Scotland & the EU

What a Customs Union Brexit compromise could mean for Scottish Independence

Tonight Theresa Mays Brexit deal was defeated by 230 votes. The UK Government will now face a motion of no confidence but to force a General Election Labour’s No Confidence vote has to win by a two-thirds majority which is highly unlikely.  The next few days will tell us what sort of Brexit we are going to get (if at all) and assuming May’s Government survives the big question will be what compromise deal will May present to be voted on next week and if it passes what would it mean to Scottish independence?

First Some Background

Brexit supporters argue that for the UK to be able to do deals with other nations around the world and follow a truly non-EU aligned trade policy they need to leave the EU, the single market and the customs union. However, in an interconnected and interdependent global trading environment abandoning your trading allies in the EU isn’t always the best solution.

However, using the concept of gravitational pull is the simplest way to explain how trade works – the closer nations are to one another on the map, the more trade will gravitate or flow in both directions. Likewise, the closer two nations are in terms of regulations, the more trade will be facilitated between those nations. The further nations are apart geographically and the more their regulatory frameworks differ the lower the gravitational pull in trade terms.

So when Brexiteers claim that the EU is stopping the UK trading with India and Japan, China etc it just doesn’t hold true as there is very little natural trade pull between these countries and the UK. The size of those nations will mean that trade is larger than with smaller nations (if you can do a trade deal) but their size also means the UK won’t be in as strong a negotiating position as the EU is when doing trade deals. So the opportunity to increase trade is not as great as Hard Brexit supporters claim. The EU has also just completed a major trade deal with Japan, meaning that the UK will be less able to trade with Japan after Brexit than they would be if Brexit were cancelled.

Regulatory agreements enhance trade so leaving the EU Customs Union will lessen the flow of UK exports and imports because of tariffs and administrative issues such as rules of origin, meaning you have to provide the paperwork to prove that the good was made in your country. Imports are important as that includes manufacturing parts and components and a lot of the food we eat.

So, assuming that Brexit will happen, business people that import and export should like to see the UK stay in the EU customs union after Brexit because it facilitates trade.

What is a customs union?

A customs union is when two or more nations agree not to charge trade tariffs between themselves thus enhancing trade gravity. They also agree common tariffs be applied to imports from nations outside their customs union.   That is the problem – if you agree to an external tariff you can’t then lower tariffs with nations outside your customs union to facilitate better trade deals.

That’s why the customs union is not on the Conservative party’s wish list or in Theresa May’s now failed deal. Tory hard Brexit supporters would revolt – a moot point as they were not willing to back her deal anyway.

Labour doesn’t support staying in the EU customs union but instead supports leaving it and then creating a new customs union with the EU that is more flexible.  Assuming the EU would actually agree to this (maybe not) this would have advantages and disadvantages which would take half a dozen paragraphs to explain, so I will just say that it ends up pretty much in the same place with less EU trade (where trade gravity is high) and more flexibility to trade with the rest of the world (where trade gravity is low). So it is not the customs union/agreement I would recommend.

So, Labour’s plan is better than a hard Brexit and better than Theresa May’s Deal but worse than staying in the EU Customs union or single market as far as protecting trade the economy and jobs are concerned.

How is a single market different from a customs union?

The single market is an agreement that goes further than the customs union: it is not just facilitating trade through tariff agreements or eliminating tariff barriers. In the single market nations also get rid of non-tariff barriers such as food safety standards or packaging rules by agreeing on common standards with the aim of facilitating fair and even trade.

Integral to single market membership is the four freedoms: the free movement of labour, goods, capital and services. You have to accept all four, you can’t cherry pick and remain a member.

This brings us Westminster’s next steps – Theresa May’s now has 3 days to speak to the EU, to see if they will now budge a little, and then come back with a plan B.  If her plan B has more clarity on the end of the backstop agreement and offers a customs union then she might just be able to get that through.

This means that Brexit is still more likely to happen than not and if so it will be a soft Brexit with a customs union that offers the maximum trade gravity whilst being short of a Norway-style EFTA deal.

All Brexits are harder on Scotland

Scotland exports far more per head than any other part of the UK and is the only UK nation or region to have maintained a positive trade balance every year since records began.  Scotland also has a greater need for EU citizens to come to Scotland in skilled labour positions such as vets, doctors and nurses but also for unskilled roles such as seasonal fruit picking jobs. With 8.4% of the UK population, Scotland also receives 17.5% of all of the EU spending and grants that come to the UK.

So, any form of Brexit is harder on Scotland than it is on the rest of the UK. It will hurt our economy, it will cost jobs and damage Scotland’s all-important exports.  This is why Brexit happening against the stated wishes of the Scottish people is the justification for a second independence referendum.

Remaining in the customs union would be the type of Brexit that would maintain the highest level of trade gravity between an independent Scotland and the rest of the UK with no tariff barriers. The UK has stated that it does not intend to lower its food safety and packaging standards.

EFTA looks more likely than EU for an independent Scotland

If Scotland were then to gain EU membership, the movement of labour between the rUK and Scotland would necessitate some border checks (the sticking point in Northern Ireland/Ireland). So to gain membership of the single market without having to accept freedom of movement (the Schengen agreement) Scotland could join EFTA. Although every current EFTA country is a member of the Schengen area, which provides for freedom of movement, this is not a prerequisite for membership.

Thus an independent Scotland would have no reduction in trade gravity with the rest of the UK and the maximum possible trade gravity with the EU under these circumstances. This could be described as a best of both worlds scenario or as simply a better set of circumstances for Scotland than the rest of the UK would enjoy.

The higher standards and EFTA trade costs will be higher overall than had the UK remained in the EU but less so than allowing Brexit to severely damage Scotland’s exporting success and damaging our key sectors such as food and drink, oil and gas and life sciences sectors. We can expect the pound to fall in value after Brexit and during the Brexit transition period so an independent Scotland using the pound temporarily would be more attractive to trade with for the rest of the UK than goods imported from nations with a stronger currency. This would make our exports cheaper for foreign buyers as the pound sinks, so our international exports would rise as the rest of the UK’s would fall.

So what’s with the People’s Vote?

So, why is the SNP campaigning for a second vote as it takes the most likely route to independence off the table (if the outcome were to be Remain)?  Well, maybe their pressure will generate the customs union compromise as Brexiteers will vote for it rather than face a People’s Vote?

It can be argued, however, that the SNP can’t, however, vote for any form of Brexit, even if it contains a customs union they have no mandate to do so and if they did they would be calling for a referendum justified by a type of Brexit they voted for.

They are following their mandate on Europe and when that door is slammed in their faces they have to say enough is enough: it’s time for a referendum on Scottish independence and that path to a referendum is the one most likely to bring EU citizens and Remain voters over to supporting independence.

About the author

Gordon MacIntyre-Kemp

Gordon MacIntyre-Kemp is the Founder and Chief Executive of Business for Scotland. Before becoming CEO of Business for Scotland he ran a small social media and sales & marketing consultancy.

With a degree in business, marketing and economics, Gordon has worked as an economic development planning professional, and in marketing roles specialising in pricing modelling and promotional evaluation for global companies (including P&G).

Gordon benefits (not suffers) from dyslexia, and is a proponent of the emerging New Economics School. Gordon contributes articles to Business for Scotland, The National and The Huffington Post.

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