Scotland, Trade and Brexit Contents

4Scotland’s trade priorities for future trade deals

34.During this inquiry we asked witnesses to set-out what Scotland’s priorities should be for its future trade with the EU, and the rest of the world, after Brexit. We have not sought to recommend any specific type of trading relationship but have instead set out some priorities which are compatible with a range of approaches to the UK’s future relationship with the EU. These priorities include:

Minimising disruption and providing continuity in UK-EU trade

35.As discussed in Chapter 2, the European Union is Scotland’s largest single international destination for exports accounting for 46% of international trade in 2017.65 Both the Scottish Chamber of Commerce and Scottish Council for Development and Industry told us that maintaining as friction free access to the EU as possible was important for their members, with businesses being concerned about how a new UK-EU trading arrangement would impact them.66 Providing this continuity would depend on the UK & EU minimising the emergence of two main barriers to trade:

Tariff-free trade

36.At the moment the UK’s trade with the EU is tariff free, due to the UK’s membership of the EU Single Market. Without the UK and EU reaching a deal on their future trading relationship, trade would revert to World Trade Organisation (WTO) rules with both the UK and EU having to apply the same tariffs on goods for each other as they do countries with whom they do not have a trade agreement.68 The Scottish food sector was particularly concerned about the risk of this outcome as 70% of their exports go to the EU, and the EU’s WTO tariffs on food range from 10% for fruits and vegetables, to 35% on dairy products and up to 50% for certain red meats.69 Sarah Baker, Strategic Insight Manager at the Agriculture and Horticulture Development Board (AHDB), warned that this could result in Scottish industries such as the red meat sector becoming uncompetitive in the EU overnight:

There are not many products that could take a 40% tariff and still remain competitive, so at the stroke of a pen a lot of those industries will really struggle.70

When we visited crofters in the Outer Hebrides we heard concerns that the introduction of tariffs on the lamb they export to the EU would have devastating consequences for crofting and the wider island economy. John Anderson, Chief Executive, Scottish Fishermen’s Organisation told us that the introduction of the EU’s WTO tariffs would increase the cost of importing Scottish fish into the EU by £40 million.71

37.Under this scenario UK tariffs would also be imposed on goods being imported from the EU, the Scotch Whisky Association told us that this would increase overheads for distilleries which rely on imports of products such as glass and closures72 from the EU.73 Cat Hay, Policy Manager, Food and Drink Federation Scotland, warned this increase in overheads for manufacturers would also impact consumers, as a proportion of these price increases were likely to be passed on to them.74

38.While most organisations we heard from had a pessimistic view of the introduction of tariffs, Scotland Food & Drink and NFU Scotland did identify some potential benefits for certain parts of the agri-food industry such as the dairy and pig sectors, where they felt tariffs on EU imports could lead to Scottish producers increasing their share of the domestic market.75 However, both organisations said these were the exceptions to the overall trend, and that their preference was for an agreement between the UK and EU which delivered tariff-free access to the EU for all goods.76

39.When the Government published its White Paper on the future relationship with the EU in July 2018, it proposed that tariffs be eliminated for goods traded between the UK and the EU.77 Since then, the Government and European Commission have published the Political Declaration on the future relationship which outlines that there will be no tariffs or charges across all sectors.78 The declaration is not legally binding and is subject to the ratification of a Withdrawal Agreement between the UK & EU.

40.We are encouraged that the Political Declaration commits to no tariffs on goods being the basis of the future trading relationship between the UK and EU. Maintaining tariff-free trade is crucially important for the food and drink sector in Scotland which would be most susceptible to the EU’s WTO tariffs, with some sectors’ exports to the EU likely to become uncompetitive overnight.

Non-tariff barriers for goods

41.Unlike tariffs, non-tariff barriers are used to maintain the quality of trade entering a country, by ensuring that any imports meet certain standards before they are allowed into a market. For goods examples can include; sanitary and phytosanitary measures to ensure products meets food safety standards, and labelling rules which require products entering a market to have certain labels for consumers. These are usually enforced through custom checks. Scottish exports of goods currently face very few non-tariff barriers when entering the EU79 due to the Single Market which eliminates many regulatory barriers to trade through the harmonisation of standards80 and mutual recognition of standards.81

42.Without a comprehensive deal with the EU on regulatory alignment in goods, the UK would be treated as a “third country” with exports needing to pass customs and regulatory procedures to enter the EU.82 While the UK will be fully aligned with EU rules after Brexit that will not in itself prevent new regulatory barriers. As the Institute for Government explain in their report on the options for the UK’s relationship with the EU after Brexit:

There is a difference between having the same rules and having those rules legally enforced as being the same as the EU’s. In the absence of formal recognition of the UK’s regulations as being equivalent to the EU’s, the EU would still be required by its own laws to treat the UK as a third country and impose checks equivalent to any other third country with no deal. That means UK firms would face regulatory barriers and customs checks in doing business with the EU.83

