Despite Brexit, Northern Ireland remains part of the European Union’s single market and customs union. While negotiations continue over the future of the Protocol that underpins the arrangement, more and better data are needed to understand its full effects on trade flows and business costs.
‘An event has happened, upon which it is difficult to speak, and impossible to be silent.’ So said the great Anglo-Irish parliamentarian Edmund Burke in 1789.
Economists should be all over the workings of the Northern Ireland Protocol, which was introduced at the beginning of 2021 following the UK’s exit from the European Union (EU). In practice, commentary on the economic cost of the Protocol – which allows goods to cross the border from Northern Ireland into the Republic of Ireland without checks – has been rather muted.
This may be because the Protocol has become a politically charged issue. But in addition, data on the size of trade flows and associated costs since its implementation remain limited. For the period since 1 January 2021, when the Protocol began to operate, the only data available are those produced by the Republic of Ireland’s Central Statistics Office (CSO) on north-south trade on the island of Ireland.
For trade in goods between Northern Ireland and the rest of the UK, the most up-to-date data – from the Northern Ireland Statistics and Research Agency (NISRA) – is for 2019 (see Tables 1 and 2). Although data for goods and services combined for 2020 are available, the 2021 data will not be available until the end of this year.
Our preference is to use NISRA-type data. Rather more up-to-date data (VAT-related, from HM Revenue and Customs) are available from the Office for National Statistics (ONS), but there are indications that this may be less reliable because of the use of UK-wide data apportioned out to the regional level.
For context, according to CSO data, exports from the Republic of Ireland to Great Britain in 2021 (€14.4 billion) increased by 17% compared with 2020. In contrast, imports to the Republic of Ireland from Great Britain in 2021 (€15.4 billion) were 13% lower than in 2020.
This article sets out what we know about the economic impact of the Protocol, whether positive or negative.
In late 2019, as part of the broader withdrawal agreement between the UK and the EU, special arrangements were made for Northern Ireland. A hard economic border between Northern Ireland and the Republic of Ireland was avoided and, as a result, Northern Ireland remains part of the EU’s single market and customs union for goods.
But how could the EU prevent businesses in Great Britain from using Northern Ireland as a back door entry into the single market?
It was agreed that goods coming into Northern Ireland from the rest of the UK would be checked to ensure compliance with the tariff and non-tariff aspects of the EU’s single market and customs union. Protocol checks or, indeed restrictions, are especially important with respect to food products – Northern Ireland applies the EU’s sanitary and phyto-sanitary (SPS) standards.
Some of the checks and controls have been mitigated by ‘grace periods’. For example, parcels sent from Great Britain to Northern Ireland that are worth less than £135 are exempt from customs procedures. Further, the EU SPS rules would have resulted in an outright ban on imports of certain meat products, but the UK government unilaterally suspended such bans. As of mid-2021, the EU estimated that only about 30% of required veterinary checks were actually happening.
The Protocol stated there should be ‘unfettered access’ to Great Britain’s internal market. In other words, there should be no formal trade barriers against Northern Irish firms selling into the rest of the UK. But this does not exclude the possibility that Northern Irish firms would become less competitive in the British market given any additional costs imposed through the Protocol (as discussed below).
In 2018 – ahead of the introduction of the Protocol – forecasts by HM Treasury suggested that international experience indicated that borders produced a cost increase of somewhere between 5% and 11% through non-tariff barriers.
Four businesses (Marks and Spencer, Allen Logistics and two anonymous businesses reported in the House of Lords sub-committee on the Protocol) and one trade association (Horticultural Trades Association) have posted data from which the cost impact of the Protocol can be estimated.
From these five examples, it is estimated that the cost averages at least 6% of general costs, which is at the lower end of the Treasury forecast. Given that the total annual value of goods from Great Britain purchased by Northern Ireland is about £11 billion (see 2019 data in Table 2), this implies that even if the Protocol increases costs by only a small amount, say 2-3%, this translates into extra costs of several hundred million pounds annually.
That is to say nothing of cases where, since 2021, British firms have withdrawn completely from the Northern Irish market or reduced their product range there. Research by the Consumer Council indicates that at least 200 British companies no longer send products to Northern Ireland (Consumer Council, 2021).
Consumers also face costs as a result of the Protocol. Currently, retail in Northern Ireland is well integrated into supply chains for the rest of the UK. In logistical terms, it is part of a national market of about 68 million people and its associated economies of scale.
But if supply chains between Northern Ireland and the Republic of Ireland were to increase in importance, then we would be talking about a smaller unit (that is, two million plus five million people) and hence economies of scale may be reduced. Transport distance may also be longer – between the island of Ireland and the rest of the EU, rather than between Northern Ireland and Great Britain.
The latest Eurostat data, which are for 2020, show that food retail prices were 34% higher in the Republic of Ireland than the UK average. Data for 2016 suggests we can assume that Northern Ireland is broadly the same as the UK average (ONS, 2018). Annual spend on food and non-alcoholic drink in Northern Ireland was £2.5 billion in 2020.
A wide variety of factors – for example, higher wages and rents, or monopoly profits – might explain the higher food prices in Ireland. Some of this could be the result of differences between the two systems of logistics. And, if the Protocol leads to Northern Ireland-Republic of Ireland supply chains to a greater extent, this may result in higher retail prices.
Take a possibly optimistic scenario. If eventually a quarter of the Northern Irish grocery market shifts to Republic of Ireland’s supply chains – and assuming that a quarter of the price difference (hence 8.5%) is linked to logistics differences – this would imply that the cost of food retail would rise by about £50 million (that is, 8.5% of a quarter of £2.5 billion).
