Breaking Up Is Hard to Do

I had a conversation with a journalist last week who lamented the lack of news coming out of the Office of the U.S. Trade Representative (USTR), leaving him with little to write about. I told him we were in the same boat, although he was much worse off, since he has to produce content every day, and I only have to do it once a week. So, instead of going on at length about the U.S.-Ecuador trade agreement that went into effect last week, or the talks on trade and investment with Uruguay, both fascinating issues I’m sure, I will take a few minutes of your time on something that hasn’t happened yet and may never happen: Scottish independence. It is worth thinking about because it raises a number of complicated and interesting issues and reminds us all that Neil Sedaka was right—breaking up is hard to do. (For the millennials out there, that was the name of a pop song in the 1960s and ’70s that made the Top 40 list three separate times.)

Scotland rejected independence in a referendum in 2014, but the United Kingdom’s departure from the European Union, which was very unpopular in Scotland, has produced demands for another vote. I take no position on Scottish independence—it is for the Scots to decide—but I can suggest some issues on the economic front that potential voters should consider.

First, a lot would depend on whether Scotland would seek to join the European Union. Membership would not be automatic, and there would be issues, such as fishing rights, which also complicated the United Kingdom’s withdrawal. The biggest issue would be the creation of a land border between an EU member and the remainder of the United Kingdom. Those who have followed Brexit know that the most difficult and fraught issue in the negotiations has been the land border between Ireland and Northern Ireland, and creating one between England and Scotland would be even more complicated. It is, however, something the European Union would insist on to ensure products, particularly food, not subject to its regulations did not leak into its territory. Creating such a border would require a substantial regulatory and enforcement effort that at minimum would cause a lot of inconvenience and could be highly disruptive to the normal back and forth in the region that has been ongoing for hundreds of years.

Second, as an independent country, Scotland would have to consider what trade policies it would pursue. If it joined the European Union, many of those decisions will be made for it, but it would also have to join the World Trade Organization (WTO). It is a member now by virtue of it being part of the United Kingdom, but an independent Scotland would have to join separately, which would require a negotiation. If it did not join the European Union, it would face the same challenges the United Kingdom faces now—renegotiating agreements it had been part of by virtue of its EU membership and negotiating new agreements reflecting whatever trade policy Scotland would decide to pursue. These things take time even if there are no big issues, so Scots should expect a substantial period of uncertainty while these issues get sorted out.

Finally, there is the issue of UK-Scottish trade. Approximately 60 percent of Scotland’s exports go to the rest of Britain. Scotland would likely establish its own currency and regulatory rules along the border. The London School of Economics and Political Science estimates that increased trade friction in the form of new regulations, customs, and other barriers would increase costs between 15 and 30 percent, not a small amount. If Scotland leaves the United Kingdom, it is also likely that tensions will arise over oil and drilling rights in the North Sea, currently an important export for the United Kingdom. Since British and Scottish exclusive economic zone (EEZ) claims would likely overlap, rights would have to be negotiated, which would affect not only oil drilling but also fishing, already a controversial issue with the continent.

And, of course, there is Scotch whisky, which accounts for 25 percent of all UK food and drink exports. Those would become Scottish exports, affecting trade balances in both countries. Alcoholic beverages generally have high tariffs, but an independent, non-EU-member Scotland might be able to negotiate better rates, particularly with the United States, where the rates had been even higher because of U.S. retaliation in the Boeing-Airbus case, where Scotland has little stake. The retaliation is currently suspended, but there is not a permanent resolution. There would also be negotiating opportunities in Asian markets like Singapore and Taiwan, which are growing markets for whisky.

These are not insoluble problems, though the land border issue comes close, but they are all challenges that serve as reminders that a globalized economy means lots of entanglements. Breaking them up and then creating new ones is complicated, time consuming, expensive, and leaves behind lots of grumpy people. The British are learning now that breaking up is hard to do, and we will see if Scotland is next to learn the same lesson.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

Special thanks to intrepid CSIS intern Catherine Puga for the research and analysis that went into this column. We are all nothing without our helpers!

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