Since the UK and the EU agreed the Trade and Cooperation Agreement (the TCA) on 24 December 2020, there has been much discussion as to what the economic impact will be on Scotland and the UK. This blog will summarise some of the work in this area and set out the latest data we have on Scotland’s exports.
How might the TCA affect the Scottish and UK economies?
The Scottish Government published an early assessment of the impact that the deal could have on Scotland’s economy on 31 December 2020, concluding that Scotland’s GDP could be 6% lower by 2030 than it would have been had the UK not left the EU.
60% of Scotland’s exports are to the rest of the UK (£51.2 billion in 2018) and will not be affected by the TCA. A small proportion of these may be re-exported internationally and while this cannot be quantified, the Scottish Government is confident that it is likely to be a very small proportion. Exports from services, utilities and construction, which make up 72% of exports to the rest of the UK, are highly unlikely to be re-exported. The Scottish Government has also suggested that many of the manufactured goods exported to the rest of the UK are in sectors where re-exporting is unlikely. However, the EU is the most valuable international export region for Scotland accounting for 48% of all international goods and service exports, worth £16 billion in 2018.
Prior to the signing of the TCA, the Office for Budget Responsibility assumed that even if a deal was agreed export and import intensity will fall. The Bank of England forecast that there would be a reduction in exports due to restrictions on trade with the EU, and the impact this would have on domestic supply chains would reduce GDP by 1% in Q1 2021. The Bank of England assume that short-term effects are temporary as businesses adjust.
Dr Thomas Sampson, writing for the UK in a Changing Europe, noted that there was little evidence of a shift in exports to/ imports from the EU to other international markets – the proportion of UK exports going to the EU rose from 42% to 43% between 2015 and 2019. As no new trade barriers were created until after the end of the transition period, this is perhaps to be expected. However, this changed on 1 January 2021. While the TCA ensures there are no tariffs or quotas related to the trade in goods with the EU, it does not prevent new non-tariff barriers such as customs formalities. In July 2020 the Financial Times suggested that British businesses face an annual bill of around £7bn because of new customs requirements. While the UK Government announced that it would phase in customs checks over the first six months of 2021 while the necessary infrastructure is prepared, the EU applied full customs requirements from 1 January 2021.
Trade in services is likely to be impacted even more than trade in goods. The TCA does little to ensure market access for services:
- financial firms have lost passporting rights which allow access to the Single Market.
- there is no guarantee of mutual recognition of professional qualifications.
- labour mobility is restricted.
- Firms will need to navigate country and sector specific regulation.
- A decision on the equivalence for the regulation of financial services is still to be made by the EU.
Dr Sampson suggested that the impact of the TCA will be significant on the British economy and exports when compared to remaining a member of the European Union, with exports to the EU expected to decline by more than one third over the next ten years as a result of the new barriers to trade. The chart below sets out the forecast impact of the TCA:
Source: Dr Thomas Sampson writing for the UK in a Changing Europe, January 2021
Data sources on Scottish exports
This blog uses two sources of data for exports:
- The Scottish Government publish Export Statistics which include a detailed picture of goods and services exports from Scotland by industrial sector and destination country. The most recent data is for 2018. SPICe produced a detailed briefing on this data, and analysis of the trends in this data over the ten years to 2018.
- HMRC publish regional trade data which includes a breakdown of Scottish imports and exports of goods by industrial classification and destination. This is timelier data – the latest available is up to end September 2020, and it also includes data on imports. However, it only covers the export and import of goods, not services.
The following analysis will focus on international exports from Scotland – and so not including those to the rest of the UK.
Exports of goods
Regional trade data from HMRC includes a breakdown of Scottish imports and exports of goods by industrial classification and destination. The most recent data is up to Q3 2020, so this will include the impact of COVID-19 as well as any impact of the transition year while the UK-EU trade deal was being negotiated. In the year from October 2019 to September 2020, 52.7% of Scottish international exports of goods were to the EU, while 43.1% of Scottish international imports of goods came from the EU. The chart below sets out the sectors with the highest proportion of exports to the EU:
Source: HMRC regional trade statistics
Taken together, exports from these industries account for £13.1 billion, comprising 48.8% of Scottish goods international exports. There has already been considerable concern about the impact of the transition to the TCA on export of goods with a short shelf life, notably fish products. SPICe recently published a blog looking in detail at the impact of recent events on the seafood trade.
The sectors with the lowest proportion of international exports going to the EU were:
Source: HMRC regional trade statistics
Exports of services
HMRC regional trade data does not cover exports and imports of services. The most recent source of data for Scottish service exports is the 2018 Export Statistics publication from January 2020. International exports of services were worth a total of £12.1bn in 2018, and 41.7% (around £5bn) were to EU destinations, a lower proportion than goods exports.
Source: Scottish Government Export Statistics 2018
When will we have data on exports?
There will be considerable interest in understanding the impact that the end of the transition period has had on Scotland’s exports to and imports from the EU, However, this will be quite difficult to disentangle, as we can expect to see volatility in the Q1 2021 data for three reasons. The discovery of the new strain of COVID-19 in the UK in December led to countries taking measures to restrict the spread, which had a significant impact on the flow of trade between Dover and Calais. Another key challenge will be separating out the friction created by the initial move to the new customs regime versus the medium-term impact on the attractiveness of exporting to the EU under the new TCA, as well as unravelling the impact any stockpiling of goods ahead of the end of the transition might have had.
HMRC will publish data on UK overseas trade in goods for January 2021 on 12 March, and regional trade data for Q1 2021 will be published on 17 June 2021. This will be our first sight of data on imports and exports under the new TCA, although as noted above this only covers the import and export of goods. The Scottish Government ordinarily publish Export Statistics at the end of January, but the 2019 publication has been delayed. This is the most comprehensive dataset covering Scotland’s exports, but it is not the timeliest. The next publication will be for the full year of 2019 – 2021 data will not be available for a further two years.
Will any reduction in trade with the EU mean that the overall volume of trade reduces, or will EU markets be substituted for alternative international markets (or indeed the UK market)? The Scottish Government has an ambitious target to increase the volume of exports from Scotland compared to GDP to 25% by 2029. The COVID-19 pandemic will have already made this target far harder to achieve, so any reduction in trade with the EU due to increased trade barriers will make this harder still.
Andrew Feeney-Seale, Senior Researcher, Financial Scrutiny Unit