14 March 2017

I recently had the pleasure of attending the Keynote Seminar – hosted by Scotland Policy Conferences – entitled “Brexit and economic policy priorities for Scotland – investment, growth and international trade”. The seminar was well attended, with top solicitors, accountants, representatives of major businesses, trade organisations, senior university faculty members and politicians contributing to a comprehensive set of presentations and lively discussion thereafter.

The title of the seminar was full of hope and positive terminology, but I confess that by the end of the event it was difficult not to feel a little downbeat. “Uncertainty” was the word of the day and, despite the delegates’ best efforts to avoid it, the word cropped up over and over again. That will probably come as no surprise. Everyone, from the man on the street to those in the top echelons of the UK Government, has their opinion on how matters will play out over the coming two years and longer; but what was clear from the discussions was that even those with a direct line to the impending negotiations with Brussels have little idea of what will actually transpire. All that can be said with any certainty is that Brexit is happening and the future for the UK and Scotland, both economically and socially, is going to be fundamentally different to anything that I have known in my lifetime. Indeed, during the discussions, the point was made that very few people below retirement age have ever worked in a time when the UK was not influenced by the umbrella of the EU, in one guise or another. For someone who is still in the relatively early stages of his career, diving into this great unknown is a daunting prospect. Change is often a good thing and there are many who will argue that in the long run Brexit may be a positive process for the UK and Scotland; but the reality is that it might take another generation before we can truly assess that outcome. In the meantime, and certainly for the immediate future, there are going to be some difficult challenges.

Negotiation, Negotiation, Negotiation

The immediate, and perhaps most obvious, challenge is the process of negotiating the UK’s exit from the EU. In this regard, time is not on our side. Much has already been spoken and written about the two year time limit for negotiating Brexit and, certainly, there seems to be some optimism that the terms of the UK’s physical departure from the EU can be agreed in that period. However, this is not the full picture. In parallel with that negotiation, the UK Government must also begin negotiating arrangements for our trade sectors with the EU. Agriculture, fishing, drink, technology, finance – all these sectors have well developed trade frameworks under existing EU legislation and regulation, built up over the course of the past 40 years. To replace that framework in the next two years is undoubtedly impossible. There is, of course, an option to extend the two year negotiating window by mutual consent but, given the scheduled EU Parliament elections in 2019, expert opinion suggests that there is virtually no possibility that Brussels will agree to such an extension.

To achieve an impression of the challenge facing the UK, comparisons are regularly drawn with CETA (the EU-Canada trade agreement) which was negotiated over a period of 6 years. The general consensus at the seminar seemed to be that the best we can hope for in the two year window is a basic overarching framework with “road-markers” in place. One can only speculate how long it will take to drill down into the detail and create a comprehensive trade framework across all sectors. Some say it might well take a decade. Will that eventual framework be better for the UK and Scotland? Quite possibly. But in the intervening time we face potential technical and political barriers to trade which will undoubtedly have an impact – and most likely not a positive one.

Underpinning all of the above is the political reality that the Brussels administration simply cannot afford to reach a deal which is seen to leave the UK in a better position than it was as a member of the EU. If that happens, some would argue that it calls into question the entire raison d’etre of the EU. If a member is better off outside of the club, what is the point of the club? There are great risks to both establishments if they are perceived to have obtained a less than favourable deal and, to an extent this might explain much of the tough rhetoric coming out of both Whitehall and Brussels. In the end, however, this is a negotiation – concessions will need to be made on both sides. It might not be an exaggeration to suggest that failing to compromise threatens the entire economic stability of Europe.

The Scotland Complication

During the seminar we had the privilege to hear from both Lord Dunlop, the Parliamentary Under Secretary of State, Scotland Office, and Michael Russell MSP, The Scottish Government’s Minister for UK Negotiations on Scotland’s Place in Europe. Both gentlemen spoke passionately and eloquently, while stressing their commitment to protecting Scotland’s interests in the forthcoming negotiations. A commitment to the themes of compromise and collaboration between the Scottish Government and the UK Government were heavily present in both speeches, but one couldn’t help but wonder about the extent to which these themes genuinely permeate “up the tree” to their respective superiors, and the power of either gentleman to effect a material influence on the views or approach of either Government. It was particularly disheartening to hear from Mr Russell, who sits on the Joint Ministerial Committee (EU negotiations), that despite 4 meetings and 2 plenary sessions of that Committee since October 2016, no progress had been made in clarifying the position of Scotland, or indeed the other devolved administrations, in the Brexit negotiations.

