Scottish independence would create an international border cutting across Britain from the North Sea to the Solway Firth. Here, Dr Thomas Sampson from the London School of Economics examines the economic consequences of introducing a border between Scotland and the rest of the UK.

Borders are barriers. They restrict the movement of goods, investment and people across countries. In Scotland’s case, free movement of people is unlikely to be affected by independence. Like Ireland, Scotland would probably form a common travel area with the rest of the UK, ensuring that each country’s citizens would retain their rights to live, work, study and travel in the other country.

But trade and cross-border investment would inevitably become more costly after independence, making it harder for Scottish firms to do business with the rest of the UK and increasing Scottish import prices.

The rest of the UK currently accounts for close to two-thirds of Scotland’s trade, a much larger share than the size and proximity of the two countries can explain. At least part of this excess trade is caused by the political and economic union between Scotland and England. Independence would weaken cross-border integration leading to higher trade costs.

Border costs take many forms. Policies such as tariffs and customs checks attract the most attention, but less visible barriers, such as regulatory differences and frictions that reduce the effectiveness of international communication, can be equally important for business. And although trade deals, like the post-Brexit Trade and Co-operation Agreement between the UK and the EU, reduce border costs, they do not make borders disappear.

Even within the EU, many economic policies, such as taxes, labour laws and regulation of services industries, are country-specific, which generates border costs between EU countries. Similar barriers would arise between Scotland and the rest of the UK following independence, even if the two countries maintained a very close relationship and formed a common economic market.

But unlike in 2014 when Scots voted against independence, any second referendum would take place in the shadow of Brexit. The campaign would not only be about Scotland’s place in the UK, but also Scotland’s place in Europe. As an independent country, Scotland would face a choice over whether to rejoin the EU and, in consequence, over where the EU’s external border should lie. Between Scotland and Europe, or between Scotland and the rest of the UK?

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Were Scotland to rejoin the EU, the customs and regulatory border between the UK and EU that was created by Brexit would no longer exist for Scotland. Scottish firms would have unimpeded access to the EU’s single market and there would be no restrictions on Scotland-EU trade.

At the same time, becoming an EU member would prevent Scotland from remaining in a common economic market with the rest of the UK. A common British market would minimise the increase in trade costs between Scotland and the rest of the UK following independence. And it would ensure that new border costs emerged gradually over a generation or more, giving the economy ample time to adjust to changes in trade patterns.

By contrast, rejoining the EU would lead to a larger and more rapid increase in border costs. Customs checks would be required on the M6, the A1 and other crossing points between Scotland and England, creating a physical border within Britain. Scotland would also have to abide by EU regulations and economic policies, further increasing trade barriers due to regulatory divergence between Scotland and the rest of the UK.

Which option would be better for Scotland’s economy? Rejoining the EU or staying close to the rest of the UK? A common argument is that Brexit strengthens the case for independence because rejoining the EU would allow Scotland to offset the economic costs of splitting from the UK. This argument is seductive. The EU is a larger economy than the UK and membership of the EU’s single market and customs union would boost Scotland-EU trade.

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But, at least from an economics perspective, the argument is flawed. My research with colleagues at the Centre for Economic Performance at London School of Economics (LSE) finds that the impact of lost trade following independence would be two to three times more costly for the Scottish economy than Brexit. And this is true regardless of whether or not an independent Scotland rejoins the EU.

The reason for these findings is simple. The value of Scotland’s trade with the rest of the UK is around three times greater than its trade with the EU.

Therefore, avoiding trade barriers within the UK is more important for the Scottish economy than reducing trade costs with the EU.

The LSE analysis estimates that Brexit and independence combined would reduce Scottish income per capita by between 6% and 9%, costing the average Scot around £2,000 per year. These estimates only account for the impacts of changes in trade costs and do not consider other possible economic consequences of independence, such as the end of fiscal transfers between Westminster and Holyrood or Scotland adopting a new currency. Nevertheless, they show that rejoining the EU is not a panacea for the economic challenges independence brings.

In fact, there is a paradox at the heart of the argument that Scotland’s economy would benefit from leaving the UK and rejoining the EU. A good rule of thumb is that, to minimise economic disruption, an independent Scotland should place the EU’s external border where it affects as little trade as possible. Currently, Scotland’s trade with the rest of the UK dwarves its trade with the EU.

This means that rejoining the EU would benefit Scotland’s economy only if independence destroys enough trade that the rest of the UK ceases to be Scotland’s biggest trade partner. However, the more independence reduces trade, the greater its economic costs. In other words, rejoining the EU makes economic sense only if independence causes sufficient economic damage. This is the paradox Scottish Europhiles must face.

Because borders rarely change, their importance can be hard to grasp. But 2021 has already provided an illustration of why borders matter. New border costs created by Brexit have disrupted UK-EU trade, reduced the variety of imported goods available to consumers and bankrupted some exporters. Independence would bring similar challenges.

Dr Thomas Sampson is Associate Professor of Economics at the London School of Economics