Scotland’s EU Single Market Options: Some challenges from the trade side

Published: 15 January 2017
Author: Kirsty Hughes
The Scottish Government's plan for a continuing trade relationship with the EU overlooks an important issue, says Kirsty Hughes. Were Scotland to join EFTA as the proposal suggests, it could not also be a member of the EU Customs Union. 
The Scottish Government paper ‘Scotland’s Place in Europe’ published in December last year sets out two major alternatives for what it would find acceptable for Scotland in the context of the UK’s Brexit talks. Both of these alternatives face serious challenges on the trade side. 
The Scottish Government proposed:
(1) That the UK as a whole, on leaving the EU, should stay in the EU’s single market and in the EU’s customs union;
(2) That if the UK left the single market, it should ask for a differentiated solution so that Scotland could, through the European Economic Area, stay in the single market.
In addition, the Scottish Government paper also proposed that:
(3) Scotland would either stay in the EU’s customs union if the UK did (even if the UK left the single market) or leave the EU’s customs union if the UK did, in the latter case creating instead a UK-wide customs union, so ensuring no EU or other customs border between England and Scotland in either case.
(4) Potential conflicts between Scotland being in the EEA and in a UK-wide customs union could be solved by allowing ‘dual’ or ‘parallel marketability’, a complex solution used to allow Liechtenstein to be in the EEA and in a customs union with Switzerland.
It has been noted by many commentators, and in the paper itself, that Scotland joining EFTA (a pre-requisite to joining the EEA) is not straightforward since EFTA and EEA treaties apply to states not sub-states. Whether both organisations would agree to accept Scotland, while in the UK, joining, or accept the UK being in both but territorially exempting all the UK except for Scotland, is a very big issue and would probably require treaty change.
What has received less attention is the feasibility of the two main solutions proposed on the trade side.

Trade Problems for the Scottish Government Proposals

Four issues arise:
(i) Incompatibility of EEA membership and the EU’s customs union: The UK cannot both be in the EEA (and so in the EU’s single market) and in the EU’s customs union. In an interview for this blog, a Swiss official said: “the EFTA States (Switzerland, Norway, Liechtenstein and Iceland) are not (and cannot) be part of the EU’s customs union.”
To join the EEA, from outside the EU, countries must first join EFTA – including its 27 trade deals with 38 third countries. But if the UK was in the EU’s customs union, it would be obliged to respect EU trade deals in its external tariffs. So it could not be in both EFTA/EEA and the EU’s customs union. 
So the Scottish government’s preferred option of the UK staying in the single market and the customs union is not possible other than by staying in the EU. The alternative might be a bespoke deal – but if the UK asked for a bespoke deal to stay in the single market and EU customs union, the EU27 response would surely be to suggest the UK stays in the EU in that case.
(ii) Scotland could not be in EFTA/EEA and the EU’s customs union: Similarly, if Scotland alone did manage to join the EEA, having first joined EFTA, it too could not be both in EFTA and in the EU customs union. This opens up the possibility of the UK, while leaving the single market, possibly asking to stay in the EU customs union (as Turkey is) for industrial goods, while Scotland stayed outside. This scenario would create a potential England-Scotland border problem.
(iii) Potential contradictions between EFTA/Scotland trade deals and UK trade deals: If the UK chose to stay outside the EU customs union, and outside the single market, and Scotland was in the EEA/single market but also in a UK-wide customs union, there would be risks of contradictions in UK trade deals and EFTA trade deals. 
The Scottish Government paper proposes the Liechtenstein/Swiss model of parallel marketability to get round this. While Liechtenstein is in the single market and Switzerland is not, both form a Liechtenstein/Swiss customs union with open borders between them. But the two countries are also both members of EFTA and so part of EFTA’s trade deals. In the UK case, Scotland would be part of EFTA deals and the UK not so there is another layer of complexity here that is potentially problematic and even contradictory.
While the paper suggests ‘there would be no impact on goods and services trade between the UK and third countries’, with Scotland being in the UK-wide customs union, there could be direct contradictions here. So, if EFTA has (as it does) trade deals with Peru or Egypt or Turkey, for instance, and the UK negotiates different deals, then Scotland would face an incompatibility between membership of EFTA and of the UK-wide customs union unless their trade deals were identical. 
(iv) How big a devolution of trade policy to Scotland? With the UK still running trade policy but Scotland being in EFTA, there is a question of who would really be taking the decisions on trade deals. The Scottish Government paper suggests new powers for Scotland in some aspects of export and import control and even independent legal personality but does not suggest full devolution of trade policy.
One issue here is the UK’s trade relations with the EFTA countries. They are currently dealt with through the EEA (for Norway, Iceland and Liechtenstein) and through the EU’s bilateral treaties with Switzerland. But once the UK has a new UK-EU trade deal, it will need to negotiate separate trade deals with the four EFTA states – since the new UK-EU deal will not apply to EFTA. If Scotland were in EFTA, then the UK might in effect be on both sides of the negotiating table, if it deals with EFTA rather than agreeing separate bilateral deals.
It is also notable that EFTA considers that about 80% of its members’ merchandise trade is covered by the combination of the EEA, the Swiss deal with the EU and EFTA’s own trade deals. If this figure were the same for Scotland only about 20% of its goods trade would be covered by joint UK trade deals – so the bulk of Scotland’s trade policy would be set separately to that of the UK. This would be a major change but not a problem per se, if the issues around compatiblity between EFTA membership and participation in a UK-wide customs union were resolved.

Where next?

The Scottish Government’s first option – of the UK staying in the EU single market and customs union – appears impossible. And while the UK looks clearly set to leave the EU’s single market, its position on the customs union is not yet clear. 
If the UK stayed in the EU customs union, Scotland could not be in both EFTA and the EU customs union raising a potential problem for pan-UK trade – unless it was independent and in the EU (and so in the customs union).
If the UK was outside both the single market and the customs union (which is quite likely) while Scotland was in the EEA and EFTA, retaining the benefits of EU single market membership, there are unresolved challenges as to how Scottish/rUK trade would operate. In particular the compatibility of a UK-wide customs union with Scottish participation in EFTA trade deals needs further consideration. 

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