Monday, 15 May 2017

Scotland In EEA

Way back in the mists of time I wrote a blog post about the expected challenges an independent Scotland would face in trying to juggle trade with a post-Brexit rUK and a relationship with the EU 27.  I had intended to quickly follow it up with an exploration of the other options available to an independent Scotland and a discussion of all the pros and cons.  What happened instead is that I got dragged in to the annual work hell of preparing a tech demo out of thin air with a vague set of requirements that change on an hourly basis. Needless to say, that follow-up blog post never happened. I know there's an election going on and this might not be the most relevant topic I could choose right now but if I don't get this blog post out there it will fester in my list of half-written articles until it rots away to form a kind of digital manure.   Ok, I know it's all digital manure but, honestly, you should see the ones that don't make it to publication.


I'll just summarise the biggest challenge facing an independent Scotland to save everyone casting their memories back to the hopeful days of early spring.  The biggest challenge is that a post-Brexit EU can finally get on with the implementation of a multi-speed Europe.  They'll be able to do this because the UK will no longer be around to veto every single proposal for change.  The fear for countries that opt not to participate in deeper EU integration is that they get left behind and find themselves caught helplessly in the slipstream of the countries at the core of the EU.  Scotland could easily decide to participate in any or even all of the proposals for deeper integration.  The real problem it faces is that rUK will be diverging from the EU in almost every way possible from trade to social policy.  We need to remember that England will still be right there, just a little to the south and quite far to the right.  The border will still be there, too.  People will want to cross that border with their dreams and thoughts; with their business ideas; to meet and marry sex robots loved ones; with lorries full of gin and whisky; with poems and songs and paintings and witty anecdotes. The competing forces of EU and rUK will be felt most keenly at the border but anything crossing that border, be it data or a pension payment or an educational certificate, will be similarly affected.  The simple truth is that England will always be a key trading partner and adding friction to that trade would be a costly mistake.   What are the options?

There aren't actually all that many options that don't involve joining the EU and participating in whatever Scotland decides is to its advantage.  That might, of course, turn out to be a great option,  a terrific option,  the best option, a truly bigly option.  I'm not advocating not going down that route but there be dragons along there and other routes are available.  One other path for an independent Scotland is to charge along towards a full-on McBrexit.  That is not a serious choice and I invite readers to read anything I've ever written here to see why I think it should never be mentioned again.  What's left?  Scotland could follow Switzerland's template and negotiate a complex and inter-twined set of treaties.  That is also not a serious choice because the EU would never agree to that and it took Switzerland over 20 years to get to where they are today.  The very last credible choice is for Scotland to follow Norway's template and join the EEA but leave the European Customs Union.  This shouldn't be a surprise because I gave the game away in the title.  I did think about leaving everyone hanging on tenterhooks for a big reveal but it was devilishly hard to disguise the bleedin' obvious.

What are the advantages of joining the EEA only?  Well, the first one is that Scotland remains in the much-fabled Single Market.  Scotland's trading relationship with the EU 27 and the EFTA 3 (Norway, Liechtenstein, Iceland) and Switzerland remains completely unchanged. This is great news if you are a hiring manager for the NHS and rely on European staff in any way at all because they will retain the right to work in Scotland with all the rights they have today.  It's also great news if you work for businesses that trade with any of the 31 EU/EFTA nations that will wave goodbye to rUK on 31st March, 2019.  It's also great news if you work as a legislator because the bulk of EU law will remain in force.  It's even better news for Scottish students who want to participate in the ERASMUS scheme.  The really big advantage is that losers like me who enjoy living in a country with well-tended bicycle paths will have no further need to complain and moan about Brexit.   More seriously, stability for a small country is extremely important, especially one that has just won its independence.  The backing of European legislation and its systems of checks and balances will be a huge advantage to a small nation undergoing rapid change.

