Blog post

What Scotland trades and why it matters for independence

Published 15 December 2022

A key argument in favour of Scottish independence is the possibility of re-joining the EU single market, Scotland’s largest export market for goods. But this comes with the trade-off of increased barriers with UK, Scotland largest export market for services and overall. But Scotland trades different things with the EU and the UK, so switching markets is far from simple.

The Supreme Court decision of the 23rd of November stalled the Scottish Government’s plan to hold a referendum in 2023 on whether Scotland should/should not become an independent country.

However, the Scottish Government remains committed to pressing the case for constitutional change, including seeking to use the next UK General Election as a ‘de-facto’ vote on independence.

In the meantime, policymakers in Edinburgh continue to make economic arguments for independence. So far, a series of papers have been published setting out Scottish Ministers’ views on the opportunities to be gained from independence. Unlike in 2014, there is no comparable set of papers (yet) from the UK Government.

The most recent paper from the Scottish Government, focussed upon economic arguments: Building a New Scotland: A stronger economy with independence. A key argument in this paper is that, post-independence, the Scottish Government would prioritise “re-joining the European Union (EU) to benefit from, and contribute to, the vast European Single Market”.

Trading borders, trading goods and trading services
Brexit now means that Scotland would face a trade-off post-independence in where to place its principal economic border (Figus et al., 2022).

Back in 2014, the pro-independence ‘Yes’ campaign argued that little would change in Scotland’s trading relationships should voters choose independence. Their vision was for Scotland to continue as a member of the EU Single Market along with the UK. But with the UK now out of the EU Single Market, if Scotland was to join the EU it would face a hard(er) economic border with the rest of the UK. A Scotland-only bi-lateral trade deal with the UK would not be consistent with EU membership.

Some have argued that independence would provide an opportunity for Scotland to pivot its international trade footprint from the rest of the UK to Europe. In effect, the argument goes, trading a market of 65 million people for one of over 500 million people.

What is often lost in debates over swapping one border for another is the composition of trade between regions and/or countries.

Despite recent reforms, trade in services is more difficult to conduct than trade in goods. Non-tariff barriers, whether that be formal barriers, such as different legal rules and regulations, or more informal barriers, such as language differences or cultural differences, are considerably higher for services rather than trade in goods.

Why is this important?

A history of Scotland’s economy in the 20th century and trade

Scotland is a services-based economy, with around three quarters of annual Scottish economic output coming from the service sectors.

But it was not always like this. Heavy industry, including shipbuilding, coal and steel production and textiles were once the dominant force in the Scottish economy. This industrial structure was positioned not just to sell into the Scottish and UK markets, but to global markets too.

Structure of Scotland’s Economy (% of GVA): 1951 to 2017)

Table showing structure of Scotland's Economy

Source: Scottish Government

Generations of people brought up in the west of Scotland have heard the proud stories of how – once upon a time – 1 in 5 of all global merchant ships were built on the Clyde. But even then, shipbuilding exports were exceeded by huge quantities of exports in textiles and heavy machinery (including train locomotives) that were shipped around the world throughout most of the first half of the twentieth century (see Cairncross 1954: The Scottish Economy – A Statistical Account of Scottish Life). Exports were diversified too. Records from the Annual Report of the Secretary for Mines in the 1930s, showed that Scotland regularly exported over 4 million tonnes of coal a year (enough to keep Longannet power station – the third largest power station in Europe – fully fuelled).

In Scotland’s first ever Input Output tables for 1973, Scottish manufacturing exports, international and to the rest of the UK (RUK), were estimated to be valued at nearly £3.4 billion – thirteen times the value of services exports.

But as the chart above shows, throughout the second half of the twentieth century Scotland – like other parts of the UK – underwent huge industrial change. Employment in manufacturing fell by over 150,000 between the mid-1950s and the late-1970s. During the 1960s alone, 300,000 people migrated out of Scotland in search of work.

But as traditional industries declined, services output grew. Scotland’s economy pivoted to servicing a smaller and more local (but in many ways more lucrative) UK domestic market, including consumer services, construction, utilities and financial services. As a result, that international export heritage diminished.

There were efforts to maintain an industrial base that would continue to export. Aberdeen has developed an outstanding global supply chain and offshore services industry in oil and gas. Food and drink (most notably whisky) contributes billions of pounds to the UK trade balance each year.

One particular success story from history was the growth of the semi-conductor industry, including the establishment of Silicon Glen. But as global competition increased, particularly from lower cost producers in Asia, exports declined sharply – see the chart below.

These global trends continue to feed through to the structure of Scotland’s export markets today.
The chart below shows export values for Scottish exports to the rest of the UK and internationally - split between the EU and the rest of the world (ROW). Three key sectors are shown: manufacturing exports, services exports and exports from mining, construction and utilities.

As has been well documented, Scotland exports more in total to the rest of the UK than it does internationally. Equally, however, it is true as the Scottish Government have stated that “the value of Scotland’s manufactured goods exports to the EU and the rest of the world (£19 billion) was higher than the value of exports to the rest of the United Kingdom (£11 billion).”1

What does this composition effect mean for debates over independence?
In considering the cost and benefit of ‘trading’ one border for another, much of the debate focusses upon the scale of exports to different markets.

But the composition of that export base will be crucial too. If, for example, Scotland chose to leave the UK it will face increased (most favoured nation) barriers with the rest of the world including with the rest of the UK. Re-joining the EU will reduce these barriers with EU countries, as suggested for example by the OECD (2019), but not with the rest of the UK.

For existing services exports with the UK (the largest share of Scottish trade in services), hoping that there can be a seamless and like-for-like transition to being sold into the EU at an equivalent value is likely to lead to disappointment. Many of these UK sales are feasible because of the very fact that they are sold within the UK (which has common regulations, laws, traditions, language and currency).

To offset this, Scotland will either need to prioritise growth in service sectors which are exportable into the EU (as has been the case in Ireland through attracting international investment) or growing its manufacturing base. Doing so, will require domestic industrial and fiscal policies to be aligned with this goal.

Simply switching access to one market for access to another market will be insufficient. The impact of Scotland ‘trading’ one border for another will depend crucially on the vision for Scotland’s domestic economy post-independence, and the adaptation of its economy to new market opportunities, not just its membership of any multi or bi-lateral trade deals. It will also require Scotland to think about how it wants to position itself. An English speaking nation within the EU Single Market with close links to the rest of the UK might be attractive to some firms and international investors but a clear strategy will be needed which includes retaining strong ties with the UK.

Ireland is often cited as an example of what is possible for Scotland post-independence, and as the long-term destination, this may not be an unreasonable target. But it is important to understand the path that took Ireland to its present destination over the decades following independence.

Ireland, for example, re-positioned its main export markets to be more European (such that today, less than 10% of Irish exports go to the UK). But even then, that UK market is not insignificant – particularly for agricultural produce.

Ireland also had to develop export industries and investments that enabled internationalisation to flourish. Even as late as the 1970s, fifty years after independence, over 50% of Irish exports were still destined for the UK.

Conclusion

Changing Scotland’s market access arrangements will not be straightforward in the short run nor will it be quick, as the UK’s exit from the EU demonstrated. But at the same time, changing the formal arrangements governing trade is only one part of the economic transformation needed to make a successful transition from one major export market to another.
In setting out post-independence trade plans, it is important to move the debate beyond simply stating which markets we want to align with, to thinking about how Scotland might pivot its businesses and the economy towards meeting the export opportunities in these markets.