates and commencement and conduct of formal negotiations. We expect the UK Government to work with us and the other devolved administrations to bring together detailed knowledge and understanding of each of our economies in a rigorous impact assessment process, capable of detecting national and regional variation. Only such thorough analysis will give us the information we need to identify the real risks and opportunities in these markets, and inform an evidence-based trade policy that delivers for all of our nations and regions.

29. The publication of these four consultations marks the beginning of the process for the first independent trade negotiations conducted by the UK since the 1970s. The progress of these initial negotiations will act as a key test of the UK’s approach to developing new trade deals, and of the UK Government’s commitment to formulating an inclusive trade policy that delivers for every part of the UK. The approach taken so far, characterised by a lack of consultation with the devolved administrations on which markets to target, limited engagement with stakeholders, and a lack of impact assessment at national and regional level, falls far short of the sort of process we would expect to see in the future, particularly if the UK leaves the EU, Single Market and Customs Union. We are therefore seeking urgent discussions with the UK Government and other devolved administrations on how this procedure can be improved from now on, and before future consultations are launched.