Blog post

The trade inclusivity of new borders and old borders: the case of Scotland

Published 17 May 2022

Trade has played a major role in shaping the history of the UK and it was one of the motivating factors for the Act of Union in 1707. It was also a primary driver for the decision of the UK to join the European Economic Community and then agree to its deepening into the EU. Fundamentally, trade allowed regions to loosen their borders and diversify their policy preferences, in a sense acting as a promoter for geographical inclusivity.

The decision of the UK to leave the EU in 2016, which followed the strong vote in favour of remain in the Scottish independence referendum in 2014, has re-ignited the debate around independence. Indeed, the Scottish National Party (SNP)-led Government (2019) argues that the outcome of the 2016 referendum constitutes a ‘material change in circumstance’ that justifies an early second referendum on Scottish independence.

In 2014, the ‘Yes’ campaign could count on the argument that independence would change little for Scotland’s trading relationships, as the existence of the EU would provide access to a unified EU market that included the UK (Scotland’s major trading partner); now the existence of a ‘hard border’ between the UK the EU has radically changed the terms of the debate. In other words, ‘borders’ did not matter much for Scotland in 2014. However, should Scotland vote for independence it will face a choice of where to erect its border with the EU and the rest of the UK.

An illustrative analysis of border options for Scotland

In a forthcoming article for the National Institute Economic Review, we look at possible options for trade for Scotland and potential trade-offs between new borders and old borders.

We use an economic model that captures trade between Scotland, the rest of the UK and the EU and simulate the impact of three scenarios ¹. The first is Brexit. This creates a baseline as our model is based on pre-Brexit data (2013). The second scenario models Brexit plus independence for Scotland. The third is a ‘reverse Scottish Brexit’ Scenario, in which an independent Scotland re-joins the EU. The scenarios are illustrative in that they make simplifying assumptions about the potential trading relationships between Scotland and the rest of the UK in the case of Scottish independence, and they rely on trade costs from HM Government (2018) that are not directly estimated for Scotland. They also assume that ‘all else remains equal’, that is there are no other costs/benefits modelled, including from different domestic economic policies or changes in macroeconomic conditions.

Our main results are presented in Figure 1. The blue bars represent results from Scenario 1 (Brexit): that is, a situation where new costs for trade between the UK (including Scotland) and the EU emerge. In our results, these are reflected in an overall increase in the cost of living, and a loss in competitiveness in international markets. Imports from the rest of the World (ROW) (including the EU) fall by 10.6% due to the increase in costs and the overall reduction in economic activities indicated by the fall in GDP of 4.5%. Exports to the rest of the World fall by 5.5%, partly due to the frictions in trade with the EU and because of the further induced increased cost of Scottish goods. Trade with the rest of the UK (RUK) falls too but by a smaller proportion because UK regions can trade without frictions.

The pink bars represent results from our Scenario 2, Brexit plus independence. In this scenario, Scotland has additional costs in trade with both the EU and the rest of the UK. These nearly double the likely fall in GDP. This is not surprising as the rest of the UK is the main trading partner for Scotland in our dataset. Similarly, trade with the rest of the UK falls more than trade with the rest of the World.

Finally, the dark grey bars represent a situation where Scotland re-joins the EU (post-UK Brexit and independence), thus Scotland trades with the EU as before Brexit, but the same trade costs with the rest of the UK associated with the previous scenario remain in place. Re-joining the EU mitigates the negative impact of independence but does not offset it completely.

Figure 1: Impact of counterfactual scenarios on GDP and trade in Scotland

What do we learn from this?

Whilst the results are illustrative and limited by the availability of new estimates of trade costs and of reliable trade data for Scotland (this is extensively discussed in the full paper) it nonetheless allows us to draw a number of conclusions. Firstly, Brexit has complicated the case for independence. All else remaining equal, seeking to re-join the EU would signify significant additional costs in trade with Scotland’s main trading partner, the rest of the UK. Domestic policies – and/or other macroeconomic factors outside of this modelling – would have to lead to a significant uplift in Scottish economic activity to offset such costs. Secondly, borders do really matter for the future of the Scottish economy and of other UK regions.²

Finally, more research is needed to understand the impacts that UK nations’ decisions have on the other nations. This work, for example, is unable to shed any light on the impact that Scottish independence may have on England or Wales. In principle, we know that the nations are connected via supply chains, but data limitations have prevented us from developing economic models that capture the interconnections between industries in the four nations. In the future, the Centre for Inclusive Trade Policy aims to fill this important gap and develop economic models that can capture key characteristics of all four nations and assess how geographically inclusive future UK trade policies will be.

¹ This is a 2 regions Computable General Equilibrium model of Scotland and the rest of the UK. Further details can be found here.
² In another paper, we have made some initial considerations about Northern Ireland.