Monday, 5 May 2014

Creating a border effect

My blog on The border effect and Scottish independence(*) was published last week at the LSE Politics site. The exercise that this post was based on, is the comparison of the apparent border frictions between Scotland and the rest of the UK, with the apparent border frictions between Ireland and the UK. These differences do not arise because of language or because of any explicit tariffs or border controls (the UK and Ireland share the Common Travel Area). Rather, the differences in apparent border frictions are likely to arise because firms in UK and Ireland do not share all of the same social and business networks(**).

In this context then, the recent CBI debacle is very interesting. The Confederation of British Industry, as well as being a fairly political animal in its lobbying behaviour, puts on events and provides a forum for socialising and networking for the British corporate sector. By explicitly aligning with the No campaign in the referendum, many organisations in Scotland which wanted to remain neutral, felt they could no longer remain members of the CBI. And so the networks that maintain the low intra-state border frictions start to unravel...

Another area which fits well with my border effect work is Prof Brad MacKay's business surveys. These find that "companies that have a majority of their trade in the rUK rather than in Scotland (often at a ratio of 90% to 10%) appear far more affected [identify more risks than opportunities] than companies with the majority of their trade either in Scotland, or globally. ... companies which were ... trading predominantly in a global market appeared to be less affected by the constitutional debate than PLCs with significant trade in the rUK". This is exactly the prediction of the scenarios I presented in which Scotland does both badly or well out of independence:

  • Scotland does badly (5.5% of GDP cost) if its border with rUK becomes as frictional to trade as the current UK-Ireland border, and
  • Scotland does well (3.5% of GDP benefit) if its border with rUK becomes as frictional as the current UK-Ireland border, at the same time as its border with the rest of the world becomes as frictional to trade as the current average for small northern European countries.
In both cases trade with the rest of the UK falls substantially: companies for whom this is the entire focus of their business are correct to think that independence implies risks. But companies which operate internationally should see opportunities: Scotland's trade with the rest of the world could and should be better.

(*) "The border effect and Scottish independence" was the title I submitted. I'm pretty unhappy with the title they chose to run it under: "The costs of a border between an independent Scotland and the rest of the UK is estimated at 5.5% of Scotland’s GDP". This sounds partisan, and an equivalently accurate statement of the content of the article could be "The benefits of normal borders between Scotland and both the rest of the UK and the rest of the world is estimate at 3.5% of Scotland's GDP".

(**) There will be other contributions like impact of common regulations, and perhaps also the impact of the Irish Sea.

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