If, more pessimistically, we assume that eventually half of the Northern Irish grocery market shifts and that half of the price difference is attributable to logistics, then the cost impact would be about £200 million (that is, 17% of half of £2.5 billion).
Government is spending about £250 million annually in relation to the Protocol, mostly related to trying to reduce the cost to businesses. Some of this is information and online assistance (for example, the Trader Support Serviceand Movement Assistance Scheme). A relatively small part of the government spending funds veterinary checks at Belfast and other Northern Irish ports.
It might be argued that most of this is really a cost to the UK exchequer and not to Northern Ireland specifically: very little is charged to the Northern Irish block of public spending. But a cost to the UK taxpayer is a cost to that taxpayer regardless of where it falls in the government accounts.
At some point, the UK government is likely to scale back this spending and the burden will shift to businesses in Northern Ireland and Great Britain, or the regional government in Northern Ireland will have to take up the slack.
The analysis above has been limited to businesses, consumers and government separately. One study has estimated the impact on the overall Northern Irish economy (Duparc-Portier and Figus, 2021). Given the scale of purchases into Northern Ireland from Great Britain and the increase in the costs of these, the research suggests that even allowing for benefits such as continued free access to the single market, the long-run ‘cost’ to the economy is equivalent to 2-3% of GDP, although the impact of inward investment is not considered (discussed below).
It might be objected that this estimate uses an unattainable counterfactual – what the situation would have been had the UK remained in the EU – but a response could be that the research analyses the variant of Brexit that was chosen. This turns out to have substantial net costs, most of which are attributable to increases in the cost of goods brought from Great Britain to Northern Ireland in terms of non-tariff barriers.
It is worth stressing that this work does not include spillover effects of any Brexit-related UK-wide reduction in GDP on Northern Ireland (Duparc-Portier and Figus, 2021). Hence, the results are not directly comparable with those of many of the forecasting exercises related to the impact of Brexit on the overall UK economy.
As well as the reduction in supply resulting from higher costs, the Protocol can be thought of as acting as a protective barrier around the two Irish economies. It would therefore be unsurprising if trade between Northern Ireland and the rest of the UK dropped, while that between Northern Ireland and its southern neighbour increased – the phenomenon known as ‘trade diversion’, first identified by Jacob Viner (Lipsey, 1957).
The Republic of Ireland’s CSO data suggest this, although we do not yet have data on east-west trade flows. Compared with 2020, Northern Irish exports to the Republic of Ireland grew by 65% and exports going in the other direction grew by 54%.
It is hard to reconcile such stellar value growth with data showing that the total number of border crossings by freight vehicles increased by only 12% in 2021. Some individual businesses in Northern Ireland have gained as British firms have sold less into either Northern Ireland or the Republic of Ireland. But as with trade protection, there remains the question about the overall impact on economic welfare of such trade diversion. The study discussed above emphasises that Northern Ireland will not get the ‘best of both worlds’ (Duparc-Portier and Figus, 2021)
Northern Ireland is the only part of these islands with access to both the UK’s internal market and the EU’s single market for goods. Might mobile foreign direct investment projects in manufacturing now have incentives to come to Northern Ireland?
Data on foreign direct investment after 1 January 2021 are extremely limited. But we may draw some idea of any changes by looking at job announcements made by the development agency Invest NI.
In 2020, 616 manufacturing jobs were announced (27% of the total) and 1,626 in services. Between 1 January 2021 and 15 March 2022, 508 jobs were announced in manufacturing (17% of the total) and 2,514 in services (including ASOS, PwC, Hinduja Global Solutions and KPMG).
Job announcements do not necessarily translate into job creations. At least two major manufacturing businesses (Almac and AMP) made announcements in 2021, which were not reflected by Invest NI (1,000 jobs in the case of the former, 160 for the latter). For what they are worth, the Invest NI job announcements do not indicate a post-Protocol jump for investment in manufacturing.
Northern Ireland’s foreign direct investment performance should be put in context. For several decades now, its revealed competitive advantage has been in terms of services activities (for example, information technologies and back office work, especially originating from US firms).
The Republic of Ireland, in contrast, relies much more on data centres and manufacturing plants. Given the Protocol’s emphasis on traffic in goods, it probably has much less impact (either positive or negative) on Northern Ireland’s attractiveness as a location for services. It remains to be seen how far we will see additional manufacturing activities come to the region.
The economist John Maynard Keynes famously said, ‘In the long run we are all dead’ – so what of the Protocol and the long run?
Northern Ireland remains a rule-taker with respect to the EU and that is notwithstanding whatever may happen in terms of divergence between British and EU regulations. In these circumstances, there must be some doubt as to whether Northern Ireland will be able to benefit meaningfully from the following potential policy levers:
The Protocol negotiations between the UK government and the EU continue with apparently glacial progress. It is probably now impossible for the UK government to make credible threats of a trade war over the Protocol given the real war in the Ukraine. Use of the Protocol’s Article 16 (a unilateral suspension) also seems unlikely.
Leaving aside the wider, political implications of the Protocol, the following policy options may exist:
The cost of living crisis and wider inflationary pressures during 2021-22 outweigh the cost disadvantages imposed by the Protocol. That said, Northern Ireland can do little about movements in global energy markets.
The Protocol represents policy choices that could conceivably be changed. The most likely scenario is that at the end of 2022, the Protocol will still be in place at its current, partial level of implementation. Economists can make the modest proposal that more and better data would help us to understand the position more clearly.
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