According to recent trade analysis, the costs of Scottish independence would be two to three times higher than the impact of Brexit, and that membership in the European Union would do little to mitigate those costs & GDP rise
The coronavirus outbreak has made it difficult to obtain data for GDP calculations (as summarised by the ONS). As a result, GDP forecasts for this quarter are more uncertain than usual, and they may be subject to change in the future.
This is the first estimate of Scotland’s GDP for the second quarter of 2021. (April to June).
Headline Results
In real terms, Scotland’s GDP increased by 4.7 per cent in the second quarter of 2021. The UK’s GDP expanded by 4.8 per cent during the same period.
Scotland’s GDP increased by 21.7 per cent in the first quarter of this year compared to the same period last year. The UK as a whole rose by 22.2 per cent during the same period.
Distribution, Hotels & Catering contributed the most to increase this quarter.
According to the SNP, there is no reason why Scotland cannot follow in the footsteps of other countries of comparable size.
The London School of Economics analysis is expected to stoke the post-Brexit independence discussion.
Other concerns include the conditions under which Scotland’s economy may expand faster, the costs and benefits of remaining in the UK post-Brexit, and if the economic arguments would influence the vote.
Brexit is teaching the United Kingdom a lot about borders and trade barriers, and it’s been a harsh lesson so far.
We’re witnessing the impact of paperwork, the need to prove where things came from, and, in some instances, tariffs after years of reduced friction.
There were also lessons from the United States, where Donald Trump demonstrated how tariffs might be used as an economic weapon by powerful nations against weaker economies.
What are the implications of these teachings for Scottish independence? It’s a question that trade modellers at the London School of Economics have looked into (LSE).
Its conclusions are unsettling for those who argue for independence on economic grounds.
“The costs of independence to the Scottish economy are likely to be two or three times greater than the costs of Brexit,” it states, adding that entering the EU after independence would do little to offset these costs.
It adds: “From a trade perspective, independence would leave Scotland considerably poorer than staying in the United Kingdom.”
The research doesn’t tell you the direction or degree of other phenomena that might emerge as a result of independence, such as company investment, inward investment, migration, changes in tax policy or productivity, or a possible currency shift.
Each of these scenarios could have its own set of dynamics.
Some of these are levers that could be used to boost growth.
Remember that some levers don’t always operate as planned and can have unintended consequences: reducing taxes, for example, can stimulate growth while harming public services.
Some are outside the authority of an independent Scottish government and might positively or negatively impact growth.
Disputes along the border
But, for now, let’s concentrate on the conclusions of the LSE, which are solely concerned with trade.
Its starting premise is that Scotland’s economy is highly intertwined with the rest of the UK’s. The economic model it employs predicts that two average neighbouring countries can expect to have a tight trading relationship but that Scotland’s relationship with its UK neighbours is six times greater than the average. Others have calculated that commerce is between 2.6 and 7.8 times that of ordinary trading neighbours.
By increasing friction, Brexit is expected to have a detrimental impact on trade. We’ve previously seen some of these. Others have yet to be tested, such as the requirement for work permits or visas to cross the UK-EU border and the lack of mutual recognition of professional degrees. Brexit is expected to reduce Scottish economic production by 2% compared to what it would have been if Scotland remained in the UK and the EU.
If Scotland declares independence as a result of Brexit, trade frictions are likely to arise.
These are not specified in the report and would be dependent on the nature of a negotiated exit agreement with the UK – possibly more paperwork, delays in delivery, regulatory requirements, more complex contractual issues for the lawyers, and different VAT and corporate tax regimes, all of which would increase business costs.
Scotland sells far more to the rest of the UK than it does to Europe is a vital aspect of this argument, as severing the UK-Scotland relationship would have a four-fold impact.
This friction is valued in the LSE study. An additional average cost of 15% would be at the low end of the magnitude.
If the divorce settlement is rough, with many new rules, that percentage jumps to a dismal 30%. Keep that concept in mind: that assumption is critical, and it may be questioned.
Gap in output
This is when the stats start to become interesting. The model calculates the impact of these costs on trade. First, it calculates what would happen if Scotland remained outside the EU as it is now. As a result of the lower friction costs, Scotland’s total economic production would be reduced by 6.5 per cent after 15 years. The higher prices, according to the estimate, would lower growth by 8.7%.
What happens if Scotland becomes independent and enters the European Union?
Because it would be the EU’s single market and customs union’s border, this is expected to exacerbate tensions at the English-Scottish border. The same checks that are already delaying trucks in Calais would be required in Gretna.
Easy access to the European Union’s massive market would improve Scottish economic production, but the decline in trade with the rest of the UK would counteract this. In other words, a company in Scotland would find it easier to sell Scottish goods to the Netherlands and beyond, and Scots would benefit from cheaper EU imports. Still, other Scots companies’ UK-based business models would be undermined, and purchasing from England would become more difficult/expensive.
Wales and Northern Ireland.
If you’re interested in the details, the model forecasts that if Scotland entered the EU and level friction costs were lower, its income would be 6.3 per cent lower than it is now within the UK. The income loss would be 7.6% if friction costs were higher.
There’s one thing to keep in mind about those percentages. They do not imply that your wages or benefits would be cut by more than 6%. They compute it as the difference between Scotland’s economic production after 15 years and what it would be if it stayed in the UK. Some people might be better off if they benefited from new trade agreements, but the balance would most likely favour those who would be worse off if the old ones were lost.
How long would it take to complete this task? The computations are carried out over 15 years, which is considered to be an extended period. However, the LSE economists estimate that disentangling a trade relationship as complex as the UK’s single market will take a decade to assess the full impact of changing trade connections. (They don’t say anything about how long a generation is, which is a point of contention in the debate over when another Scottish independence vote should be held.)