Sarah Baker, AHD told us that preparing for non-tariff barriers would be “equally important” as tariffs for most exporters, as it would be the first time they had encountered technical barriers to trade with the EU.84

Custom Checks for goods

43.The British Veterinary Association told us that the agri-food sector would be most exposed to non-tariff barriers outside the EU due to the biosecurity concerns about their exports.85 These custom checks would include sanitary and phytosanitary checks86 at the border and could result in the number of products requiring veterinary health certifications to increase by up to 325%.87 NFU Scotland told us this would have a huge impact on the red meat industry in Scotland, which would require 170,000 export certificates if current export levels to the EU were maintained.88 They argued this would be most challenging for SMEs who may not have the resources or experience to deal with large numbers of EU export certifications.89 To help prepare exporters for these changes the Scotch Whisky Association suggested the Government issue guidance on how to navigate new customs arrangements post-Brexit.90

44.Most witnesses agreed that any increase in custom checks at the border would lead to delays, with James Withers, Chief Executive of Scotland Food and Drink warning that just a small increase of custom checks at the border could lead to 10 to 20-mile tailbacks which would have a serious impact on businesses which traded perishable products, most of which relied on “just in time” supply chains.91 This concern was emphasised to us by representatives from the fishing sector, most of whom traded live or perishable products. John Anderson Chief Executive of the Scottish Fishermen’s Organisation told us that “harmonisation” of standards with the EU would be a vital step in avoiding delays at the border in the future:

Harmonisation is vital […] there are things like catching export certificates, heavy administrative burdens that we would have to deal with if we did not have that. That all induces time delays [particularly] for live and perishable products, that is a major concern and something that we would want to avoid.92

Allie Renison, Head of Europe and Trade Policy, Institute for Directors (IoD), told us that when offered the option of remaining aligned to the EU or realigning with other standard setters such as the United States, the majority of IoD manufacturing members said they would rather maintain alignment with the EU to maximise market access to one of their largest markets.93

45.The UK Government and European Commission published the Political Declaration on the future relationship in November which outlined that the “future economic partnership” would consist of a “comprehensive free trade area” which will ensure there are provisions in place to “promote regulatory approaches that are transparent, efficient” and promote avoidance of unnecessary barriers to trade in goods.94 While agreed by both sides, the declaration is not legally binding and is subject to the ratification of a Withdrawal Agreement between the UK & EU.

46.Scottish manufacturers have benefited immensely from frictionless access to the EU Single Market and require assurances that trade with one of their largest international markets will not be disrupted in the future. We welcome the Political Declaration’s ambition for a “comprehensive” free trade area, but this must minimise non-tariff barriers for goods and provide continuity for businesses which rely on EU supply chains and perishable products. If the Government, no longer wishes to align with an EU standard in the future it should clearly state its rationale for diverging and provide businesses with ample opportunity to comment on the proposed changes before they are agreed.

New export support schemes

47.Following the concern about the impact of non-tariff barriers on Scottish goods exports with the EU post-Brexit, we asked witnesses what new measures the Government could introduce to help traders prepare. Dr Michael Gasiorek suggested the Government follow the example of the Republic of Ireland and the Netherlands and establish a UK voucher scheme.95 Under the voucher schemes operating in the Republic of Ireland and the Netherlands, SMEs which trade with the UK can apply for a monetary voucher (up to €2250 in the Republic of Ireland and €2500 in the Netherlands) which can be spent with accredited companies to get advice on specific trade issues arising from Brexit, such as the movement of goods and customs paperwork in addition to support on currency management, movement of labour and legal matters.96 Dr Gasiorek felt a similar scheme in the UK would incentivise more businesses to engage in Brexit preparations.97

48.Since we concluded taking evidence, the UK Government has announced a one-off investment of £8 million to fund two new grant schemes to help UK businesses and custom intermediaries prepare for customs declarations post-Brexit. This is narrower in scope than the Brexit voucher schemes referred to above, as they can only be used to fund customs training for staff and make IT improvements related to the automation and productivity of customs paperwork.98

49.Whilst we welcome the announcement from the Government that small and medium sized businesses will now be able to apply for two new grants to help them prepare for post-Brexit customs declarations, they are narrow in scope focusing on training and IT improvements only. The Government should urgently look to extend the remit of the grants to cover additional areas of export support for businesses such as the movement of labour, goods, currency management and legal advice as is the case for the Brexit voucher schemes operating in the Republic of Ireland and the Netherlands.

