Category: Trade

Hard choices

The SNP should debate whether a separate Scotland should join the EU post-Brexit. But all their options are bad

We often forget the SNP campaigned against the Common Market in 1975. But ‘Independence in Europe’ has been an SNP rallying cry for quite some time now. The European Union creates an unusually benign home for small states. To the SNP, the EU also promised continued economic integration with the United Kingdom after secession. The SNP claim that Scotland could carry on in the EU automatically was almost certainly spurious, but that didn’t stop them.

Brexit changes that. It makes the SNP’s political case more appealing, but its practical case harder. It creates sharper dilemmas for a separate Scotland. So it makes sense that some in SNP ranks are raising the question of Scotland’s future EU relationship. Most still back EU membership, including Nicola Sturgeon herself. Some look to the European Economic Area — the so-called Norway model. Are there any good options?

A hard border in Great Britain?

Many Scottish nationalists use Northern Ireland as Brexit grievance fodder. It’s an ugly gambit: Scotland is a country which voted to stay in the UK very recently, not a post-conflict region with a contested land border. Nonetheless, Theresa May’s backstop and Boris Johnson’s frontstop for Northern Ireland show what you need to keep a border open.

Scotland wouldn’t just need to align with the UK on customs and rules of origin. Not joining the Schengen Agreement would avoid checks on people, but still wouldn’t suffice. Scotland would need to align on goods, VAT and sanitary and phytosanitary standards (SPS) too. Joining the EU prevents that, unless the UK aligns with the EU or the EU exempts Scotland from some EU rules.

In the EEA but outside the EU, Schengen, VAT and the EU Customs Union wouldn’t pose an obstacle. But goods regulation remains, as does SPS: EEA members don’t have free trade in agriculture, but apply plenty of EU food safety rules. And being outside the EU Customs Union doesn’t avoid the need for customs checks and rules of origin between Scotland and the UK. And a customs union with the UK is hard to square with joining the European Free Trade Association — required for a non-EU EEA member.

Liechtenstein manages, but Scotland is not a microstate

Granted, one EEA member has an open border with a non-EEA neighbour. Liechtenstein has had a customs union with Switzerland since 1923. It also applies Swiss VAT law. They planned to join the EEA together, but the Swiss rejected joining in a referendum. Switzerland pursued bilateral agreements with the EU instead.

This delayed Liechtenstein’s EEA entry until 1995, but it managed in the end. Both Swiss and EEA goods circulate via so-called ‘parallel marketability’. The authorities monitor goods ‘in the market’ to keep EEA-only products out of Switzerland. Where EEA goods attract tariffs in Switzerland but not Liechtenstein, Swiss customs reimburses importers to Liechtenstein. (This isn’t too far from the plans for Northern Ireland.)

This is much easier for Liechtenstein than it could ever be for Scotland. Switzerland aligns with the EEA for most goods and applies EU SPS rules. It’s in EFTA, along with Norway, Iceland and Liechtenstein. All but Switzerland joined the EEA, reducing the scope for friction due to other trade deals. Furthermore, Liechtenstein is tiny — and so permitted to be anomalous.

Scotland, by contrast, would have the EEA’s largest EFTA population. The UK plans to diverge from EU norms far more than Switzerland. We don’t know how its new trade deals will go, but it shows no interest in joining EFTA. Switzerland has a long history of cooperation with its small, sovereign neighbour. The UK would be asked to help Scotland carve a niche to advantage it against itself.

Cake from London, Brussels, Oslo, Reykjavik and Vaduz? No chance

Only EU membership could grant Scotland a proper vote on EU rules. Overall, though, being a giant Liechtenstein might well be better for an independent Scotland than EU membership. But it’s not going to happen. Neither EU nor EFTA countries will cut corners to keep the Scotland-UK border open. Doing so would mean 49% of the EEA’s non-EU population lived in an anomaly next door to a far trickier neighbour than Switzerland.

Yes, the EU bent some rules for Northern Ireland. Scotland will not get the same offer. It was required for Northern Ireland because Ireland, a continuing EU member, had a vital national interest at stake. Perhaps excepting a Schengen opt-out to preserve the Common Travel Area, Ireland has no such interest in helping Scotland.

