Sunday, 15 June 2014

Scottish exports

This morning, the Yes campaign tweeted thusly:
I have no issue with their second sentence. I'm not one to make the "too poor, too wee, too stupid" argument. Indeed, it is only ever independence supporters who do.

But the first sentence gave me pause, because £73.6 billion is more than a quarter of total UK exports. I know Scotland punches above its weight as a benefit of the union, but this struck me as unlikely. So I went and found the Scottish Government's figures. Here we are:
"The total value of international exports from Scotland in 2012 (excluding oil and gas) is estimated at £26.0 billion, of which £15.4 billion was from the manufacturing sector and £8.7 billion from the services sector."
(Scottish Government website)
Okay, so what's going on here? Aah:
The total value of exports from Scotland to the rest of UK in 2012 (excluding oil and gas) is estimated at £47.6 billion, of which £25.3 billion was from the services sector and £12.7 billion from the manufacturing sector.
(Scottish Government website)
So the Yes campaign has added these two figures together to reach their £73.6 billion. Well that seems fair, doesn't it? Maybe? Perhaps?

UPDATE: Actually, no it doesn't. As a couple of people have pointed out since I wrote this, there's a well-documented phenomenon in international trade known as the "border effect" which says trade is inhibited by borders for a variety of reasons, and a pair of regions within a country tends to trade 10 to 20 times as much as an otherwise identical pair of regions in two different countries. So not only is this figure unreliable, there are also good reasons to think it will fall dramatically simply because a border is created.  You can read more here.

Let's have a look at where the data comes from first. It's derived from the Global Connections Survey (GCS), an annual exercise which asks companies to classify their own trade. Around 5,000 companies with operations in Scotland are sampled, and the government says around 2,000 respond, "including nil responses". So, fewer than 2,000 data points then, but we don't know by how much. They are asked to fill in a form which has precisely one question tracking Scotland versus rest of UK sales, and the fourth most common complaint by companies is that they can't separate out their "rest of UK trade" from their "Scottish trade". [page 8]

One can appreciate their difficulty. If the Tomatin distillery company (try their 30-year-old, it's a cracker) was estimating the percentage of its whisky sold into the rest of the UK, how would it classify its sales to Asda (head office Leeds)? How does Tunnocks divvy up its deliveries to Morrisons? What does a company supplying call centre services to Sky write down in the percentage box? Moreover, what motivation have they to take the time and effort to make this accurate? What's the easiest way of filling out the form?

Is this level of evidence a good basis on which to decide the future of our country? Does it make any sense whatsoever to pretend that companies doing business entirely within the UK, with goods often crossing the Scottish border more than once, are somehow involved in "export"? Do these companies even think of themselves as "exporters" as they operate in their home market? Does the "Rest of UK" figure have any meaning at all?

To be fair, the GCS does deliver a bit more detail. It tells us [page 10] that the largest industry sector by far in the "Rest of UK exports" is financial services, accounting for nearly £10 billion - more than 20% of the total. Indeed, according to Scottish Financial Enterprise that's 90% of the Scottish financial services industry's customers.

Unfortunately here's where the wheels really start to fall off.

The only reason many Scotland-based financial services companies can successfully sell into the rest of the UK at all, is that both supplier and customer are in the same country. This would of course stop being the case if Scotland became independent. What we're actually adding up here is the value of financial services business that Scotland stands to lose should we vote to separate from the UK.

ICAS has said that proposed transitional arrangements to resolve cross-border pension problems are "wholly insufficient"; that EU rules preclude regulatory sharing meaning that separate systems and therefore separate markets are an inevitable result of independence; and that the White Paper's assertion of a shared workplace pension protection fund is pretty much pie in the sky.

It's fair to say that classifying as an "export" the supply of a service that could not actually be supplied across a national border is a very considerable stretching of the truth.


I'm not an economist, and I'm open to the likelihood that I might have mis-stepped in this layman's analysis, but it seems to me that explicitly basing a call for a Yes vote on a set of figures which are at best a hurried guess - and at worst a dishonest representation of the potential for Scottish exports to the rest of UK should independence come - is pretty slippery.

And another thought creeps inexorably around my head. Most people aren't going to look this closely at the things the Yes campaign says. When it says a Yes vote will end child poverty, for example, a good number of people are going to take it at its word. And when someone like me takes issue with such assertions, I will be dismissed as a scaremongering tribalist/careerist/BritNat/whatever.

So perhaps this blog is just another straw in the wind. Perhaps the relentless battering of those expressing doubts over independence will sideline these questions just as it has sidelined others. Perhaps the key Yes argument - that everything will be fine just because we want it to be - will win out in the end.

It's a hell of a basis for dividing our country in two.

14 comments:

  1. Like you, Duncan, I am a non-economist but a few thoughts occur.

    As you point out, currently within UK, financial services are a cross-border phenomenon. Both ways. If your analysis is credible, it will also mean that rUK financial services 'exported' into Scotland would also have to stop. These services would then have to be provided within an internal market, ie. a Scottish market. If the cross-border financial service is remotely comparable then any loss would be negligible. I do suspect, however, that Scotland 'exports' more financial services than we 'import' from rUK but without factoring in those figures your analysis is clearly flawed and certainly won't result in Scotland 'losing' the value of all those exports from the economy as at least a proportion of pensions, investments, life assurance etc currently provided to Scots by rUK companies would have to be serviced by Scottish companies.

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    1. Fair point, Sean, and one I will try to address in an addendum later.