Non-tariff barriers for services

50.Unlike trade in goods, services are not usually affected by financial barriers to trade. Instead non-tariff barriers to trade arise from companies needing to meet domestic standards to trade in a particular market, such as demonstrating compliance with another country’s regulatory regime. Scottish service exporters currently face limited barriers in the EU due to the harmonisation and mutual recognition of standards through the Single Market. Scottish service trade with the EU accounts for 41% of the sector’s total international exports.99

51.Most service providers we heard from were positive about their experiences of trading with the Single Market, with ScotlandIS, representing Scotland’s digital sector, telling us that the Single Market offered the “best trading conditions” for Scottish firms due to the free flow of data.100 This view was shared by Scottish Financial Enterprise (SFE), who told us that the success of Scotland’s financial industry was based on its ability to access and service all customers within the EU.101 This is because of the EU “passporting” system, which authorises’ all UK firms to trade freely in any EU or EEA state and avoid non-tariff barriers.102

52.UK Finance said the sector’s priority for the post-Brexit trading relationship with the EU was to secure an agreement with the EU which maintained market access to a similar level of passporting.103 Alistair Ross, Association of British Insurers (ABI), warned that without such an agreement, it might not be possible for insurers to honour contracts with obligations extending beyond the date of Brexit.104 This could impact the sector in Scotland, with some of the ABI’s Scottish members having started the process of establishing subsidiaries in the EU to ensure they can continue servicing existing contracts after Brexit.105

53.Outside the EU the UK would no longer have access to financial passporting. The EU has an equivalence regime for third countries which allows businesses to operate in certain areas of the Single Market without checks. This would mean the EU acknowledging that the legal, regulatory and supervisory regimes of the UK are equivalent to its own. Conor Lawlor, UK Finance said this would not be ideal for the sector:

[That] would be incredibly minimalistic and get you absolutely nowhere near the current level of cross-border trade or trade in general of services that is granted under the current single market and passporting system.106

There were two reasons for this, first that equivalence had a narrow scope, and did not cover certain financial services such as banking, debt issuance and deposit taking.107 The second was that the EU can revoke the equivalence agreement after giving just 30 days’ notice.108 SFE told us this would not be acceptable to the industry and called for a “stronger and more robust equivalence regime” which would provide businesses with confidence that they could make long-term decisions.109

54.The Government’s White Paper on the future trading relationship with the EU proposed an expanded version of the EU’s existing equivalence regime. This would allow both the UK and EU to retain autonomy over access to their markets and legislation but create a bilateral framework of commitments. Central to this would be an understanding that the UK and the EU avoid adopting regulations that produce divergent outcomes in relation to cross-border financial services, with processes setup to discuss future regulations and a structured withdrawal process established to provide safeguards should either side revoke its equivalence decision.110

55.For digital providers, the EU offers an adequacy framework for third countries, which allows countries recognised as having equivalent standards to send data to the EU without further safeguards being necessary. The EU currently has 12 adequacy agreements with non-EU countries.111 ScotlandIS told us that a future arrangement needed to ensure the free movement of data within the EU, failure to maintain this would impact data-intensive service industries such as accounting, banking and telecommunications, which could become uncompetitive in Scotland as a result.112

56.The Government’s White Paper stressed the importance of maintaining frictionless trade in digital services between the UK and EU. To facilitate this, it proposed an “ambitious” policy on digital trade with the EU covering telecommunications and digital infrastructure. The Government suggested that this be based on the EU’s existing adequacy arrangement for third countries.113 Since we heard from the services sector, the Political Declaration on the future relationship has been published, which commits the UK and EU to explore provisions related to services that:

57.Scotland’s service sector has benefited from its ability to freely offer services to customers in the EU, which accounts for 41% of service sector’s trade. We were told that any agreement to provide the sector with continued market access to the EU needed to go further than the EU’s existing equivalence regimes. We therefore recommend that the Government ensure that any new equivalence regime covers the broadest range of activity conducted by Scotland’s service’s sector. This agreement must not be vulnerable to sudden revocation, instead a dispute resolution mechanism should be established to resolve disagreements about whether the two regimes are equivalent, which would need to be followed before either side could withdraw from the agreement. This should provide confidence to businesses that they can make long term decisions with the knowledge that their access arrangements will not suddenly change.

Mutual recognition of professional qualifications

58.Another priority for the service sector was to ensure the continued mutual recognition of professional qualifications with the EU.115 At the moment there is a reciprocal framework which enables professionals from the European Economic Area (EEA) and Switzerland to work, in countries other than the one in which their qualification was obtained.116 In the absence of an agreement post-Brexit, this will no longer apply to UK nationals in a number of professions including law, accountancy and medicine, who will instead need to comply with the national policies of Member States.117 While the scheme covers multiple professions, the evidence we heard focussed on the legal and financial services sectors.

