LESS than a third of Scottish businesses are now exporting, as Brexit creates uncertainty over exchange rates and a greater focus on the domestic market, according a new report.

The latest six-monthly Business in Britain survey from Bank of Scotland found just 29 per cent of Scots firms trading overseas, down from 37 per cent last June.

Across the UK, the number of firms exporting dropped four points to 40 per cent.

The report collated responses from 1,516 UK firms, including 125 in Scotland.

Across the UK, it found a sharp drop in the number of companies confident their interests would be protected or promoted in Brexit negotiations, down from 60 to 48 per cent.

Those expressing a lack of confidence rose from 18 to 29 per cent.

Only 18 per cent said a “no deal” Brexit would be positive, compared to 39 per cent who said it would be negative, with Scotland one of the most pessimistic parts of the UK on the issue.

It coincided with a new study from the Institute of Directors (IoD) suggesting a “partial customs union” as a compromise plan for future trade with the EU after Brexit.

The IoD said a “bespoke” scheme covering industrial goods and processed agricultural products would help maintain the competitiveness of key industries.

It said the customs union that Turkey has with the EU, outside the single market, could be used as the template for a broad free trade agreement.

Director General Stephen Martin said prolonging the effects of the existing customs union was “crucial” in the transitional period after March 2019, while in the long term the UK should consider staying in a “narrowed customs union” to mitigate disruption from Brexit.

He said: "In the interest of our members and the wider business community, while respecting the decision taken by the people in June 2016, we feel this is the best way forward.

"We must be ambitious in undertaking the most important negotiations this country has embarked on for decades and push for a bespoke solution."

Allie Renison, author of the paper and head of Europe and trade policy at the IoD, said: "There are some important choices to be made about our future economic relationship with the EU, but sadly this debate has not fully come to fruition.

"Even now, 20 months on from the referendum, there is still much talk and much less action."

The Bank of Scotland report found 24 per cent of Scottish companies had taken a strategic decision not to export, a marginal 2 point decrease in the past six months.

A quarter of firms said they had decided to focus more on UK trade in light of Brexit.

Exchange rate uncertainty was the biggest factor in deciding whether or not to trade - cited by 26 per cent of firms as the largest barrier to exporting.

This was followed by tariffs and quotas (identified by 10 per cent of firms) and costs, including transport and port entry taxes, the biggest barrier for 7 per cent.

However despite the drop in exporting, Scottish firms already trading overseas were positive about their prospects for 2018, with a net balance of 17 per cent expecting overseas sales to increase over the next six months.

Scots firms saw the best markets as China (for 25 per cent), the US (22) and Germany (8).

The US is currently the most popular partner for Scottish exporters, at 17 per cent of trade, with Brazil, China, France, Germany, Ireland and Norway all on 8 per cent.

Simon Quin, Scotland area director for Global Transaction Banking SME at Bank of Scotland, said: “The majority of Scotland's exporters still see international trade playing an important role in their plans, despite the climate of domestic and international uncertainty.

“By using internal trade as a growth strategy for their business, British firms can also manage risk during periods of uncertainty. The fact that Scottish exporters see China as offering the biggest opportunity in future shows that they are looking to pre-emptively tackle the impact of a potential loss of access to the EU single market.”

On the political front, EU diplomats have removed a so-called “punishment clause” from the draft text of the arrangement for the Brexit transition period.

The European Commission last week said the UK might be sanctioned by the EU if it broke any European rules, as there would no time for the European Court of Justice to rule.

The warning, buried in a footnote, infuriated pro-brexit MPs.

Officials have now promised a new wording referring to standard infringement procedures.