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    2. Hi again Sean. After a good look around, I can't find any useful data either in HMRC's RTS or OTS releases detailing estimates of rUK financial services supplied to Scotland. I do accept your point, but I think it is widely acknowledged that Scotland's financial services industry sells the vast majority of its services into rUK, and rUK's financial services industry also sells the vast majority of its services into rUK.

      So while you are right that there will be an impact, I think it is relatively small. I would welcome any assistance from anyone who knows where to find some actual numbers on regional financial services trade within the UK.

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  2. Hi Duncan, of course both sell the vast majority of their services into rUK - after all 90% of the population live there. The question will be the relative difference in the majority of Scottish services versus the minority of rUK services. I'm going to guess the differential is relatively small but I'll also look around for evidence.
    Of the UK's 10 biggest insurance companies, for example, Legal and General (1), Aviva (2), Prudential (3), Phoenix Life (7), St. James Place (10) are based in England. Old Mutual (4) in South Africa. Resolution (6) in Guernsey. XL Group (9) in Ireland. Standard Life (5) and AEGON UK (8) in Scotland.
    I'm sure you'll find the same spread across all financial products. Personally, I have no financial products with Scottish-based companies and (presumably) would have to transfer everything into the Scottish economy in the event of independence and I'm certain many people are in the same position.

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  3. Hi Duncan, surely Tunnocks and Tomatin would get pretty good regional sales figures from the likes of Asda? I would expect them to use these to guide their advertising and promotional spends. It's the modern world and large supermarkets can tell you what most of their individual customers are buying every week from every one of their outlets after all. Granted the figures may not be completely accurate, but they are backed up by some reasonable data in my opinion. In that case, Scotland does currently export £73.6billion a year. That may change after independence, but at the moment it may well be true.
    Why would Scotland not be able to sell financial services to other countries? It already does (not just the rest of the UK) and we already buy them from countries outwith the UK. People have Euro mortgages, and I'd quite like one of those Dutch pensions - there's a Dutch company in London selling them at the moment.
    I think the problem you refer to about cross border pension schemes refers to them being fully funded. It's stretching the truth a bit to suggest that Scottish financial services companies only sell underfunded pension schemes.

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    1. My husband used to manage sales into multiple retailers (including Asda and many others) for a Fife-based manufacturing firm. I can assure you the last thing the retailers would do is feed back any sort of regional sales data to suppliers. It's simply not part of the relationship. The only post-sales feedback received was in the case of returns, which resulted in contractual penalties. Once the order is dispatched, suppliers have zero visibility.

      I linked to the form on which all of this estimation is based. I cannot see how you can consider it likely to result in accurate data. I think relying on the £73.6 billion figure is an act of faith, not reason.

      With regard to the question of financial services sales, I confess I have less direct experience, but I'm told by friends in, for example, the pensions industry that they have no option but to split their business into rUK and Scottish if we vote Yes. Perhaps some financial services can still be sold into rUK post indy, but it seems clear that many are threatened, according to ICAS and other industry bodies and companies themselves.

      I appreciate you taking the time to comment.

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    2. Thanks for your reply. Aviva plc is a British multinational insurance company headquartered in London, United Kingdom. It has around 31 million customers across 16 countries (Wikipedia). Why would Scottish companies be uniquely incapable of selling financial services across international borders?

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    3. I suspect insurance companies are more able to sell cross border. I'm not sure what proportion of Scottish financial services is insurance. I know we have a substantial chunk of pensions business, and that that would be affected by cross-border regulatory problems. So I think it's fair to suggest Scottish financial services companies would take a hit if we vote Yes, yes?

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    4. But the only cross border pension problem that you have raised the the problem of underfunded pension schemes. I don't believe anyone is trying to sell one of them. If pensions are affected in another way by cross border regulatory problems, then as Sean points out above, that would mean opportunities for Scottish companies in the event of Scottish independence. This can only affect a fraction of the Scottish financial services companies. If everything else (insurance, fund management etc) is not affected, then - it's not affected. I don't think it's fair to say that Scottish financial services companies would take a hit if we vote Yes. We don't know the figures, so any predictions are based on faith, not reason. Do you accept that classifying financial services as "a service that could not actually be supplied across a national border " is stretching the truth?

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    5. Pensions are affected in a range of ways by EU law. Yes, as Sean points out, that means opportunities for Scottish pension funds to meet the needs of Scots who are currently customers of rUK pension companies. But the reality is that Scottish pension companies currently serve a majority of non-Scottish customers, and they would likely lose that business. The Scottish financial services sector punches well above its weight because it has access to the whole UK market. It's not reasonable to ignore that fact.

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    6. http://dealbook.nytimes.com/2014/06/11/hsbc-sells-british-pension-business-to-swiss-re-unit/?_php=true&_type=blogs&_r=0
      HSBC sells it's pension business to Swiss RE - based in Zurich, Switzerland. They're not even in the EU. I don't see any fundamental reason why a Scottish based company can't make a profit from pensions sold in a different country.

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    7. Admin Re is based in London.

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  4. But Admin RE are a subsidiary of Swiss RE. Are you suggesting that Swiss RE don't make a profit from them? In that case, why would any company have subsidiaries in other countries?

    Please answer this question - do you accept that classifying financial services as "a service that could not actually be supplied across a national border " is stretching the truth?

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  5. "Scottish pension companies currently serve a majority of non-Scottish customers" - what is your source for this statement?

    "they would likely lose that business" - you haven't shown this to be true.

    Please answer this question - do you accept that classifying financial services as "a service that could not actually be supplied across a national border " is stretching the truth?

    It's good that you are questioning the figures presented by the Yes side - we need facts, not assertions in this debate. You're letting yourself down though when you make statements that aren't backed up with plausible sources.

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