59.Both the Law Society of Scotland and Scottish Financial Enterprise (SFE) told us mutual recognition of qualifications was an important commercial asset to Scotland, as it allowed professionals to work throughout the EU with little restriction and have greater access to the EU market than professionals from third countries.118 SFE said this was crucially important to the financial sector which relied on qualified accountants and lawyers to perform services such as auditing and providing legal counsel across the UK and EU without restriction.119 All the witnesses we heard from stressed the importance of mutual recognition being maintained post-Brexit, with SFE saying the UK would lose many of the rights mentioned above if it was not incorporated into a future trade deal between the UK and EU.120

60.In the event of mutual recognition of professional qualifications not being extended post-Brexit, Michael Clancy, Law Society of Scotland, told us that without an agreement professionals would have to comply with local work permit and immigration requirements as well as requalifying.121 Carolyn Thurston Smith, Law Society of Scotland, said this would cause problems in countries that required citizenship to qualify, such as in Austria.122

61.The Chartered Insurance Institute told us that there were also inconsistencies amongst the educational requirements of different Member States, which could cause difficulty for professionals trying to requalify in some countries. They cited Belgium as an example:

[In Belgium] the regulator sets the bar for qualification recognition at a very high level, stipulating that a senior manager or any member of staff responsible for the distribution of insurance in a Belgian intermediary must be qualified to MA level or have a specialist Batchelors degree [in insurance …] this means that at present, for any firm looking to establish post-Brexit in Belgium, any senior staff would need to sit and obtain a qualification via the [Belgian] Financial Services and Market Authority.123

62.The Government’s White Paper on the future relationship with the EU proposed that a new recognition agreement be established to enable UK and EU professionals to continue to provide services across the UK and EU.124 Since then, the Government and European Commission have provided an update through the Withdrawal Agreement and Political Declaration. The Withdrawal Agreement says that during the Implementation Period UK professionals working in the EU and vice versa will continue to have their professional qualificators recognised.125 The declaration on the future relationship states that both parties will:

Develop appropriate arrangements on those professional qualifications which are necessary to the pursuit of regulated professions, where in the Parties interest.126

63.The Law Society of Scotland welcomed the short-term continuity which would be provided by the Withdrawal Agreement, but were concerned that the Political Declaration lacked ambition and was not specific enough to provide service sectors with assurance that they would maintain the same access to the Internal Market as present.127

64.Scotland’s service sector currently benefits from its ability to operate throughout the EU due to the mutual recognition of professional qualifications within the single market. We heard this was particularly important for the legal and financial services sectors. However there remains uncertainty as to the future recognition of UK professional qualifications in the EU post-Brexit. We welcome the provisions included in the Withdrawal Agreement which will provide continuity, but the Government must confirm and deliver on its intention to negotiate a long-term agreement with the EU which maintains similar market access for UK qualifications. This will provide clarity about what the future arrangements will be for Scottish professionals operating in the EU after Brexit.

Preserving trade within the UK

65.The second priority that came up during our inquiry was the importance of maintaining Scotland’s trade with the rest of the UK. As discussed in Chapter 2, in 2017 60% of Scotland’s exports went to the rest of the UK.128 NFU Scotland told us that the rest of the UK market was particularly important for the Scottish food and drink industry, with the rest of the UK accounting for 61% of all Scottish food and drink exports.129 This sentiment was shared by representatives from Scotland’s financial services sector which exported more to the rest of the UK than any sector in 2017.130

66.When he appeared before us, the Secretary of State for Scotland argued that it was important not to neglect Scotland’s largest trading market when discussing Scotland’s future trade priorities.131 During this inquiry we raised with witnesses the importance of this trade and the need to ensure that whatever arrangements were put in place after Brexit did not risk introducing any barrier to the flow of exports between Scotland and the rest of the UK.132

67.As the UK leaves the EU, power currently held in Brussels will return to the UK and in some cases the Scottish Parliament, this could potentially allow policy differentiation within the UK in areas where EU law has previously provided a common legal framework.133 As outlined in the discussion of non-tariff barriers, different approaches to issues such as food safety, product safety and services regulation can introduce barriers to trade. As powers are devolved post-Brexit some witnesses said it would be important to ensure that Scotland and the rest of the UK remain broadly aligned in these areas, both to ensure that there are no barriers to trade within the UK and to allow the UK Government to make commitments on these non-tariff barrier issues in their discussions with other countries when negotiating new trade deals.134

68.The potential impact of divergence amongst the UK nations in repatriated EU law was recently highlighted in the UK Agriculture Bill. While delivering agricultural support is a devolved policy, the Bill contains provisions for the UK Government to set levels of domestic farming support across the UK in order for the UK to comply with World Trade Organisation limits on farming subsidies.135