The ensuing discussion also hammered home the reality that there seems to be a fundamental disconnect between the objectives of the Scottish Government and those of the UK Government in the Brexit process. Mr Russel set out in his presentation the Scottish Government’s position that there are only 3 possible outcomes for Scotland from the Brexit process. The first, he stated, is that Scotland exits the EU along with and as part of the UK, on the exact same terms as the rest of the UK. The second is that Scotland exits the EU as part of the UK but with a different set of negotiated terms applying to certain aspects of Scottish trade, politics etc. The third and final option is that Scotland, by referendum, votes to leave the UK and thereby somehow maintains membership of the EU or obtains membership in its own right. Mr Russell stressed that, in the spirit of compromise, the Scottish Government is pushing for Option 2. At face value that is somewhat reassuring but, given that one of the fundamental objectives for the Scottish Government is that Scotland would remain part of the single market (something which the Prime Minister has already publicly stated will unequivocally not happen), the likelihood of a genuine compromise seems to dwindle. This is borne out, to an extent, by the lack of progress made by the Joint Ministerial Committee to date.

The issue is further compounded by the UK Government’s stated objectives for the Brexit negotiations which include, in particular, a requirement that the UK will no longer be subject to decisions of the Court of Justice of the European Union. That objective forms part of a more fundamental desire to protect and shore-up the sovereignty of the UK Parliament. Some would argue that this focus on protecting parliamentary sovereignty runs counter to any possibility of Scotland receiving a modified Brexit deal, which would of course likely require further devolution of powers.

Much like with the main Brexit negotiation, the rhetoric from both Governments is strong. The UK Government’s position is that that the UK is to leave Europe as “one country”. By contrast, in the days since the seminar, the First Minister has announced that the Scottish Government are now formally seeking a second Independence Referendum in 2018. This is certainly adding fuel to the fire and appears fundamentally at odds with Mr Russell’s focus on compromise and collaboration. One might hope that the lack of compromise in the language being used in public will not translate to the negotiating table but this is beginning to seem less and less likely. Internal discord between the UK Government and the devolved administrations can surely only weaken our negotiating position in Brussels. Without compromise at this intra-UK level, however unlikely that might be, the possibility of the UK achieving any sort of positive outcome from the Brexit process is critically threatened.

What can businesses do?

There are no elections scheduled for either the UK Parliament or the Scottish Parliament before the anticipated deadline for the Brexit negotiations. To a degree then, the extent to which “we the people” can have a direct influence on the Government(s)’ (whether Scottish or UK) approach to Brexit and the related negotiations is limited.

Of course, it will remain important for individuals at all levels of society to engage with politicians to ensure that our hopes and fears are at the forefront of the minds of those in power, but it cannot be denied that the ultimate direction of the negotiations is being handled by a small cadre of individuals in the current UK Government.

Until those negotiations are concluded, or at least until they reach a more advanced stage, there will be uncertainty surrounding:

1. The status of EU nationals working in Scotland (both settled and migrant);
2. The status of EU nationals attending Scottish universities;
3. Inward investment into Scotland, particularly from investors in the Middle East, China and North America where access to the EU common market via Scotland, and the UK as a whole, is seen as a key factor;
4. Barriers to export including tariffs, technical (i.e. labelling and product specification) requirements) and physical;
5. and myriad others.

The challenges for businesses in this climate are clear, but that should not be cause for inaction. There was much discussion during the seminar of the need to foster new relationships and develop existing relationships to the fullest extent possible over the coming two years or so. Of course, focusing on developing business relationships in such a climate is challenging, but this focus on relationships must not be merely about companies, trade bodies and educational institutions, it must be about individuals. It is about key individuals within Scottish business building professional relationships with counterparts in both markets abroad and across the UK; it is about universities building close relationships with foreign students; and businesses providing reassurance to foreign workers, so that as clarity about the post-Brexit reality begins to emerge, we are as well placed as possible to exploit those opportunities that arise.

It is also a time for renewed collaboration among business sectors in Scotland. Food and Drink, Agriculture, Technology, Finance and many other business sectors have, under the EU, been placed into silos of regulation, with each sector having a separate regime of rules and legislation. Brexit presents potential opportunities for business sectors to collaborate together to discover and exploit synergies, increase cross-sector trade, and develop holistic trade frameworks which are of benefit to Scottish and UK businesses.

Finally, there is an opportunity (and a requirement) for the leaders of business, politics and education in Scotland to consider what type of economy we genuinely want Scotland to become. Will we rely heavily on in inward investment from foreign organisations, or can we begin to generate domestic wealth which can be used to increase our global influence? Will we focus on developing a service based economy, or can we exploit our world class educational establishments to create a pool of home-grown talent with the technical skills to develop new technologies and manufacture new products, allowing us to build on our existing exporting successes in sectors such as food and drink but also opening up new export markets for our products?

It is clear that there are complex and uncertain times ahead for Scotland. But there are glimmers of positivity and, with the right mix of hard work, collaboration and innovation, we may be able to weather the storm and begin to see more positive results in the years to come.

Contact: Graeme Loarridge Solicitor glo@bto.co.uk T. 0141 221 8012