George Kerevan: It’s complicated, but Scotland can stay in the single market: here’s how

What exactly is the single market? It comes down to four basic principles of economic policy by which EU states must abide: tariff-free movement of goods between members; ditto free movement of services; free movement of capital and investment; and, not least, free movement of people, whether they have a local job or not. On this strong foundation Europe has created peace and reasonable prosperity.

The Brexit vote of June 23 focused on opposition to the free movement of people – a nasty xenophobia stoked by the populist right. So, we will assume that Theresa May will end the automatic right of EU nationals to come and live in England, though she may be forced to do a deal over work permits for certain classes of professional workers (eg in financial services) to placate powerful interest groups. How then could Scotland keep free movement of people while still being part of the single market?

The answer is quite simple. EU citizens would remain free to live, study or work in Scotland, they just couldn’t go south to do these things without a visa or work papers for England and those parts of the UK keeping English rules in these matters. If England imposes separate work and study visas, the onus would be on English universities and employers to adhere to English law and be open to prosecution if they failed to comply.

What happens if EU citizens use Scotland as an entry point and then take a bus to London looking for work illegally? Would that necessitate identity checks at the Scotland-England border? The answer is no. The Conservative Government has already conceded it will not impose a “hard” border (ie one with rigorous identity and passport checks) on the border between Northern Ireland and the Irish Republic, after Brexit. If it was proven that suddenly there were tens of thousands of EU migrants using Scotland as an illegal backdoor into England, then the Scottish Government might have to agree to cooperate with the English authorities to take corrective action. Personally, I think the issue will be resolved when a post-Brexit Tory administration inevitably introduces identity cards to “deal” will illegal immigration.

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One upshot of special status for Scotland would be that Scottish citizens, of necessity, will enjoy a special mark in their UK passport explaining their separate right to free movement inside the EU. Another gain for Scotland in retaining free movement of European people is that we will become an instant location for businesses operating in the UK who require staff they can only get from the EU. City-based financial services companies will be inclined to locate more of their functions in Scotland, where they will not be hidebound by rules in migrant EU workers. The Scottish economy will grow faster and more local jobs will result.

What about the other “pillars” of being in the single market: free movement of goods, services and capital? Free movement of capital is largely governed by international rules and unlikely to be affected by Brexit. As regards trade in goods and services, let’s assume that whatever Brexit deal the Tories do, it involves some new tariff barriers between the UK and Europe. This leaves Scotland with a problem. How can we be inside the single market – with goods and services flowing freely between Scotland and EU – yet still be inside the UK which has tariff walls with Europe? Have no fear: there is a solution.

But first, we need to make a distinction between the single market and what is known as the customs union. The customs union came before the single market. It is the obligation of EU member states to trade goods freely with each other without tariffs but simultaneously to maintain a common external tariff wall against foreign imports. The solution to Scotland’s post-Brexit trading position is to be in the single market but outside the customs union.

How could that be possible? Answer: Norway is inside the single market but outside the EU Customs Union. Norwegian goods sell freely in the EU (ie without extra import tariffs) and vice versa. That boosts trade and jobs. But Norway is also free to trade with the non-EU world any way it wants, without adhering to common EU external taxes. What happens if some Norwegian importer buys cheap Chinese widgets (on which Norway does not impose tariffs) then resells them in Italy, potentially evading EU tariffs on Chinese goods? More sneakily, what happens if our Norwegian imports Chinese components tariff free, then incorporates them into local goods he is selling on to the EU?

Answer: Norwegian firms selling to Europe have to meet EU reporting rules on the origin of re-exports or exports using components imported from outside the single market. A Norwegian firm thus becomes responsible for paying the EU external tariff on its goods or bits of goods that originated outside of Norway. But the Norwegian bits go to the EU tariff-free so benefitting from being in the single market. Scotland could operate the same system.

OK, I know this is complicated. But it means Scottish firms can stay inside the single market and get cheaper access to EU markets. At the same time, they can stay inside the UK and keep their tariff-free sales to England. Certainly, they would be responsible for paying English tariffs on material imported from outside the UK. And they would add EU tariffs on the bits of their manufactures using English components. That would require the appropriate accounting software, but if the Norwegians can do it, I don’t see any insuperable problem.

And the potential gain to Scotland is huge. We would get cheaper access to EU markets than England would have. And cheaper access to English markets than the EU would have. Companies galore would park themselves in Scotland, to take advantage. To make this work would require the devolution of significant corporate regulatory and tax powers, resulting in domestic home rule.

This is the prize that Nicola Sturgeon is seeking when she says Scotland should stay in the single market. It is also a programme that unites at least two thirds of the Scottish people. There are even gains for the British Treasury by keeping financial services companies in the UK (albeit relocated to Scotland) and paying taxes. What’s not to like?

My hunch is that Theresa May will look this gift horse in the mouth. A flexible, pragmatic Brexit deal that serves all the nations of the UK is not what the Tories are really after. They are living the illusion of an imperial England reborn and Britannia ruling the waves again. If so, a united Scotland will have to look to its own long-term interests.