69.With most future UK trade agreements likely to impact devolved competencies, Professor Andrew Scott, Edinburgh University said mechanisms would be required to reconcile the views of the devolved administrations and manage regulatory convergence within the UK.136 This does not mean that there could be no flexibility for Scotland to approach these issues in a way that meets its own needs, but it does suggest that there may need to be a limit to such divergence or agreement of some common principles of rules that underpin the approach taken on a UK wide basis. Both the Secretary of State and the Scottish Trade Minister Ivan McKee agreed that alignment between Scotland and the rest of the UK was important in maintaining trade within the UK.137 To address this, both governments have agreed that UK-wide common frameworks will be established where they are necessary in order to:

These frameworks will consist of common goals, minimum or maximum standards, harmonisation, limits on action or mutual recognition, while respecting the devolution settlements and the democratic accountability of the devolved legislatures.139 The UK Government expects all common frameworks to be in place by the end of the Implementation Period in 2020.140

70.Scotland exports more to the rest of the UK than it does to the rest of the world and ensuring free and frictionless trade with Scotland’s largest trading partner will be important to its future economic prosperity. We welcome the UK Government’s commitment to protecting Scotland’s trade with the rest of the UK and recommend that the UK Government ensures that as powers currently held in Brussels return to the UK and Scottish Parliaments, every effort is made to ensure no new barriers to trade between Scotland and the rest of the UK are introduced. Establishing UK-wide common frameworks is one way to address this, as it will allow all of the UK’s governments to agree where the same rules should apply across the UK and how to manage areas where flexibility for the UK’s four nations is desirable.

Rolling over of EU trade agreements

71.Through membership of the European Union, the UK currently participates in around 40-free trade agreements (FTAs) with over 70 countries.141 Under these agreements, Scottish businesses are eligible for a range of preferential market access opportunities including:

72.While these existing agreements account for only 12% of total UK trade,143 AHDB told us they were integral to certain sectors of the Scottish economy such as the potato industry, which enjoyed zero-tariff access to their two biggest markets: Egypt and Morocco.144 Strategic Insight Manager, Sarah Baker said without these FTAs, exporters would face a 10% & 40% tariff respectively.145 The Scotch Whisky Association meanwhile told us that the EU’s FTAs had helped spread the recognition of Scotch Whisky around the world and accounted for 10% of their £4.37 billion in exports.146

73.The UK Government’s policy has been to rollover these agreements so that the UK and other third countries can continue to trade on the same terms as now until a new Free Trade Agreement can be negotiated. The Rt Hon David Mundell MP, Secretary of State for Scotland, told us that the Government’s priority was to have:

continuity in our trade and investment relationships with third countries, including those covered by existing EU free trade agreements and other EU preferential arrangements.147

The European Commission has agreed that once the UK-EU Withdrawal Agreement has been ratified it will write to all relevant third countries asking them to roll-over the existing arrangements.148

74.If it is not possible to roll-over these agreements trade between the UK and these third countries will take place under World Trade Organisation rules, which prevent countries offering preferential tariffs to countries they do not have an FTA with. As a result, goods from the UK would face a higher tariff in these countries as they currently do, and vice versa.149 Nearly all our witnesses agreed that it was important for the UK to avoid this scenario, with Matthew Lancashire, Scottish Council for Development and Industry, telling us that failure to rollover the existing agreements would have ramifications for the Scottish economy.150

75.However, some commentators have raised concerns about how easy this process will be. Dr Michael Gasiorek, UK Trade Policy Observatory, warned that some countries may be unwilling to commit to an agreement with the UK until they know the terms of the UK-EU future relationship:

Part of the difficulty here is that, although many of the countries with which the EU has FTAs have expressed some willingness to extend existing trading arrangements, at least for the transition period. Until they know what the form of deal is between the UK and EU, it is hard for them to commit to rolling over the existing agreements on a long-term basis.151

76.We also heard from Dr Kristen Hopewell, Edinburgh University, that there was no guarantee all third countries would agree to roll-over the existing deals in their current form unamended, citing Japan as an example:

It looks increasingly like most countries will want to renegotiate, that they will not be willing to let the UK just replicate, copy and paste agreements. Another example is Japan, which has already come out and clearly stated they will not be willing to just replicate the EU-Japan free trade agreement. They are going to demand more from the UK [on labour mobility & visas].152

Allie Renison, Institute of Directors expressed concern that delays in rolling over these agreements could leave businesses with limited time to prepare for new trading arrangements.153

77.When we asked George Hollingbery MP, Minister of State for Trade Policy for an update on the rollover of these agreements, he said that while good progress had been made on a “large number of deals”, there were some that were being “problematic” and likely not to be rolled over by the UK’s exit. This he said was due to:

Since then, the Government has signed agreements with Switzerland (the largest agreement in terms of UK trade flow representing more than 20% of the value of all existing EU trade agreements), Chile, the Faroe Islands, Israel, the Palestinian Authority and the Eastern and Southern African Economic Partnership Agreement states.155 It has also signed Mutual Recognition Agreements with Australia, New Zealand and the United States.156 In February the government published an update on the status of outstanding EU trade agreements, this showed that discussions were still ongoing with 32 agreements. The Government has said that four of these agreements; Japan, Turkey, Algeria and Andorra and San Marino, would not be rolled over in time for the UK’s withdrawal from the EU.157

78.We are disappointed that some existing trade agreements will not be rolled over by the time the UK leaves the EU. While we welcome the government’s publication of a register outlining the status of outstanding agreements, this does not offer practical advice to businesses on the steps they should be taking to minimise disruption. We recommend that the government outline the practical steps it will take to support Scottish exporters who rely on these agreements.

