The Scottish export conundrum

It’s becoming abundantly clear that the Unionists’ main argument in the next independence referendum will be that if Scotland has to choose between being in the UK’s and the EU’s Internal Markets, the former wins hands down. Here’s for instance David Mundell’s take on it:

Our own domestic market in the UK is far and away the most important market for Scotland’s businesses.

The Scottish Government’s own figures show our trade with the rest of the UK is worth four times our exports to the EU.

Businesses in Scotland sold £37.5bn more in goods and services to their own market in the UK than they did to all 27 EU countries put together.

Today’s figures show the UK is the vital union for Scotland and highlight the importance of maintaining the UK market and preventing any new barriers to doing business across the UK as we leave the EU.

We must therefore find a convincing answer to this question. Wings over Scotland has provided one, but it’s making certain assumptions about the deal Westminster will achieve.

I therefore think it might be useful to examine the various scenarios systematically:

The (r-)UK remains with the EEA and the EU’s Customs Union

This scenario could happen either because Brexit never happens due to a second referendum, or because a new government decides to apply for continued membership of both the EEA and Customs Union (which basically would be membership without voting rights).

Would Scottish independence be good or bad for different types of businesses in this scenario?

• Exporters to the rUK: Not a huge difference. Some companies might decide to set up a separate Scottish HQ if we are independent, which will increase employment and domestic demand, but that’s about it – the EU will ensure that the rUK doesn’t discriminate against Scottish businesses.
• Exporters to the EU: Very little difference, but independence will be preferable, because there might still be small bits and pieces that Westminster will not take part in.
• Exporters to the rest of the World: Very little difference, because participating in the Customs Union means that Westminster can’t make their own trade deals.
• Other businesses: Very little difference — the main difference will be that independence will lead to a rise in the number of Scottish HQs and government agencies, which is likely to lead to a general rise in economic activity in Scotland.

Verdict: Under this scenario, independence is economically the best option, but the difference isn’t great.

The (r-)UK gets a really good trade with the EU

In this scenario, the (r-)UK does leave the EEA and the Customs Union, but manages to negotiate a really good trade deal. There will be some restrictions on the free movement of people, and there will be customs checks at the borders. The (r-)UK will make separate trade deals with the countries of the world (but because the EU is a much bigger trade block, these deals will typically the worse than the one they replace).

Would Scottish independence be good or bad for different types of businesses in this scenario?

• Exporters to the rUK: Independence won’t make much of a difference with regard to trade, but the customs checks will make it a bit of a hassle, so some of these companies will relocate to the rUK.
• Exporters to the EU: Independence is much better because of the lack of customs checks, and because companies can send key personal back and forwards between Scotland and the rest of the EU freely.
• Exporters to the rest of the World: Independence is preferable, because the EU’s trade deals will be better.
• Other businesses: My guess is that more companies will move from the rUK to Scotland to remain within the EU than the other way, so it’s likely the overall effect will be positive. It’s really an unknown at this stage, though.

Verdict: Mixed, with independence being better for some companies and worse for others. On average, I think independence will be somewhat better for the Scottish economy.

The (r-)UK gets a limited trade deal

This scenario is of course rather vague – a limited trade deal would necessarily prioritise some products or sectors over others, and there are infinite possibilities. What is certain, however, is that it will be somewhere between the preceding scenario and the following one. This scenario is likely to be accompanied by a recession (but a smaller one than in the next scenario).

Would Scottish independence be good or bad for different types of businesses in this scenario?

• Exporters to the rUK: If Scotland is independent, some companies will not feel much of a difference, while others will struggle badly, depending on whether they’re included in the trade deal. If Scotland remains within the UK, things won’t change much at first for these companies, but any supply chains depending on EU links could break, and the general recession is likely to affect them.
• Exporters to the EU: If Scotland is independent, nothing will change (and companies from the rUK will move to Scotland to remain within the EU). Without independence, some sectors will struggle while others are OK, but worse than they would have been.
• Exporters to the rest of the World: Scottish independence is a lot better, because Scotland then keeps the EU’s great trade deals.
• Other businesses: Independence is likely to be better, because of the increased economic activity caused by companies and people moving north; furthermore, the rUK recession can hopefully be avoided.

Verdict: Independence is better on average, even though a few companies who focus solely on exporting to the rUK in sectors not covered by the trade deal will struggle.

WTO terms

In this scenario, the (r-)UK leaves the EU without any agreement and has to trade on WTO terms, which means there will be tariffs on lots of exports, and no free movement of people. There will also necessarily be a hard border in Ireland. In this case, there is broad agreement that the economy will take a severe hit, with many companies and people fleeing the country. Things might improve eventually, but the economy will first experience a severe recession for several years.

Would Scottish independence be good or bad for different types of businesses in this scenario?

• Exporters to the rUK: If Scotland is independent, these businesses will suffer, but people will still want their whisky to forget their worries, and they’ll still need energy produced in Scotland, so the exports won’t collapse. If Scotland remain within the UK, these exporters will still suffer because of the UK recession.
• Exporters to the EU: Scottish independence is a hundred times better for obvious reasons.
• Exporters to the rest of the World: Scottish independence is a lot better, because Scotland then keeps the EU’s great trade deals.
• Other businesses: If Scotland isn’t independent, they’ll suffer because of the recession. If Scotland is independent, it’s likely the rUK recession will be felt north of the border, so things will still be bad, but much better than it would have been without independence.

Verdict: Companies focused on exports to the rUK will struggle after independence, but they’d struggle anyway because of the severe recession. For other companies, independence is much better.

Conclusion

Interestingly, independence seems to be better in all scenarios, but in some of them, the difference is much bigger than in others.

The Unionists going on about the amount of Scottish exports to the rUK compared with the rest of the World seem to be overlooking two big issues: (1) The more the UK cuts itself off from the EU, the more the economy will suffer, and that will hurt also those companies exporting to the rest of the UK; (2) the UK is likely to get trade deals that are much worse than what the EU has already negotiated, and that will be bad for lots of companies if we remain within the UK.

It’s really misleading to look at the size of the exports without looking at what will happen to them in the future, especially if Theresa May manages to shoot the UK in the foot. The more the rUK cuts itself off from the EU, the more we’ll need Scottish independence.