Analysis – Not oil but trade: the economic case for Scottish independence

EDINBURGH While the economic case for Scottish independence once centred on oil, people like company director Niall McLean now argue that trade is the way to ensure their country’s future prosperity – and avoid the damage of the United Kingdom leaving the EU.

Turning Scotland, which sells two thirds of its exports to the rest of Britain, into a heavyweight international trader would be tough. This is especially so because a dive in global oil prices since Scots voted on – and rejected – independence in 2014 has hit its economy hard.

With the Scottish National Party (SNP) which runs the devolved government pushing for a new referendum, opponents of dismantling the 300-year-old union say the economy can ill-afford another divisive campaign and its inherent uncertainty.

But McLean says uncertainty is a given anyway as the government in London prepares to negotiate Britain’s departure from the European Union after 44 years in the trading bloc.

“At the end of the uncertainty you have to think of where you want to be,” said McLean, who sits on the advisory board of Business for Scotland, a pro-independence group. “Independence gives us a route where the EU market is still open to us and there is a way forward for trade. Brexit is the opposite.”

His firm, Geo-Rope, provides civil engineering services across Britain and continental Europe. And just as McLean needs the bloc as a market, he also needs it as recruitment pool: his 200 staff include many citizens of other EU countries whose future right to work in Britain remains uncertain after Brexit.

Last June’s vote by Britons to quit the EU has altered the political landscape; England, the United Kingdom’s most populous nation, opted along with Wales to leave; the Scots and Northern Irish wanted to keep their EU membership.

Scotland’s First Minister and SNP leader Nicola Sturgeon says Brexit has dissolved the certainty that the United Kingdom once offered; faced with being taken out of the EU against the will of the majority, Scots must have a new choice, she argues. Independence offers them an opportunity to stay in the bloc, or at least its single market, after Britain exits.

British Prime Minister Theresa May, who would have to sign off on any binding referendum, has said now is “not the time” for one but Sturgeon is raising the pressure for a vote between the autumn of next year and spring of 2019.

MARKET, WHICH MARKET?

Campaigning for succession in 2014, the SNP argued that tax revenues from North Sea oil production which go to the UK exchequer should belong to an independent Scotland, providing a cushion of prosperity for its five million citizens.

In the end a majority did not see the sense of breaking with Scotland’s biggest trading partner and its currency, the pound. Since then, oil prices have dived from $100 a barrel to half that, leading to a collapse in North Sea tax revenues and hurting Scottish regions that service the offshore energy industry, notably around the east coast city of Aberdeen.

Nationalists and unionists both want expanded trade, but argue over which market should take priority.

With 8 percent of the UK population and annual economic output of 150 billion pounds, Scotland sells 50 billion pounds ($62 billion) in goods and services to the rest of Britain. In 2015, that amounted to 63 percent of Scottish exports, compared with just 16 percent to other EU member states, Scottish government figures show.

“If everyone in Scotland agrees that free trade with Europe is important – and we do – it is literally impossible to deny that trade with the rest of the UK matters four times as much,” Ruth Davidson, who leads May’s Conservatives in Scotland, said earlier this year. This opinion is shared by many in the divided business community.

Oil no longer dominates Scotland’s trade. In 2015 petroleum and chemicals were only the third biggest international export industry, earning 2.8 billion pounds. By contrast food and drink, including Scotch whisky exports, brought in 4.8 billion.

If another referendum is held, SNP projections will assume oil produces no tax revenues, its economic strategist has said.

As in most developed economies, services are by far the biggest sector, accounting for 75 percent of Scottish gross domestic product. Among these are tourism, a large financial industry centred on Edinburgh and firms like Geo-Rope.

The SNP denies independence would mean business turning its back on neighbouring British markets.

Scottish Economy Secretary Keith Brown has cited Canada, which sells 75 percent of its exports to the United States. “Are our opponents really saying that Canada cannot be independent because their largest trading partner is America?” he asked. “Of course not, because their argument is illogical nonsense.”

GATEWAY TO THE EU

Economists are divided over the long-term consequences of Brexit but Simon Wren-Lewis, Professor of Economic Policy at Oxford University, estimates it could cut average British incomes by 10 percent by 2030.

“If Scotland, by becoming independent, can avoid that fate then you have a clear long-term economic gain right there. But it is more than that. If Scotland can remain in the (EU) single market it could be the destination of the foreign investment that once came to the UK as a gateway into the EU,” he said.

The question of what currency an independent Scotland would use remains open. In 2014 the SNP proposed keeping the pound despite the implied dependence on the Bank of England and the British authorities’ rejection of the idea.

Sturgeon has said using sterling is a “starting point” for an independent Scotland. Former Bank of England governor Mervyn King has said he does not think using the pound would be a major complication, but he pointed to another – public finances.

NO ISSUE WITH BORDERS

Before 2014, Scotland’s economy grew for a few years in line with broader British GDP but this changed after oil fell that year. In the third quarter of 2016, Scottish GDP rose just 0.7 percent year-on-year compared with 2.2 percent for Britain.

Scotland ran a estimated 15 billion pound fiscal deficit in the year to March 2016, equal to around 10 percent of its annual GDP. EU states are supposed to limit their deficits to 3 percent; the UK figure was 3.8 percent.

David Eiser, a fellow at economic thinktank Fraser of Allander Institute and an adviser to the Scottish parliament, said tough questions would face an independent Scotland.

“How do you fill what is a very large gap? Are there types of economic activity that aren’t being taxed at the moment, such as in the digital economy … and where do you cut chunks of public spending?” he asked.

Businesses are keen to keep free movement of EU labour which has helped redress an ageing and shrinking population. About 181,000 citizens of other EU states live in Scotland, around 3.4 percent of the population. A third work in hotels and restaurants and around 20,000 in the 14 billion pound food and drink sector, much of which is in outlying areas.

Tom Barrie runs a transport and logistics firm employing around 450 drivers from Britain, France and the Netherlands. “If we don’t have free movement of trade and free movement of labour, that will damage my business,” said Barrie, who supports independence and wants Scotland to keep the pound.

Barrie is confident that, post-independence, a deal could be struck with London avoiding trade barriers, citing the example of the open frontier between British Northern Ireland and the Irish Republic, which uses the euro. “In Ireland they have two currencies and one country and don’t have a border. I’m a frequent visitor and it has no detrimental effect to life there.”

($1 = 0.8081 pounds)

(editing by David Stamp)