Liam Fox (L), David Davis (centre),  Phil Hammond (r) at Singapore EXPO, 2019.
The real advantage of EEA membership is that it allows Scotland to strike its own trade deals.  Now, I don't mean that in the way that Liam Fox and David Davis mean it.  They frequently conjure up a picture of old conolialists dressed in khaki shorts,  parading around the world by Royal decree in a floating castle.  I only mean that Scotland can sign an independent trade deal with rUK.  It's really important to remove friction at the Scotland/England border and the only guaranteed way of doing that is to negotiate a trade deal.  A bit of background here is that EU membership can be viewed as the Venn intersection of the Customs Union and the EEA. The Customs Union involves collective bargaining so that tariffs applied to goods arriving from outside may be taxed a the same rate at every possible entry point.  There are huge advantages to Customs Union membership, especially for small European nations.  One might be that access to the EU is a huge win for nations wishing to gain tariff-free access to European markets.  This means that the EU has a bargaining power in FTA negotiations that could never be matched by any individual nation.  The UK, for example, is going to find out quite soon that China and India will expect an asymmetric trade deal in their favour that is roughly proportional to relative market size.  The other advantage of the Customs Union is that goods can move freely around the tariff zone without any further checks or delays or charges.  This is a huge boost for just-in-time manufacturing processes.  Nissan Sunderland springs to mind but this affects pretty much anyone making anything more complicated than turnips.  The disadvantage of Customs Union membership is that Scotland would be required to implement a customs border with rUK.   It will need to do this to prevent low-tariff goods leaking into the EU tariff zone through the Scotland/England border.  Nobody wants a customs border adding trading friction to your immediate neighbour so leaving the European Customs Union might be a favourable option.

Checkpoints at the France/Switzerland border.   The top of the photo is the runway at Geneva Airport. There is no obvious way to make this graphic more exciting.
There are, of course, disadvantages to leaving the Customs Union.  The first is that goods and services leaving Scotland for the EEA will need to prove country of origin so that goods from outside the EEA can be differentiated from tariff-free goods whose origin is inside the EEA. Goods and services from third party nations that have a Free Trade Agreement with the EU also need to be differentiated from goods from nations trading under WTO terms only. This adds an extra cost to Scottish trade with the EEA.  It is a cost that Norway already absorbs so there is good precedent for success but it is still a non-zero cost.  The second drawback is that Scotland will no longer participate in the trade deals negotiated by the EU.  That is actually a significant blow but let's think about this for a bit before letting leash a torrent of wailing and gnashing of teeth.  Now, I'm not an economist but I am an engineer.  If I want to optimise a system I always start with the biggest component.  If I can squeeze 10% extra out of that I've made a good win.  Even if I double the efficiency of the smallest component the gain will likely still be less than a meagre 10% win on the largest.  It makes sense to start with the big stuff and secure that before working down the list.  For Scotland that means securing trade with rUK and the EEA before worrying about South Korea and Canada.  Scotland can always attempt a trade deal with South Korea and Canada but we do have to be realistic about the asymmetry in market size.  A more appealing outcome would be to join EFTA and participate in the trading relationships negotiated collectively by Norway, Liechtenstein, Iceland and Switzerland.


 I'd like to die peacefully in my sleep like my grandfather, not screaming in mortal fear like the passengers on his bus.

Leaving the Customs Union presents one final challenge:  it means leaving the EU, which means Scotland would have no democratic representation in Europe. A Scottish Government would have restricted input to shaping EU Directives adopted by the European Council of Ministers. Similarly, there would be no Scottish MEPs to forward Scotland's interests regarding EU Regulations in the European Parliament.  Personally, I'd say that the lack of influence at the Council of Ministers is the real issue rather than the European Parliament.  The ability to negotiate opt-outs will be limited yet the bulk of EU legislation will still apply.  How does that work?  The truth is that Norway/Liechtenstein/Iceland all participate in the consultation process that leads up to the publication of a Directive. Naturally, they have no vote on its adoption, even though there is some scope for input in its formulation.  The implementation of the Directive is then applied much more flexibly for EEA countries. They can even refuse to implement a Directive but statistics tells us that is a theoretical power rather than a real one. I know I'm skimming this a bit but I'm going to come back to it in a future post.

The real problem in all of this is that nobody knows where Brexit will lead and nobody knows how long it will take.  A timeline of 10 years doesn't seem unreasonable but towards an unknown goal. While the horror of the Brexit bus unfolds for rUK, an independent Scotland will need to do something quickly to secure its European trade and its rUK trade.  EEA membership combined with a rUK FTA seems like a good compromise that readily achieves both of those goals.  That doesn't need to be the end of the story, though, because EEA membership doesn't close the door to being a member of the EU at some point in the future.  Iceland, for example, is very likely to have a referendum on joining the EU.  It might be the case that rUK strikes a trade deal with the EU that would completely remove the need for a customs border between rUK and Scotland.  If that happened Scotland might then decide to re-join the EU.  I'd describe myself as a Euro-federalist so I need to cling on to hopes wherever I find them.

