I have been absolutely clear that these figures are against the baseline. That is absolutely correct. These are figures where GDP is lower than would otherwise have been the case.
The language of the political declaration is about negotiating a future relationship. If we set aside the way in which that has been dressed up as some kind of exceptionalism that we are going to have the best deal ever, we are in essence talking about no more or no less than the vague intention to start to negotiate what the Government hope will be a preferential free trade agreement. However, the vulnerability of our economy to Brexit cannot be adequately mitigated through a UK-EU free trade agreement. That is, in essence, all we are talking about. For example, the EU FTA with Canada does include some limited provision for some degree of third country validation that is aligned with EU regulations in order to facilitate the trade in goods, but it falls substantially short of securing access to the European single market that the UK or any European Economic Area member country currently enjoys. We argue that continued membership of the European single market and the customs union is vital to ensure that the UK economy continues to benefit from those current fundamental trading arrangements.
If memory serves, there was a previous assessment by NIESR that demonstrated that retaining single market membership could avoid a 60%—yes, 60%—decline in goods and services exports to the EEA in comparison with an arrangement based on WTO rules. I would also add at this point that the current arrangements do not simply facilitate trade with the EU directly. Membership of the EU has, for example, enabled Scotland to benefit from EU FTAs with more than 50 trading partners, so that by 2015 Scotland exported £3.6 billion to countries with which the EU has a free trade agreement. That trade accounted for 13% of Scotland’s international exports. In addition, although this is harder to quantify, many of the products exported from Scotland to the rest of the UK—this goes the other way as well—will form finished goods destined for the rest of the single market or countries with which the EU has an FTA. I will come back to that point, because it is important.
Of course, the rather non-exhaustive list of reasons why trade is likely to fall and drive down GDP growth, includes: the increased cost of bureaucracy; uncertainty about the nature of customs arrangements; additional regulatory burdens; non-tariff barriers, which in some cases are the most significant; uncertainty about the legal basis upon which certain transactions may be carried out; and so on. Now, it is likely that some of those issue will be resolved—I have no doubt about that—but not all, not quickly and not without a cost to businesses and the economy.
If we look briefly at one or two of the ways in which the political agreement intends to take us forward, we can demonstrate how uncertain that is. On customs—this is in paragraph 27 of the political agreement—the UK has suggested a facilitated customs arrangement, or “facilitative” as it is described. But that is broadly similar to the maximum facilitation already described as fundamentally unworkable by the EU. On tariffs—this is in paragraph 23—what is said is fine in principle, but if we do not achieve that or if there is no deal, we are left with a situation where some people who support a harder Brexit are suggesting we set all our tariffs to zero and thus increase trade. However, were that to happen—this was confirmed yesterday in terms of the backstop—there is no guarantee that it would be reciprocated and it may well lead to the dumping of goods here from countries with massively lower labour costs, undermining business, jobs and prosperity here. Absolutely nothing is certain. In a sense, we are not taking a decision on an agreement. We are taking a decision on a wish list in a political statement, some or all of which may come to naught.
I have already gone through what is said in the political agreement about labour, and we are already seeing staff shortages, particularly in the rural economy. UK farms take in about 60,000 workers a year on a seasonal basis. The UK Government’s present proposal is for an evaluation scheme of 2,500 people. That does not cut the mustard. It may be that this matter is resolved in two or three years and that this issue is resolved quite successfully, but the damage will be done by then; the crops will have rotted in the fields.
I think that somebody said earlier, “This is all terribly bad news, it is all Project Fear—is there any reason for optimism?” Frankly, I do not think that there is. I do not believe that an FTA could adequately mitigate the damage that Brexit will cause. The Government’s own assessment says that an end to free movement plus an FTA would result in a decline of around 6.7% of GDP.
It was argued in the UK Government’s “Global Britain” strategy that we would offset a decline in trade with the EU from being outside the single market by exporting to more countries. However, fully replacing the value of EU trade will be challenging, as illustrated by the trade flows from the emerging BRICS economies—Brazil, Russia, India, China and South Africa. I will use the Scottish figures to demonstrate that briefly. Those nations account for £2.1 billion, or 7%, of Scotland’s exports. In comparison, the EU accounts for £12.3 billion, or 43%, so even a small proportionate loss in trade, or lost growth in trade with the EU would require a dramatic increase in trade—over 30%—with those countries. We would all love to see that happen across the whole of the UK, but I suggest that that is highly unlikely.
If the UK signed agreements with the 10 biggest non-EEA countries, including the USA, China, and Canada—a process that could take many years—that would cover only 37% of Scotland’s current exports, compared with the 43% that goes to the EU. Some of the trade simply could not be substituted. If one is selling low-margin or perishable goods to the EU that are refrigerated in a wagon overnight, it simply cannot be substituted by shipping the same stuff to Australia, Japan or China. It simply does not work like that.
Finally on trade, it is also worth pointing out that despite the Government’s optimistic assumptions, even signing a substantial number of trade deals would result in an increase in trade of less than one quarter of 1% of GDP compared with the situation today—that was confirmed yesterday—if we successfully negotiate trade deals with the US, Australia, New Zealand, Malaysia, Brunei, China, India, Brazil, Argentina, Paraguay and Uruguay, the UAE, Saudi Arabia, Oman, Kuwait and Bahrain. That is an awful lot of risk for very little potential gain.
I want to talk about two other areas briefly. The first is foreign direct investment, now a key feature of the contemporary global economy and one from which the UK and Scotland derive considerable benefits. We have seen a substantial number of jobs in Scotland owned by EU companies that have invested here over the decades precisely to have access to the European market. There is no certainty that that would stay, and in the future much of it would go.
The second point that I wish to raise is productivity. The Bank of England assessment in the past week cites academic evidence that shows how tariffs may force the reallocation of
“production toward less efficient domestic producers, lowering aggregate productivity”—
So, even if there is substitution, as many argue, it is likely to lower aggregate productivity.