Scotland in the Single Market, rUK Out – What Would It Take?

Kirsty Hughes

In-Depth Analysis

If Scotland is to remain in the Single Market while the rest of the UK leaves it, substantial political and technical challenges would need to be overcome, writes Kirsty Hughes. She outlines the key questions facing Scotland’s continued participation in the Single Market and argues that, until the UK’s full post-Brexit relationship with the EU is known, it is difficult to assess how Scotland would be affected by these options.

Scotland in the Single Market, rUK Out – What Would It Take?
Welcome to Scotland, Chris Merlo, CC-BY-NC-ND-2.0

Nicola Sturgeon has set out a clear demand that Scotland should stay in the EU’s single market, even if the rest of the UK (rUK) leaves, as part of the UK’s Brexit deal with the EU. Sturgeon has yet to set out the details of how she thinks this could happen, but the big questions are already clear.

In essence, there are two main questions to be answered as to whether this could happen: is it politically likely and possible, and is it technically possible? There is then a key follow-up question, if it were possible politically and technically: would it actually be a good idea?

Politics of Brexit

For Scotland to stay in the EU’s single market, as part of the final Brexit deal, then both the UK government and the EU would have to agree to this.

Theresa May looks very unlikely to agree. She can either say a blunt ‘no’, as she effectively did in her Conservative Party conference speech or she can respond that the UK is looking for maximum access to the single market, so Scotland should contribute to that aim – effectively, a ‘wait and see’ response.

The wait and see option is not a good one for the Scottish government, as the two years of talks under Article 50, expected to start early next year, will set the basic exit terms rather than complete an overall comprehensive trade deal between the UK and EU – which would take several years. So the UK is likely to have been out of the EU for several years before its final terms of access to the single market are clear – unless the UK simply goes for an ultra-hard Brexit, basing its trade on WTO rules.

And there is no guarantee, nor is it very likely, that any transition arrangement – if there is one – between the first exit deal in 2019 and the final overarching deal would keep the UK entirely in the single market in the meantime.

Whether the EU27 leaders – and the European Parliament and Commission – would be sympathetic to Scotland’s aim is hard to say at this point. Opinion in the EU is clearly more positive now to the possibility of Scotland being an EU member state if it chose independence. But that does not automatically translate to sympathy for Scotland leaving the EU with rUK but staying in the single market.

The UK-EU talks are set to be complex and difficult, including dealing with the Ireland/Northern Ireland border issues (which don’t simply translate into an equivalent deal for Scotland within the UK). A more complex deal involving Scotland, as a sub-state, staying within the single market may or may not be welcome.

What is clear is that unless the UK government includes Scotland’s demands in its talks with Brussels, the EU27 will not consider such differentiation. The EU cannot negotiate over the head of any of its member state governments with a sub-state.

The demand from the Scottish government is also a weakening or stepping back from Nicola Sturgeon’s five points that she set out in late July, insisting that Scotland should keep a voice and influence in the EU, and be involved in big issues such as climate change – criteria that would be hard to meet without being a full EU member state.

Technical Challenges Abound

Scotland staying in the EU’s single market, while outside the EU and inside the UK, is essentially applying the Norway model to Scotland but as a sub-state. It raises numerous technical challenges – similar to those Ireland faces in keeping an open border with Northern Ireland, except that Scotland could choose, as we discuss here, to be outside the EU’s customs union with the rest of the UK, while the Republic of Ireland as an EU member state has to remain within it.

Trade, Borders and Customs

If Scotland and rUK, like Norway, were outside the EU’s customs union, then they would have free trade (no tariffs) between them (ie within the UK), but face some tariffs from the EU (depending on the Brexit deal).

But if Scotland was fully in the EU’s single market – respecting all four freedoms of goods, services, people and capital – and rUK was not, then Scotland and rUK would not relate to the EU’s markets in the same way. Scotland would be inside without tariff or non-tariff barriers (though not for fisheries and agriculture, which are outside the single market and so may face tariffs there as Norway does), while rUK would have a more complicated relationship.

Norway is in the single market but not in the customs union, so it has to meet complex rules of origin requirements, to show it is not simply being used by third countries to gain tariff-free access to the single market. So Scotland too would have to meet EU rules of origin requirements for exports to the EU. Scotland, being in the single market, would need to apply these rules of origin to rUK products in making its customs declaration for EU exports.

How complex this might be, and whether it might result in controls at the England-Scotland border, is unclear since we don’t know the degree of access rUK will eventually have to different sectors of the EU’s single market. If free trade continues between rUK and Scotland (as both are outside the customs union in this scenario), then Scottish businesses would need to keep track of rUK content (and other non-EU countries’ inputs) in its products and services for export to the EU, and customs officials would need to be able to check this was happening.

This would be cumbersome and would need checking before Scottish products entered the rest of the EU, but may not require an England-Scotland border.

If, as is likely, rUK faces some tariff barriers for some products and services it exports to the EU, then Scottish products exported to the rest of the EU, which contained rUK inputs, would have to pay the appropriate tariff for the rUK content (again as Norway has to).

In its rUK-EU deal, rUK is likely to face not only some tariff barriers but, crucially, non-tariff barriers – one example of this being the already much discussed financial services ‘passporting’ that allows the provision of different financial services across the EU.

If rUK no longer had passporting but Scotland did, then while that may confer some benefits on Scotland (in retaining and attracting financial services business) it would also fracture the current financial services market across the UK as a whole, with more negative implications. The more rUK faces non-tariff barriers in single market sectors – which Scotland would not – then the more divisions will appear in the pan-UK market.