Nor would the UK have much interest. It wants to be able to diverge from the EU. It will want to secure the integrity of its regulatory order. And Scotland would be an important trading partner, but not as important as the EU. The UK left the EU to avoid pooling sovereignty: it wouldn’t re-pool it with Scotland for much less economic gain. Any deal would mean Scottish rule-taking and UK decision-making.

Breaking up is hard to do

So Scottish secession means a hard Border unless Brexit softens or the UK rejoins the EU. Joining the EEA would allow fewer barriers with the UK in some areas (eg agricultural tariffs) if the UK agreed. Nonetheless, EEA membership would remain a choice to dealign from the UK.

Still, the scale of Scotland’s UK trade means even this flawed compromise might beat EU membership on economics. A separate Scotland would have two main trading partners: the UK and the EU. But those two partners are far from equal: UK trade dominates.

Data from the Scottish Government. Figures do not add to 100% due to rounding. Flag images from Wikipedia.

For now, Scotland sells to the rest of the UK within a far more integrated market too. There’s a reason the Commission keeps battling to complete the single market. From digital services to hairdressing, from the limits of EU mutual recognition to the UK monetary and fiscal union, sharing a state goes much deeper than joining the EU.

For both reasons, the shock of leaving the British home market — whether for the EU, the EEA or neither — would dwarf leaving the single market. This matters. UK fiscal transfers are crucial, but not the biggest economic question about Scottish secession. The bigger question is: how far would growth exceed or fall short of growth within the Union?

Nationalists make heroic assumptions here, cherrypicking small states and copying countries whose growth isn’t higher than the UK’s. Above all, they don’t factor in the true cost of their political project.

Secession will hurt. So tell Scots what you think they’re paying for

The economic arguments against Brexit apply in spades to breaking up Britain. Scotland’s biggest economic interest lies in its home market with most of its trade. Economic gravity, crucial in Europe according to the SNP (and they’re right), still applies within the UK. If Scotland secedes, the closest possible alignment with the UK would be its least damaging option.

But such close alignment with the UK isn’t realistic. It can’t be: the point of Scottish secession is rejecting the neighbours. Shared EU membership could have cushioned that shift, but not now. Unsure voters will back major pain for radical change, the SNP still wants to sell separation as safer than the Union. But that’s a worse lie than anything from Vote Leave. And the SNP leadership are far too intelligent not to know it.

Breaking up Britain is a far bigger leap of faith than Brexit. It would pull Scotland away from its main market and closest neighbours and the people with whom it shares most. Its rationale is ideological and nationalist, not practical or economic. The least the SNP could do is own its costs.

This post was originally published on Medium.com on 10 February 2020.

Sentiments and statistics: why CANZUK won’t fly

The idea that the United Kingdom should try and rebuild closer ties with Canada, Australia and New Zealand raises its head from time to time. Obviously we’re close friends, with ties of history, language and culture, and there’s nothing wrong with reinforcing old friendships.

But thanks to Brexit, we’re hearing a bit more about this kind of thing than usual — with a focus on some kind of economic and geopolitical partnership. So is there a business case for CANZUK as a primary relationship for any of these four countries? Let’s look at where our potential partners currently sell goods and services.

Data: World Bank statistics (I grouped CANZUK, EU-27 and GCC figures myself)

In the United Kingdom, nearly half of our exports go to the rest of the EU. When you add EFTA members in, a majority goes to countries in or partly in the single market. By far our largest non-European partner is the United States. China and the Gulf Co-operation Council states both come in ahead of CANZUK. You might try and argue that we’ve had a lot of trade diversion to the rest of Europe. But even if you doubled our trade with Canada, Australia and New Zealand, it’s never going to be anywhere near enough to make up. We are a Euro-Atlantic economy.

Data: World Bank statistics (I grouped CANZUK, EU-27 and GCC figures myself)

In Canada’s case, it’s quite obvious that nothing and no-one could match the scale of US trade. It’s next door, it’s huge and it’s economically fairly integrated. Again, China and the EU-27 both come in ahead of CANZUK. Again, there’s no way CANZUK could even come close to matching trade with the neighbours.