Over and out,

Terry

PS I skimmed over the processes and obligations of EEA/EFTA membership because I'm planning to write about that and EFTA in the next post.  It might be the next post or the one after or in about 6 months time.  To be honest, it might never happen at all. This blog has been terribly unreliable of late.

PPS The chances of rUK negotiating a trade deal with the EU that eliminates the need for customs checks is vanishingly small.  Theresa May has set out her Brexit objectives very clearly:  leave the jurisdiction of ECJ, leave the Customs Union, leave EEA.  More worryingly, the prospect of signing up to any European court in any form seems remote.  Under these conditions it is next to impossible to have a trade deal with the EU that is sufficiently comprehensive.  Any deal like that would require a change in government and a complete turnaround in political climate.









9 comments:

  1. Interesting analysis. Like you I feel we should work hard to retain our membership of the EU. We're already in and 62% of Scots voted to stay in. I'm still hopeful our EU friends will help us not just to remain a member but to gain our independence.

    In my view, this will enable us to grow our economy more easily when we break from England.

    The border issue is a tricky one but at least we're not alone in wrestling with the issue. Our friends in Ireland will be trying to get the best possible solution and we should work with them on this even before independence.

    Hopefully, out of all this we'll have a Breaking Good rather than a Breaking Bad.

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    1. The border issue is a tricky one, indeed. I suspect that a customs border will be the solution at the NI/Ireland border. It's true that a precedent there could be used at the Scotland/England border but I think that is also unlikely. The UK is keen to push on with trade talks and they'll be under pressure to settle the issue somehow or other. Getting the EU to agree not to implement a border on their side will take significant goodwill towards the UK. Due to the antics of David Davis and Theresa May, that's in short supply at the moment.


      One interesting thing is that EEA membership is the red line for Nicola Sturgeon. It even formed the bulk of the Scottish Government's White Paper on Brexit. Given that, I wonder if she would ever propose EEA/EFTA membership instead of EU membership.

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  2. I have, over the last few months, become convinced that EFTA is Scotland's best way forward. We cannot ignore, even if we wanted to, England on our southern border & need to be able to accommodate close ties with that country. And that most especially includes trade. I think the EU governments will understand that Scotland sits between a rock & a hard place & will be glad to not simply lose us to Brexit along with rUK.

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    1. I'd rather remain an EU citizen but it's clear that we can't ignore the land border. Unless England has a change of heart, compromises will need to be made somewhere along the line. The First Minister has made it clear that EEA membership is her red line. That makes perfect sense to me.

      Everything would depend on how far rUK would really go in cutting themselves adrift from the EU. Right now, they are sailing away to the mid-Atlantic.

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    2. Oh aye, I'd rather remain in the EU (on the whole) but the Norwegians seem to have found a way to make it all work so I see no reason why Scotland couldn't either. And, like it or not, we can't just forget our southern neighbours are there and trading with them is a far better prospect than fighting them (again). Unfortunately I can forsee the need for a hard border between Scotland & England in the medium term if the political direction of England does not change significantly. Fingers & toes crossed...

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    3. I think some kind of transitional arrangement is close to being a certainty. The EU have made clear that 3 years will the time limit and that the UK must accept all EU obligations during the transitional phase. The time limit is a choice by the EU but forcing the UK to accept all obligations during the transition phase is just because nothing more complex than an existing template is feasible to negotiate. Anyway, all of that means that I doubt the shutters will go up any time soon.

      A customs border is indeed still a possibility but much reduced if Scotland leaves the Customs Union. I can't imagine a scenario where there would be a passport border between Scotland and England unless Scotland joins Schengen. Scotland is not going to join Schengen because it is of less value than keeping the Scotland/England border open.

      The combinations of all the pros and cons are hard to work out. Just so many choices available.

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  3. Shengen if the least of my imagination. Mine is clearly more violent & warlike than yours. I hope yours is the more realistic one but I hope for the best & papers prepare for the worsts, as they say...

    (Which, in case GCHQ is reading this, is emigrating the hell out of Scotland/the UK not preparing for armed struggle against the invading English.)

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    1. I honestly don't think there will be any credible threat of war in my lifetime and I intend to live for a very long time, indeed. I don't know anything, of course, but I just can't imagine people who share the same pop culture ever going to war with each other.

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  4. Aye, it is a horrible thought. But many in the 1930s thought exactly the same. Prepare for the worst & hope for the best. Look to Ireland if you don't believe I could be right.

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