Future economic debates on Scottish independence will likely feature Scotland’s future trading relationships with its current export markets. The debate about Brexit has shown the importance of maintaining trading relationships for future economic prospects – and the consequences of any disruption to these trade flows.

The impact that the exit from the EU transition period has had on Scottish exports is, of course, difficult to disentangle from the effects of the coronavirus pandemic, which severely disrupted global trade flows. However, there is no doubt that the road has been bumpy as exporters transition to the new arrangements.

The fact that the UK is outwith the EU is one of the main differences in the economic battleground in any future referendum campaign compared to 2014. In 2014, the “No” side promoted EU membership as part of the UK as a crucial part of the case for remaining in the union, as opposed to the relative uncertainty, as they saw it, of an independent Scotland becoming part of the EU. 

A future independent Scotland would have to choose to become part of the EU, with all the difficulties that may come from sharing a land border with a country outside the EU, or remain outside the EU to be more in line with the remaining part of the UK. Practically speaking, this decision could significantly impact the volume and nature of Scotland’s trade.

So, what is the current nature of Scotland’s export activity, and how important are different markets?

The latest data with the detail of Scottish exports is from 2019: so it gives details of the pre-Brexit trading situation. This data allows us to see the export flows to three different markets of interest – exports to the rest of the UK, exports to the EU, and exports to the non-EU rest of the world.

In 2019, Scotland’s exports totalled £87 billion. Around 60 per cent was trade to the rest of the UK, 19% to the EU, and 21% to the rest of the world. So, in other words, trade with the rest of the UK is three times the size of the flows to the EU. In recent years, these percentages have remained pretty stable.

The top EU destinations are France, the Netherlands and Germany. However, aside from the rest of the UK, the largest single-country destination is the USA: this accounts for £6bn of trade in the most recent year, or around a third of non-EU international exports.

Therefore, above and beyond considering EU membership, trading relationships with the USA will also be of great importance to an independent Scotland. We have seen in recent years the impact that broader geopolitical tensions can have upon key Scottish exports, such as the tariffs that were placed on Scotch whisky, seriously limiting the exports of this critical Scottish good during that dispute.

Apart from whisky, what are we trading to these different markets?

It is natural to think of goods that can be put on trucks and container ships and physically cross borders when we think of trade. However, trade in services has been steadily increasing in importance over the last two decades.

Services now make up 75% of the Scottish economy, compared to 11% for manufacturing. “Services” as a catch-all term covers a vast range of activities, including retail, hospitality, truck drivers, IT professionals, architects, lawyers, accountants, NHS workers, hairdressers, cleaners, bankers, public sector workers, landscapers, engineers… to name just a few!

The nature of these services has meant two things concerning trade. Despite their prevalence in the economy, they are more likely to be delivered to the customer where “produced”. Secondly, even if they are sold to customers abroad, as is becoming more common, it can be more challenging to measure them due to their intangible nature. These measurement challenges mean that the understanding of services trade internationally is much poorer than that of physical goods. 

Services trade is also different to goods in that it is not subject to many of the same taxes as goods – there are no tariffs applied to services or restrictions on rules of origin. The restrictions on services tend to be practical, cultural, and regulatory or legal differences across borders.

The trend of increasing services exports can be seen clearly in the Scottish data: going from around a quarter of international exports in 2002 to almost two-fifths in the latest data. Trade with the rest of the UK has always been much more services-based (56% in the latest year). 

This is due to several factors to do with the much greater integration of the Scottish economy into the rest of the UK, the prevalence of large companies across GB, and common regulatory frameworks, such as on finance and banking. This contrast is shown by the differential nature of the types of services traded with the EU versus the rest of the UK.

The most significant element of services trade with the rest of the UK is financial and insurance activities, making up almost a third of this type of trade. In contrast, this makes up only 18% of international trade. The next largest sector for rUK trade is wholesale and retail at 23%, reflecting the integrated nature of supply chains across the UK. This compares to 14% for international exports.

The dominant sector for international services exports is professional, scientific and technical services (27%). This sector includes engineers, lawyers, architects, accountants, auditors and the like. Many of these professions, particularly in engineering, are likely to be selling expertise that has been prevalent in the oil and gas supply chain. In contrast, this makes up only 14% of trade in services to the rest of the UK.

This data sets the scene for a fascinating debate about Scotland’s trading future, whether as part of the UK or as an independent country. Any future economic case for independence will need to propose how different trading relationships will contribute to Scotland’s future prosperity. In doing so, it will be essential to recognise that services trading flows with the rest of the UK may be very different in nature to those with the EU and the rest of the world.

Mairi Spowage is director of the Fraser of Allander Institute.