Data: World Bank statistics (I grouped CANZUK, EU-27 and GCC figures myself)

A clear majority of Australia’s exports go to east Asia, with the developed English-speaking world clocking in at about 10%. CANZUK would theoretically be the fourth-largest destination for exports, but over half of them go to New Zealand. (Let’s also note that Australia and New Zealand already have a free trade agreement.) Australia trades mostly with its neighbours and within its geographical region.

Data: World Bank statistics (I grouped CANZUK, EU-27 and GCC figures myself)

New Zealand is the only CANZUK country where CANZUK would be the top recipient of exports (or even in the top three). But that’s overwhelmingly down to Australia, where 17% of New Zealand’s exports go. The UK makes up 3.4%. (Incidentally, the EU-27 accounts for about twice that.) Again, New Zealand is mainly an Asia-Pacific economy.

So all four of our prospective partners show the usual truth in trade: countries tend to sell to their neighbours. The UK, Canada, Australia and New Zealand are already mature, developed economies, so any idea that their vast growth potential could make up for diversion from elsewhere doesn’t stack up. There is no sensible case for CANZUK as a main economic bloc for any of its members.

But CANZUK has been sold as a geopolitical partnership, not just (or even mainly) an economic one. Do the defence and security arguments stack up any better? Clearly the four countries spend a large amount on defence between them — over $96 billion, though nearly 60% of that is spent by the UK. We have served together in many conflicts. Australia and New Zealand are committed to each other through ANZUS. Canada and the UK are allied through NATO.

But again, look at members’ defence strategies. The four countries share two main things: a predominant focus on their own regions and a critical dependence on the US. Our most important joint defence endeavour is the Five Eyes, where the US is the most powerful member. Only the UK even aspires to have a global reach in its own right. Our Strategic Defence and Security Review cited our military and intelligence’s ability to ‘project our power globally, and … fight and work alongside our close allies, including the US and France, to deter or defeat our adversaries.’ Note the US and France are the two main allies cited. It is abundantly clear that the UK’s main defence commitment lies in NATO.

Australia’s Defence White Paper from last year is clear. Its priority is to ensure an independent ability ‘to defend Australia and protect our interests in our immediate region,’ and then to ‘enhance Australia’s ability to contribute to global coalition operations.’ Its two principal allies are the United States and New Zealand. Canada’s key roles are ‘defending Canada,’ ‘defending North America — in partnership with the United States’ and then ‘contributing to international peace and security.’ New Zealand’s focus includes the need to ‘defend New Zealand’s sovereign territory’, ‘meet New Zealand’s commitment as an ally of Australia’ and ‘contribute to, and where necessary lead, operations in the South Pacific’.

Granted, the UK, Australia, New Zealand, Malaysia and Singapore have one joint security commitment. They have agreed to consult on responding to a threat to the latter two countries. But the Five Power Defence Arrangements aren’t a collective security agreement. They stem from a UK withdrawal from commitments east of Suez in 1968–71, not a willingness to take on new ones.

The FPDAs are generally agreed to contribute to security. But does anyone believe the UK and Canada could possibly defend states in the Pacific in an existential crisis without the US? Would Australia and New Zealand be in a position to assist in Europe if the roles were reversed? That may be a remote prospect, but a true collective security commitment requires the answer to be ‘yes’. I don’t think anyone actually believes that would be the answer without the Americans. So what, meaningfully, are we going to do together in the field of security and defence on our own?

There’s no decent case for making an economic priority of CANZUK. There’s no real defence or security case for it either. We’re all liberal democracies with similar positions on global issues, but we can already co-ordinate our foreign policy as and when we want. No doubt we could bring in freedom of movement between our countries if we particularly wanted, though it’s hard to see that as practically transformative. But in the end, this is about sentiment.

If ever the UK needed to be frank about its role in the world, the time is now. Brexit is going to be damaging anyway: if we get it wrong, it could be catastrophic. Our priorities are to minimise the damage to our relations with our nearest neighbours, try to keep the transatlantic alliance in one piece and develop economic ties where they will do most good.

Whether we’re ‘more like’ continental Europe or mainly-anglophone-developed-democracies-but-not-the-US is subjective and highly politicised. Much of the argument boils down to rival sentiments. But our trading patterns, principal threats and security priorities aren’t sentimental. And an economic, foreign or defence policy governed by sentiment would be doomed to failure.

This post was originally published on Medium.com on 8 April 2017.