Maintaining high standards and quality

79.Throughout this inquiry we heard that Scotland’s reputation for high quality was an important factor behind the success of its top exports in the food & drink sector. As Jonnie Hall, Director of Policy, NFU Scotland put it, Scotland’s strength as a trading nation was not based on the volume it produced but on “what we do and how we do it.”158 This reputation for quality does not just apply to goods, we heard from the digital, financial, legal and education sectors that Scotland’s services also traded on a world class reputation for quality.159 Professor Richard Williams, Universities Scotland told us it was:

So critical that we retain that quality and that reputation because that opens doorways to us in many countries in the world. That is the critical factor that enables us to have access and, beyond that, the explicit skills that we have in our sector.160

80.Tim Allan, President, Scottish Chamber of Commerce, told us this reputation for quality was built on the foundation of EU regulatory standards, which were trusted around the world. He warned that divergence from these could impact on the saleability of products in non-EU markets.161 This was echoed by Cat Hay, FDF Scotland, who said international markets such as China were looking for authentic safe products, and by maintaining high standards, there was an opportunity to “capture” the market.162

81.However during this inquiry, we heard concerns that UK standards could be lowered in order to negotiate new free trade agreements with other countries such as the US.163 This concern has been highlighted in a recent consultation from the US Department of Trade, asking American industry what its objectives would be for a future US-UK Free Trade Agreement. Proposals included:

82.Most witnesses said there would be a cost to the UK if it lowered standards to secure new trade agreements with new markets. NFU Scotland’s Jonnie Hall said such a decision:

Would be shooting ourselves in both feet. We need to conform to the highest possible standards [ … ] we will never be an agricultural economy that can stack it high and sell it low and compete on world markets. Our beef sector, in particular, would be blown away in comparison with production from South America, North America and Australasia.165

Dr Michael Gasiorek, UK Trade Policy Observatory, argued that protecting consumers and regulating markets should be the primary focus of regulatory policy and that “changing regulations simply to try become more competitive is probably a really bad principle.”166

83.George Hollingbery MP, Minister of State for Trade Policy, sought to alleviate concerns about lower standards, stating that the Government had no intention of lowering standards to secure new trade agreements with new markets:

My Secretary of State has made it absolutely plain, time and time again, that we will not be lowering our standards […] It would be commercial madness for us to [do so]. The brand for the UK overseas is about quality […] we would be very foolish commercially, internationally, to lower our standards. It would do untold damage.167

84.Scotland’s success in trading with other countries is based on its reputation for high quality and high standards. We welcome the absolute commitment from the Minister that the UK’s future trading arrangements will not lead to any undermining of these standards.

Protecting Geographical Indications

85.One way in which Scotland’s reputation for high quality produce is currently promoted is through geographical indications (GIs), which apply to 15 iconic Scottish food & drink products including Scotch Whisky, Scotch Beef and Stornoway Black Pudding.168 A geographical indication is a name that can only be used on products that have a specific geographical origin and possess qualities or a reputation due to that origin. As the UK is subject to the EU’s GI system, Scottish GIs receive legal protection against imitation throughout the EU and some third countries the EU has agreements with.169 This is enforced through national authorities who can take civil and criminal action against offending manufactures, which witnesses told us was a more robust form of enforcement than other intellectual property, such as trademarks, where it is the responsibility of the trademark owner to challenge violations via the courts.170

86.Throughout this inquiry witnesses highlighted how important GIs were to the Scottish economy, with products such as Scotch Whisky (£4.36bn) and Scottish Salmon (£600m) being two of Scotland’s most successful food & drink exports.171 Lindesay Low, Deputy Director of Legal Affairs, Scotch Whisky Association, told us that products with GI status benefited producers, consumers and local communities:

Establishing a domestic GI regime

87.Once the UK leaves the EU, the UK will need to pass legislation to establish its own GI regime, if it wishes to continue to use GIs as a way of protecting iconic products. The Government has said it recognises the economic and cultural importance of GIs and will use the EU (Withdrawal) Act to establish a domestic GI scheme and automatically register all existing UK GIs to ensure they remain protected in the UK.174 When we wrote to the Government in December 2018 requesting an update on when this scheme would be established, we were told that legislation would be laid either before the end of the Implementation Period in 2020, or in the case of “no-deal” in early 2019 so the scheme can be established before EU Exit.175 As of the writing of this report, no domestic legislation to establish a UK GI scheme has been published.

