Scottish independence trading costs calculated

• A new economic study into trade concludes that the costs of Scottish independence would be two to three times greater than the impact from Brexit, and that joining the European Union would do little to offset that cost.

• The SNP response is that there is no reason why Scotland cannot emulate the success of other countries of a similar size.

• The report, from the London School of Economics, is set to fuel the post-Brexit debate about independence.

• Other questions concern the conditions under which Scotland could get faster economic growth, the costs and benefits of remaining in the UK post-Brexit, and whether the economic arguments will make any difference to the outcome.

Brexit is teaching Britain a lot about borders and trade barriers and it is proving so far to be quite a painful lesson.

After years of lessening friction, we're seeing the impact of paperwork, the need to prove where products came from, and, in some cases, tariffs.

There were lessons also from the USA, where Donald Trump showed how tariffs can be used as an economic weapon, wielded by strong economies against weaker ones.

So how would those lessons apply to Scottish independence? It is a question that has been taken on by trade modellers at the London School of Economics (LSE).

Its findings make uncomfortable reading for those who argue the economic case for independence.

It says: "the costs of independence to the Scottish economy are likely to be two or three times larger than the costs of Brexit, and rejoining the EU following independence would do little to mitigate these costs.

It adds: "From a trade perspective, independence would leave Scotland considerably poorer than staying in the United Kingdom."

Lorry drivers' documentation is checked by police officers at the Port of Dover

What the report does not tell you are the directions or strengths of other dynamics that could be expected with independence such as business investment, inward investment, migration, changes to tax policy or to productivity or a potential change of currency.

Each of those could have different dynamics.

Some are levers that could be used in an effort to boost growth.

Remember that some levers don't work as they are expected to, and can have unwanted consequences: for instance, cutting tax can boost growth, but harm public services.

And some are outside the control of an independent Scottish government, and could go either way in boosting or harming growth.

Border friction

But for now, let's look at the LSE findings, and its sole focus on trade.

• It's starting point is that Scotland is very highly integrated with the economy of the rest of the UK. The economic model it uses assumes that two, average neighbouring countries can expect to have a close trading relationship, but that the Scottish one with its UK neighbours is six times higher than the average. Others have looked at this and concluded the amount of trade is between 2.6 and 7.8 times higher than average trading neighbours.

• Brexit is assumed to have a negative impact on trade, by introducing friction. Some of these we have seen already. Others have barely been tested yet - such as the need to have work permits or visas to work across the UK-EU boundary, and the absence of mutual recognition of professional qualifications. It is forecast that Brexit will leave Scottish economic output 2% lower than it would have been within both the UK and the EU.

• If Scottish independence follows through from Brexit, it could be expected to introduce friction in trade. These are not specified in the report, and would depend on the nature of a negotiated exit deal from the UK - perhaps added paperwork, delays in delivery, regulatory requirements, more complex contractual issues for the lawyers, and there would certainly be different VAT and corporate tax regimes, adding cost for business.

• An important part of this argument is that Scotland sells much more to the rest of the UK than it does to Europe, so fracturing that UK relationship would have a much bigger impact - roughly four times bigger.

• The LSE study puts a price on this friction. At the modest end of its scale would be an added average cost of 15%. If the divorce deal is a rocky one, with lots of new rules, that rises to a pessimistic 30%. Hold that thought: that assumption is important, and it is open to challenge.

Output gap

• This is where we get to the crunchy numbers. The model estimates the impact on trade of these costs. First, it calculates what might happen if Scotland remains as it now is, outside the EU. The effect is that the lower friction costs would reduce Scotland's total economic output by 6.5% after 15 years. The model indicates that the higher costs would reduce growth by 8.7%.

• What happens if an independent Scotland then joins the European Union? That is seen as increasing the friction at the English-Scottish border, because it would be the frontier of the EU single market and customs union. The checks currently delaying trucks at Calais would also be necessary at Gretna.

• Easy access into the European Union's huge market would boost Scottish economic output but that would be offset by the reduction in trade with the rest of the UK. In other words, a company in Scotland would find it easier to sell Scottish goods to the Netherlands and beyond, and Scots would benefit from cheaper EU imports, but other Scots companies would find their UK-based business model undermined, and it would become more difficult/expensive to buy from England, Wales and Northern Ireland.

• If you want the numbers, the model predicts that Scottish income would be 6.3% lower than the status quo inside the UK, if it joined the EU and there were lower level friction costs. With higher friction costs, the hit to income would be 7.6%.

• An important note about those percentages. They do not mean you would face a drop of 6%-plus in your pay or benefits. They calculate that as the gap between Scotland's economic output after 15 years, and the output if Scotland remains within the UK. Some would be better off if they benefited from new trade arrangements, but the balance would likely be towards more people being worse off because of losing the old ones.

How long would this process take? The calculations are done over 15 years, which usually counts as the long term.

But in disentangling a trade relationship as highly integrated as the UK's single market, the LSE economists suggest it would take a generation to see the full effects of changed trading relations.

(They don't offer any view on one of the questions in dispute over the timing of another Scottish independence referendum: how long is a generation?)

SNP response

And what are the counter-arguments? Scottish economy secretary Fiona Hyslop has several. Here they are in full:

"As an independent member of the EU, free from the damage of Brexit, Scotland would be part of the huge Single Market which is seven times the size of the UK.

"There is no reason whatsoever that Scotland could not emulate the success of independent countries of our size which are far wealthier per head than the UK.

"Denmark's GDP per head is around 20% higher than the UK's and Norway's is nearly 40% higher.

"In the real world, through membership of the EU, independent Ireland has dramatically reduced its trade dependence on the UK, diversifying into Europe and in the process its national income per head has overtaken the UK's.

"The study is also clear that it takes no account of any changes in migration policy, inward investment or any economic levers the Scottish Government would have control of in an independent Scotland to do things better and boost the economy.

"With our economic resources and advantages, control of economic policy and membership of the EU Scotland would be very well placed to grow the economy.

"It is still too early to calculate the long-term damage that Brexit will do to Scotland's economy, but the disruption it is already causing is deeply concerning."

Will it matter?

None of Ms Hyslop's comments contradict the LSE report's findings. She seeks to set out a different narrative, which assumes that other factors, under the control of an independent Scottish government, would counteract any negative impact on trade with the rest of the UK.

They repeat the key assertion from the Growth Commission, set up by the SNP under former MSP Andrew Wilson, producing a report which is now SNP policy. To repeat: "There is no reason whatsoever that Scotland could not emulate the success of independent countries of our size."

The key questions for the economic debate over independence is: what would be required for Scotland to match that success, how long would it take, and what dislocation and cost would be involved in getting there?

A further question for those in favour of the union, which has become more relevant following Brexit: what is the trajectory of the UK economy if Scotland remains within it, will Brexit harm or benefit the economy, and how long will that process take?

And the other big questions about the debate itself, and for us all: does forecasting the economic effects of independence - whether positive or negative - make any difference to that debate?

Are supporters of independence, and are voters, willing to sacrifice income if that is required to achieve independence?

Will the debate be decided instead on issues of identity, democracy and politics?

This is only one economic analysis of one aspect of independence. It comes from a reputable economic source. Its assumptions are open to challenge.

Other studies will come along in this new, post-Brexit phase of the independence debate, and they will also reflect a very different set of circumstances now that the UK has left the European Union.

But the LSE report is set to reverberate around that debate until the issue is resolved - if it is ever resolved.