© 2019 SCER
The UK constitutional settlement is in a fragile state. The chances of Scotland remaining part of the UK have diminished following the 2019 general election. Recent polls have suggested that independence commands majority support among the Scottish electorate. The probability that Scotland becomes independent and then rejoins the EU may be small but has been growing.
If this chain of events occurs, the Anglo-Scottish border would become an EU – rump UK (rUK) border. This is the scenario which this chapter seeks to address. What would be the economic implications for Scotland? While the chapter focuses on the detail of this prospect, a recurrent theme is the close analogy between pro-Brexit arguments relating to prospective UK-EU borders, and those relating to an independent Scotland’s border with rUK. Arguments concerning “border frictions” between the UK and EU translate straightforwardly into the Anglo-Scottish border context.
It is also worth noting that Brexit means that current arguments about the role of the Anglo-Scottish border differ substantively from those made at the time of the 2014 independence referendum. In 2014, with the assurance that the remainder of the UK would remain part of the EU’s single market, the argument centred on whether Scotland could rejoin the EU and therefore, as part of the single market, have a frictionless border with England. Within the scenario imagined in this chapter, this situation is reversed. An independent Scotland within the EU would be part of the EU’s single market: England and Wales would be outside.
As a member of the EU, Scotland would not be part of the UK customs union and would not be party to trade deals negotiated by rUK. Instead, as a full member of the EU, its trade deals would be arranged by the EU Commission on behalf of all the member states. As part of the largest trading block in the world, this would likely mean that it would benefit from more advantageous deals than rUK is likely to be able to negotiate. However, Scotland would have to accept the standards that the EU is likely to impose on such deals. These include the “precautionary approach” which it uses to guide environmental, health and animal welfare standards and which, for example, has led to the prohibition of imports of GM crops. Nevertheless, in Scotland’s case, the negotiating strength of the EU might, for example, have the advantage of more effective “geographical indication” protection – particularly important for the food and drink sector.
Barriers to trade are generally bad for growth and prosperity. But it is difficult to predict what specific barriers an independent Scotland might face until the shape of the EU/UK trade deal becomes clear. The greater the divergence on trade issues between the EU and the UK, the more frictions there will be at the border.
Northern Ireland would be inside the UK customs union. It would therefore be part of any trade deals that the UK agrees with third countries Yet if the UK government keeps the commitments it made in the EU Withdrawal Agreement, checks will have to be carried out on goods coming from Great Britain to Northern Ireland that are “at risk” of being shipped to Ireland, and thus to the EU single market. Customs checks within the existing UK territory will therefore be in place before Scotland becomes independent. The paradox of these arrangements is that the UK government will wish to show that they have minimal impact on NI/GB trade, while at the same time arguing that similar checks on the Anglo-Scottish border will have a devastating effect on the Scottish economy.
The border checks may be quite significant. The UK has just indicated that it is not seeking a waiver on EU Safety & Security Border declarations. This will mean that each consignment traded between the EU and UK will have to complete lengthy paperwork after end of the transition period in 2020. Whether this approach will survive the inevitable conflict with British business, particularly those traders working with perishable goods including the Scottish fishing industry, is perhaps unlikely. And where the UK is treated by the EU as a “third country”, there would also be checks on ensure relevant tariffs are paid, that the correct VAT on goods that carried tariffs, checks on VAT, sanitary and phytosanitary checks on foodstuffs and checks to determine whether goods comply with relevant rules of origin. These would clearly disrupt cross-border trade at a cost to both parties.
How such checks may play out along the NI/GB border in the near future is unclear. Nevertheless, if the UK government were to persist with antagonism towards measures that reduce trade frictions, then the checks on the Anglo-Scottish border would be damaging to current trading patterns. But to do so would harm its own exporters as much as Scottish exporters. And it might encourage trade diversion, in the same way that Brexit has caused the Irish government to establish direct routes to mainland Europe, obviating the need to use the UK land-bridge to access EU markets.
Trade flows across the Anglo-Scottish border are substantial. Figure 1 shows the size of imports and exports (excluding offshore effects) relative to Scottish GDP from 1998 to 2018 (figures for 2017 and 2018 are provisional). While Scotland’ trade with the rest of the world (RoW) is almost consistently in balance, it runs a deficit in goods and services with rUK, which has averaged 5.7 per cent of Scottish GDP during the last ten years. This would be an issue for a Scottish government if it set up a separate currency and could not establish compensating capital inflows. On the other hand, the argument put forward by the Brexiteers was that the EU needed a trade deal with the UK more than the UK with the EU because of the UK’s trade deficit with the EU – so a similar logic applies to a Scottish/rUK deal?
Source: Scottish National Accounts Programme: Whole of Scotland Economic Accounts Project 2019
Scotland could establish deals with rUK independent of the EU because the single market is not complete: whereas most trade in goods is covered, very little progress has been made in respect of trade in services. Both rUK and Scotland are service-dominated economies. Hence there may be opportunities to agree sector-by-sector deals (e.g. some areas of banking, health, education) that would not threaten obligations that Scotland might have under EU treaties.
Similar consideration would apply to the movement of people between Scotland and rUK. Like Ireland, Scotland would likely prefer to be part of the Common Travel Area rather than join the Schengen zone to which most EU countries belong. This would mean there would be no need to show passports on crossing the border and given the volume of movement, this would save substantially on administrative costs.
How the establishment of an Anglo-Scottish border will affect Scottish GDP in the medium to long-term is impossible to predict. Frictions in trade are likely to restrict growth in the short-run, as we are about to observe when the UK leaves the EU. However, its existence will set up a new set of incentives for individuals and companies: whether these play in Scotland’s favour depends very much on the choices that the UK government is currently making in respect of the post-Brexit relationship between the UK and EU, and future policy choices that an independent Scottish government might make.
Under the scenario of an independent Scotland rejoining the EU, foreign investors might consider Scotland a desirable location given its unfettered access to EU markets, a well-educated English-speaking workforce, some trade integration with rUK in respect of services and good communications. But Scottish workers might be attracted to rUK if it offers better long-term income prospects. How these and other incentive effects might balance out is impossible to anticipate.
The closest analogue to these issues lies in the situation that Ireland now confronts in its relationship with the UK. Immediately post-independence, Ireland’s GDP per head was 56 per cent of that of the UK. In 2018, Irish gross national income per head was 43 per cent above the UK level. A report prepared for the Irish government suggested that Irish GDP might fall by up to 7 per cent if the UK opted for “no deal” with the EU. This would pose a serious problem for Ireland, but its GDP per head would obviously continue to be well above UK levels. It is clearly possible for a small country to succeed economically in a similar situation to that which would confront an independent Scotland within the EU and establishing a new border. But because it is possible does not mean it is inevitable. It would require both good fortune and skilful, occasionally tough, policymaking.
 comparisons of GDP per head in recent years are not meaningful measures of welfare due to the distortionary effects of high levels of profits declared by multinational corporations in Ireland.
University of Stirling
Prof David Bell CBE FRSE is Professor of Economics at the University of Stirling. He is affiliated to the Centre on Constitutional Change and his research interests include the economics of social care and of subjective well-being, the Scottish economy and the economics of education.