88.The European Union’s system of geographical indications has been crucially important in protecting the provenance and quality of many high-profile Scottish products, and we support the Government’s decision to establish a domestic scheme. However, with Exit Day fast approaching we recommend that the Government bring forward this legislation as a matter of urgency to assure businesses that their products will remain protected in all Brexit scenarios.

Enforcing UK GIs in other countries

89.Creating a domestic regime would only be a first step, the UK would also need to have this scheme recognised by other countries if the UK’s GIs are to be a useful tool in promoting and protecting iconic Scottish brands in foreign markets. Without this recognition, Lindesay Low told us that Scottish GIs would be protected via the international standards on intellectual property as outlined in the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).176 This offers less protection with manufacturers having to take civil action themselves against offending traders.177 Lindesay Low described this as an “unsatisfactory situation” which would be more time consuming and expensive than protecting GIs under the existing EU system.178 Dr Gail Evans, an expert in GIs at Queen Mary University of London told us that a second problem with TRIPS was that it established “two tiers” of protection with wine and spirits having greater provisions than food.179 This difference is that countries only need to protect food GIs from imitations which may mislead the public and create unfair competition, meanwhile wine and spirits are protected from imitating products even if there is no danger of them misleading the public and creating unfair competition.180

90.For these reasons, many of our witnesses called on the Government to negotiate a mutual recognition agreement with the EU which maintained protection of UK GIs in the EU market and vice versa. We were told this was essential for high profile products such as Scottish Farmed Salmon and Scotch Lamb which had built strong reputations across the EU based on their GI status.181 AHDB said there was precedent for this with 23 non-EU products registered for GI protection in the EU.182

91.When the Withdrawal Agreement was published in 2018, the UK and European Commission agreed that UK and EU GIs would remain protected in each other’s markets through the Implementation Period until an agreement is reached on the future relationship.183 The Government confirmed to us that this protection would be extended to new GIs registered during the Implementation Period.184 However, when we asked the Government to set out its proposals for a future UK-EU GI arrangement, the Government did not confirm it would negotiate a long-term reciprocal agreement, stating:

The Government understands the importance of GIs to both UK and EU producers. To help ensure a smooth transition to the future economic partnership, the UK has committed to maintain the protection of all existing EU GIs until the future economic partnership supersedes the Withdrawal Agreement. The long-term protection of EU GIs in the UK will be determined as part of the negotiations under the future economic partnership.185

92.The Government argued that ongoing protection in the EU for existing GIs was not dependent on reaching an agreement on the future relationship beyond the implementation period. This was because current EU legislation made EU GI protection indefinite unless specific grounds for the cancellation of GIs from the EU were met.186 As this did not include the removal of a former EU Member State, the Government argued that further EU legislation would be required to remove any UK GIs from the EU register.187 This assessment was challenged by the Scottish Government, who told us that:

While it is correct for the UK Government to say that there is currently no process for the EU to remove the UK GIs, if that asymmetry continued it would be very likely that the European Union would move to remove the UK GIs. Our preference [ … ] is for continued mutual recognition, at the very least, of the existing GIs between the UK and EU.188

93.Concern was expressed that the Government’s reluctance to commit to a future agreement on GIs with the EU was linked to its intention to negotiate new trade agreements with countries opposed to the EU model of GIs, such as the United States and Australia. NFU Scotland and Trade Justice Scotland told us the EU had struggled with this obstacle when negotiating its own trade agreements, with negotiators unable to extend GI protection for certain products such as Scotch Beef in recent trade deals with Canada, Japan and Mexico.189 Lindesay Low and Dr Evans told us that the main objection these countries had with GIs was that they protected what they saw as generic products names such as feta cheese, which some countries felt were no longer linked to one specific geographic origin.190

94.NFU Scotland’s Jonnie Hall warned that it would be a “naïve and backward” step for the UK to trade away GI protection in the EU to secure trade agreements with other countries.191 This view was shared by James Withers, Scotland Food and Drink, who said it should be a “red line” for the UK in future negotiations.192 Dr Evans highlighted to us the importance of the UK maintaining a “strong GI” system like the EU, but said it was possible to be flexible to suit countries who had grievances about GIs.193 One model she suggested the UK emulate was that of the Trans Pacific Partnership:

