Daily question: How much does Scotland buy and sell to the rest of the UK?

By Douglas Fraser
Business and economy editor, Scotland

  • Published

As the people of Scotland weigh up how to vote in the independence referendum, they are asking questions on a range of topics.

In this series, we are looking at those major questions and by using statistics, analysis and expert views shining a light on some of the possible answers.

Here, we focus on how much Scotland buys and sells to the rest of the UK and whether that is important to the referendum question.

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BBC news website user Kenny Anderson asks: "What is the value of all Scotland's export, including and then excluding, to the rest of the UK?" Iain Caird and Jim Birnie also ask questions on the issue of cross border trade.

Is this an important issue in the referendum?

Image source, Thinkstock

Well, it certainly crops up a lot in the debate on Scotland's currency. It's in the interests of Scotland and the rest of the UK to keep trading goods and services, with or without independence.

So, the question is about whether independence would be a hindrance to that trade, particularly if there's a change to the current UK arrangements for using the pound sterling.

The most recent Scottish government figures, not including oil and gas, show Scotland sold £50.5bn in goods and services to the rest of the UK in 2013. The rest of the UK sold £62.7bn in goods and services to Scotland.

That's a lot more than trade with the rest of the world, to which Scotland sold £21.3bn in goods and services, while importing £21.6bn from abroad.

While UK exports more than doubled in the past 15 years, exports to the rest of the world grew by just over half.

It's worth noting that it doesn't matter that Scotland/Rest of the UK (rUK) trade is not balanced. What matters is that each country has a broad, long-term, trade balance with all of its trading partners combined, or that it's able to fund a deficit.

Oil and gas exports could be expected to put Scotland into surplus.

What's bought and sold across the border?

Image source, Thinkstock

Trade is partly in the obvious things - a bottle of Scotch whisky sold in Coventry, for instance.

Food and drink exports to the rest of the UK are estimated at more than £4bn. Meanwhile, a Land Rover made in the English Midlands is an import if it's sold from a showroom in Perthshire.

The more complex relationship can be in supply chains. Scottish firms supply parts to the car or aerospace industry in England, which can then be included in the finished car sold in Scotland, or an Airbus sold around the world.

And English engineering firms supply equipment to Aberdeen subsea firms which are then exported.

The service sector's exports are roughly twice as big as manufacturing. Scots are reckoned to sell the rest of the UK around £9bn per year in financial services, while imports range across mobile phone services to accountancy, software and downloaded music.

So, does it matter to me?

Well, it matters most if you have one of the jobs at least part of which involves serving those export markets.

Standard Life in Edinburgh is an example of a company that has 90% of its UK customers outside Scotland, which is why the pensions, savings and investment giant is making plans to move operations south of the Border, if it feels it has to.

And the issue matters to everyone, as total exports to the rest of the UK and the rest of the world represent more than half of what the Scottish economy produces.

So the economy of Scotland is very highly integrated with the economy of the rest of the UK.

As we've seen, Scots sell more than twice as much to the rest of the UK as they sell to every other country in the world combined. And that's why it matters that Scots keep those markets open and trade flowing freely.

What might be the impact of independence?

Image source, Thinkstock

As with so many questions, we don't know. The Scottish government White Paper on independence says there will be no impact, because Scotland will continue to have access to rUK and EU markets. It says the Scottish government would use overseas representation to support exporting companies.

This is something the Scottish government already does, and several UK agencies, including the Foreign Office's embassies, already promote exports.

The Better Together campaign cites Strathclyde University research suggesting nearly 267,000 jobs are linked to trade with the rest of the UK. Of those, 45,000 are in manufacturing and 43,000 are in finance.

Image source, Thinkstock

Note that they're not "dependent" on such trade, but the claim is that they're linked. No-one is arguing that all these jobs will be lost because of independence. But those campaigning to keep Scotland in the Union raise concerns that trade with the rest of the UK could be reduced, so some jobs could go if new markets aren't found.

These so-called economic "border effects" aren't because of formal barriers to trade or tariffs, least of all within a trading bloc like the European Union, but because of informal barriers, or at least a drifting apart.

The most studied "border effects" are between the USA and Canada. It's been reckoned that trade would be 44% higher if North America were one country.

But that's partly because they've developed as separate countries and they've always had their own currencies. It's harder to tell what happens if you separate an integrated economy.

The Czech Republic and Slovakia saw a sharp deterioration in trade when they split, only partly compensated with a growth in trade with other neighbours. But there are limits to how comparable the command economy of Czechoslovakia was more than 20 years ago with the UK's today.

A study for the Economic and Social Research Council (ESRC) compares the trading integration of Scotland and the rest of the UK with that of Ireland and the UK. It concludes that there could be a 5% reduction in the Scottish economy's output if Scotland were to reduce the extent of its integration to UK-Irish levels. That effect would be seen over two or three decades, so it may only mean about 0.1% reduction in trade each year.

The research also points out that factors resulting from independence could compensate for that fall in output. The Scottish government has set out plans for growing the Scottish economy more strongly than the rest of the UK.

Or there might be a boost to trade with the rest of the world. The same ESRC research points to evidence that trade between Scotland and the world beyond Britain has been constrained by such a close integration into the UK, and it suggests there could be compensatory growth there.

What has this got to do with currency?

Image source, Reuters

The Scottish government has argued that the rest of the UK would want Scotland to keep using the pound, because without that, English, Welsh and Northern Irish businesses would face the extra costs of transacting between currencies when they trade.

Transaction costs for businesses are similar to the costs of buying cash when travelling abroad. Banks charge businesses for that, and for insurance against the risk that the exchange rate could change.

The contrary argument is that, in total, businesses in the rest of the UK are much less dependent on Scottish trade than Scotland is on the rUK.

The USA is a bigger rUK trading partner than Scotland. About 10% of rUK exports are to Scotland. And if the argument is that the rUK priority is to minimise currency transaction costs, the Westminster government would join the eurozone. No sign of that happening.

It's possible that English businesses could either insist on trade being carried out in pounds, saving them transaction costs and loading them instead on to Scots suppliers. Or they could assume that Scotland will keep using pounds sterling, maintaining low transaction costs, even if Scotland doesn't get the security of a formal currency alliance.

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