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2 Global, European and UK Economic Developments
2.1 Scotland in the Global Context
Scotland's economy has become highly integrated with the wider UK, EU and global economies over centuries of trading. Overseas commerce has allowed businesses located in Scotland to tap into markets much larger and more diverse than Scotland's domestic economy. The everyday exchange of goods and services that now takes place between Scotland and other countries is a major influence on growth, employment and living standards here. Indeed, the strength and growing prevalence of Scotland's overseas trading links dictate that global economic conditions, the subject of later sections of this chapter, have a major bearing on all aspects of economic life in Scotland.
2.1.1 Scotland's Trade
Given Scotland's position as a high-wage, developed economy, businesses located in Scotland tend to find comparative advantage in high value-added sectors (see Chart 2.1), such as electrical & instrument engineering, financial services and niche products like whisky (which constitutes a large proportion of the food & drink sector). As a consequence of the specialisation of economic activity in high-value production, around 90 per cent of Scottish exports go to other developed economies, in particular the rest of the UK, Europe and North America.
Just under two-thirds of Scotland's exports in 2002 (63 per cent) were sold to the rest of the UK. This is unsurprising given the obvious links in terms of geography, shared language and currency as well as the size of the potential market (the UK is the world's fifth largest economy). The strength of the economic linkages between Scotland and the rest of the UK implies that the performance of the wider UK economy bears significantly on the performance of the Scottish economy (see UK commentary below).
Beyond the UK, Scotland's major export market is the euro area (see Chart 2.2). Europe is a natural destination for Scottish exports due to its relative prosperity, geographical proximity and the free trade rules that apply within the European Single Market. In 2004, the euro area was the destination for 46 per cent of Scotland's identifiable non- UK exports (£16.7 billion), having fallen from 51 per cent in 2003. This decline reflected the relative economic weakness of the 'core' economies of the euro area. Within the EU, much of the most impressive recent growth has been outwith the euro area - in the UK and in the 10 new EU Member States.
The United States ( US) was Scotland's largest national export market in 2004, with the Netherlands in second place. The relative buoyancy of consumer and business demand in the US boosted its importance as an export destination for Scotland, while the weaker economic performance of Germany saw it decline from being Scotland's largest export market in 2002 to third place in 2004.
Chart 2.1: Exports from Scotland by Sector, 2004
Source: Scottish Executive, Global Connections Survey, 2005
Asia is a relatively modest export market for Scotland (accounting for only 12 per cent of Scotland's non- UK exports) although its importance to Scotland as a source of imports is much greater (see Chart 2.3). The largest Asian economies of Japan and China have carved out dominant global positions in a range of sectors from textiles to technology goods. Indeed, according to the Organisation for Economic Cooperation and Development ( OECD), China became the world's largest exporter of information and communications technology ( ICT) goods in 2004 - surpassing Japan and the EU in 2003 and taking over from the US in 2004. Looking ahead, the rapid economic development of China and India should further boost Scottish exports to Asia, which increased from 9 per cent of Scotland's total in 2003 to 12 per cent in 2004. Emerging Asia is likely to remain a key growth market for Scotland, even if exports levels remain relatively low.
Chart 2.2: Scotland's Non- UK Exports by Destination, 2004
Source: Scottish Executive, Global Connections Survey, 2005
Chart 2.3: Scotland's Non- UK Goods Imports by Origin, 2005
Source: HM Revenue & Customs, UK Regional Trade in Goods Statistics
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