A customs border between an independent Scotland and a “New UK”, or a customs union?

This is the first of two blogs examining links which might be agreed between a hypothetical independent Scotland and the “New UK” which emerged from secession, if both countries wanted to avoid the disruption of a customs border, and to ensure continuity of defence arrangements and financial stability. The only way to avoid a customs border would be for the two countries to enter into a customs union. This blog explains how such a customs union might work, and how it could give Scotland more say in negotiating international trade agreements than if it (re)joined the EU. This analysis  was first published by think-tank UK in a changing Europe.

The independence promised to Scots by the SNP in any forthcoming second referendum would involve EU Membership and a new Scottish currency. On this prospectus (or indeed any other, such as EFTA membership), an independent Scotland would mean a customs border with the “New UK” (NUK) which emerged from secession. The SNP’s protestations to the contrary are a variety of what EU Brexit negotiator Michel Barnier once described as “magical thinking”.

For an independent Scotland, rejoining the EU single market, which in 2018 took less than 19% of Scottish exports, would mean leaving the UK single market, which in the same year took 60% of Scottish exports, amounting to 30% of Scottish GDP. The disruptive effects of a customs border impacting such a high proportion of Scottish exports could not be economically beneficial to Scotland. For the rest of the UK, the disruptive effects of a customs border would impact relatively less trade, but could still be significant - exports to Scotland have been estimated at 3.5% of the GDP of the rest of the UK.

Experience with the quasi customs border between Northern Ireland and the rest of the UK shows that such a border would be no notional white paint line on the landscape – it would impose new customs, origin and health checks, and new paperwork and other non-tariff barriers on exports from Scotland to the NUK, and vice versa.

But a customs border would not be inevitable if an independent Scotland, instead of seeking EU membership, entered into a customs union with the NUK – its largest export market. There would also have to be agreement on health and related standards for animals and for food products, but there need be no harmonisation, on the EU pattern, since mutual recognition of standards agreed to be equivalent would suffice.

The customs border problem would be solved.

A customs union in which Scotland simply agreed to apply tariffs applied by the NUK or agreed by the NUK with foreign countries would not guarantee that Scottish exporters could in turn enjoy the benefit of tariff and quota free trade when they exported to those countries. For that to happen, Scotland would have to become a party to existing NUK trade agreements with such countries, and be a party to future trade agreements made between the NUK and other countries.

That could be arranged by a pact in which the NUK and Scotland agreed to act jointly in seeking continued participation by Scotland in all the NUK’s existing trade agreements, and in negotiating future trade agreements. Just to be clear about it, as regards past and future trade agreements, both independent Scotland and the NUK would be parties on the one side, and the relevant third country – Australia or India say – would be the party on the other side.

Securing the participation of Scotland in the NUK’s existing trade agreements would be uncontroversial vis-à-vis the third countries concerned, since it would represent a continuation of the status quo. Scotland would thus retain the benefit of all the EU’s trade agreements negotiated prior to Brexit, because the UK has rolled over every one of those agreements.

A more difficult issue would arise as regards the negotiation of future trade agreements by Scotland alongside the NUK. Scotland would not want to participate in trade negotiations with third countries in which its participation was merely symbolic, and the NUK made all the decisions.

By way of a reality check, it should be pointed out that if Scotland (re)joined the EU, Scotland would not influence the course of EU trade negotiations with third countries. Scotland would have a voice in the Council and the European Parliament, but it would be a very small voice indeed. Taking Slovakia as a comparator, Scotland would have less than 2% of the votes in the Council and the European Parliament.    

A pact between an independent Scotland and the NUK on jointly negotiated trade agreements with third countries could offer considerably more to Scotland than that.

The first stage would involve agreeing a negotiating mandate covering the aims of the forthcoming negotiations. Not all the elements of what Scotland and the NUK agreed would be disclosed, in the mandate or otherwise, but the process of agreeing a mandate would be an important political preliminary to joint trade negotiations with a third country.

As regards negotiations, the NUK and Scotland would pledge best endeavours to reach consensus between themselves on all positions, and would adopt an internal mediation mechanism to facilitate this. NUK would take the lead on most issues (reflecting its share of the total market on offer), but there could be a list both of reserved issues, and of sensitive products, agreed by Scotland and the NUK in advance.

For reserved issues (say, fishing opportunities) Scottish consent to agreement with a third country would be necessary. For sensitive products, Scotland could qualify tariff-free access to the Scottish market through a retail sales tax. This would provide a surrogate Scottish tariff (imperfect but serviceable) on certain imports, without interfering with the Scotland/NUK customs union. The rate of the tax would be negotiated by one of Scotland’s negotiators, as would any balancing tariff to be applied by the third country concerned on any Scottish exports.

Needless to say, the fewer reserved issues, and the fewer sensitive products the better. In practice, it is likely that there would be few, and that Scotland and the NUK would have a strong common interest in reaching free trade agreements which would abolish tariffs and quotas on trade in goods, and reduce or remove regulatory barriers to the export of services. Both the NUK and Scotland would be major exporters of services.

A second referendum on Scottish independence is unlikely to be held soon, but nor can it be forever postponed. In the interim, the policy of the UK Government could either make the prospects of a customs union between an independent Scotland and a NUK at least a possibility, or downright unthinkable. What would make a customs union unthinkable would be the negotiation by the UK of trade agreements which were perceived in Scotland as damaging to the Scottish economy.

There may never be the right political moment for an independent Scotland or a NUK to seek to form a customs union. But if the moment ever does arise, it would be as well to be prepared for it – on both sides of the border.

By Professor Derrick Wyatt, QC, Emeritus Professor of Law, University of Oxford, former barrister specialising in litigation before the EU Courts, and Member of the International Academic Council of Fundacion Fide, an independent and non-partisan Spanish think-tank.