I had a look at chapter 18 of the Trans-Pacific Partnership because [ … ] a lot of the Asian countries who are members of the current Transpacific Partnership support GIs, the system that is similar to the EU model. It is possible to embrace both the GI and the trademark. There is some realpolitik trade-off, but personally I think that is worth it. They have not been publicising it, but Brussels has been doing that in their free trade agreements with the Pacific region. As long as we can maintain the strength of our European model GI protection within the United Kingdom and Scotland.194

95.Creating a UK GI register will not protect iconic Scottish products in foreign markets unless those counties agree to recognise and protect these GIs. In negotiating the UK’s future relationship with the EU, the Government must ensure that it agrees a comprehensive mutual recognition agreement which protects existing and future Scottish geographical indications indefinitely. The Government should also ensure that its trade agreements with other countries include robust protection for these products. Ensuring Scottish producers enjoy the protection of GI status must be a red line in all the UK’s future trade negotiations.

65 Scottish Government, Export statistics Scotland 2017, 2019

67 Rules of origin are rules requiring products to be able to demonstrate in which country they were produced, often so that it can be determined whether the good can benefit from preferential access under a free trade agreement or whether tariffs should be imposed.

69 Q150 & Exiting the European Union Committee, EU Exit Analysis: Cross Whitehall Briefing, 2018

72 The caps on the tops of the bottles.

79 Despite single market integration, some non-tariff barriers do remain in trade between EU Member States. These can include differences in national tax systems and different national regulations for certain services sectors which companies must comply with to provide that service.

80 In some areas the EU replaces national legislation with harmonised rules. These are common standards which exist in areas such as technical regulations and food safety.

81 Where rules are not harmonised, the Single Market guarantees that products and services can be sold irrespective of their differences because member states recognise each other’s standards are being equivalent.

86 These can include documentary, identity and physical checks of live animals and products of animal origin to ensure animal health, animal welfare and food standards are met.

96 InterTradeIreland, Brexit: start to plan vouchers and, Brexit vouchers

99 Scottish Government, Export Statistics Scotland 2017, 2019

101 TFI0026

115 Known as the Mutual Recognition of Professional Qualifications Directive (MRPQ)

116 Department for Business, Energy and Industrial Strategy, Providing services including those of a qualified professional if there is no Brexit deal, 2018

117 Department for Business, Energy and Industrial Strategy, Providing services including those of a qualified professional if there is no Brexit deal, 2018

123 TFI0029

125 Department for Exiting the European Union, Withdrawal Agreement, 2018

126 Department for Exiting the European Union, Political Declaration on the future relationship, 2018

128 Scottish Government, Export Statistics Scotland 2017, 2019

130 Scottish Government, Export Statistics Scotland 2017, 2019

133 Institute for Government, Brexit, devolution and common frameworks, 2017

135 House of Commons Library, The Agriculture Bill (2017–19) briefing paper, 2018

136 Q24

138 Joint Ministerial Committee, Policy paper: Joint Ministerial Communique,2017

139 Joint Ministerial Committee, Policy paper: Joint Ministerial Communique,2017

140 Department for Environment, Food and Rural Affairs, Agricultural framework progress update: September 2018, 2018

155 Comoros, Madagascar, Mauritius the Seychelles, Zambia and Zimbabwe

156 HC Deb, 13 February 2019, col 891(Commons Chamber) & Department for International Trade, UK and USA agree to continue Mutual Recognition Agreement, 2019

159 Q272 & 337 & TFI0026

168 The full list of Scottish Geographical Indications is- Native Shetland Wool, Shetland Lamb, Orkney beef, Orkney Lamb, Bonchester Cheese, Traditional Ayrshire Dunlop, Orkney Scottish Island Cheddar, Stornoway Black Pudding, Scottish Wild Salmon, Scotch Whisky, Scottish Farmed Salmon, Scotch Lamb, Scotch Beef, Arbroath Smokies and Teviotdale Cheese.

169 Scottish Parliament Information Centre, Geographical Indications and Brexit, 2018

170 TFI0015

171 Scottish Government, record levels of salmon and whisky exports. 2018

174 Department for Environment, Food & Rural Affairs, Protecting food and drink names if there's no Brexit deal, 2019 & Office for the Secretary of State for Scotland, Letter from Secretary of State for Scotland to the Scottish Affairs Committee, 2018

175 Office for the Secretary of State for Scotland, Letter from Secretary of State for Scotland to the Scottish Affairs Committee, 2018

184 Office for the Secretary of State for Scotland, Letter from Secretary of State for Scotland to the Scottish Affairs Committee, 2018

185 Office for the Secretary of State for Scotland, Letter from Secretary of State for Scotland to the Scottish Affairs Committee, 2018

186 Office for the Secretary of State for Scotland, Letter from Secretary of State for Scotland to the Scottish Affairs Committee, 2018

187 Office for the Secretary of State for Scotland, Letter from Secretary of State for Scotland to the Scottish Affairs Committee, 2018

Published: 10 March 2019