This also raises questions about the UK’s trade policy. If Scotland is in the single market, then that is, in effect, its post-Brexit trade deal with the EU, while rUK will probably have a different, Canada-plus style deal. Will the UK government then still negotiate UK-wide trade deals with third countries? Presumably so – and these will be more complicated given the differentiation within the UK.

A Lot More Devolution

If Scotland was in the single market, while rUK was not, then Scotland would need, like Norway, to implement all relevant EU directives and regulations into Scottish law – respecting all the four freedoms.

This would mean Scotland having powers to implement EU rules ranging from employment and social policy to product and professional standards, health and safety, consumer protection and migration. There would also be flanking policies including competition and state aids – and potentially a range of other areas for cooperation from research to enterprise to culture. This may suggest an eventual substantial divergence between Scotland and rUK in laws and standards.

If immigration policy is devolved to Scotland, at least in terms of powers to allow free movement between EU member states and Scotland, then the question arises as to whether that would require border controls between England and Scotland (the question will definitely arise for the Ireland/Northern Ireland border).

If EU nationals are still allowed visa-free entry into the UK as a whole for tourism, business visits, etc, then it is reasonable to assume that checks at the external border of the Common Travel Area could suffice, while any rUK work permit system for EU nationals would then be checked at the work place, not at the border. But would the UK government agree to such an approach? Politically, it could be very unpopular with Conservative MPs and voters.

Meanwhile some change in UK passports would be needed so that those residing in Scotland could show they had the right of free movement to the EU27 – or else some additional form of identity or residence card. This could be controversial – for instance, those born in Scotland but residing in rUK would not be eligible for free movement.

Pay But No Say – And Who Judges?

If this complex technical and political process actually went ahead, Scotland – like Norway – would have to contribute to the EU budget. It is highly unlikely that its contributions would benefit from a share of the current UK budget rebate (much disliked by the EU27 and retained only due to the UK’s veto, as an EU member state).

Scotland would also have no vote or real influence over any of the EU’s single market laws and directives, so it would have to lobby as an outsider over any new EU decisions that went against its interests. The need for voice and influence was among Sturgeon’s key five points to ensure Scotland’s interests in the EU – but, as Norway has found, the EEA results in a democratic deficit in terms of the need to follow EU rules without any vote or real voice in their development.

Norway’s adherence to single market rules is overseen by the EFTA court – which takes account of EU court rulings. What court would oversee Scotland’s adherence to those rules, given Scotland would still be a sub-state? There would need to be some equivalent to the EFTA court for Scotland and the EU (a complication the EU may not be happy about) and how this could be established for a sub-state would need to be answered.

Any future UK-EU deal may also need some joint adjudicatory body to look at regulatory convergence – but such a body would have a different remit to one needed to monitor Scotland’s adherence to EU single market rules.

How Would It Impact on Scotland-rUK Links?

Apart from the questions around potential checks on goods, services, capital and people raised above, the other key question is whether such a differentiation would be damaging to Scotland’s economic integration with rUK – currently much greater than its EU trade.

It is hard to answer this question without knowing the final comprehensive deal the UK will strike with the EU. If the UK has full access to the EU’s single market in goods, and substantial access in services but with limits in some sectors such as financial services, then the impact will be less than if the UK ends up trading on WTO rules.

If rUK has less access to EU financial services than now, Scotland might – in the single market – pick up some of this business (though much of it will go elsewhere), but at the same time the Scotland-rUK integrated financial services market would be fractured. Costs and benefits of that scenario would need to be analysed.

If the UK didn’t revert to WTO rules, but negotiated over several years a Canada-style deal but more comprehensive (since the Canada-EU trade deal barely touches on services), then there would be sector-by-sector agreements between the UK and EU. Until these are known, the extent to which the overall deal will create barriers or frictions in Scotland-rUK trade is quite unclear, and so the costs and benefits cannot be estimated with any degree of precision.

Choices Ahead

A ‘hard’ Brexit looks likely to be damaging for the overall UK economy. But protection for Scotland from this through staying in the EU’s single market, while still in the UK, looks tricky. It would also mean Scotland being outside EU fisheries and agricultural policies, outside EU foreign policies, including global climate change deals.

Politically, the UK government would need to agree to Scotland remaining in the EU’s single market while rUK did not – and is unlikely to. And if Theresa May did agree to this, then the EU would need to agree it too – and it might not. It is also clear that the EU would not negotiate this option at all without UK government agreement that it was on the negotiating table.

Technically, Scotland staying in the single market is complex, would require substantially more devolution, and is likely to create at least some barriers, frictions and fractures in the UK’s internal market. The potential costs and benefits of this are unclear while the likely final UK-EU deal remains unknown.

And while Scotland could benefit in many ways from retaining its full access to the single market, it will, like Norway, have no real say or vote in future EU rules and regulations, and will need to make a budget contribution.

Nicola Sturgeon has raised a very challenging demand – technically and politically – and one that the Scottish Parliament agreed was important after the Brexit vote at the end of June. Whether May will consider it at all, we may soon find out. Its overall implications for Scotland need much more in-depth consideration. But the political and technical complexity of the proposal does raise the obvious question as to whether such a move is easier or more desirable, even in the short term, than full independence in the EU.

This article is co-published with the Centre on Constitutional Change.

Tobias LockKirsty Hughes
Friends of Europe

Dr Kirsty Hughes is Senior Fellow at Friends of Europe, Brussels and a writer and commentator on European and international politics and policy. She has worked for organisations including Chatham House, the Centre for European Policy Studies, Oxfam GB and the European Commission.

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