Remaining EU, Irish nationalist and UK watchers continue to argue that Northern Ireland’s economy is outpacing that of the rest of the UK and that the Northern Ireland Protocol is ‘working’ so. This claim is simply not supported by the available evidence, which points in the opposite direction. In addition, the long-term costs of the protocol for Northern Ireland could be much higher than those seen so far. The UK government must not agree a deal with the EU that keeps the protocol in place, as it appears to want to do.
The Northern Ireland Protocol is now the subject of an economic disinformation campaign. Over the past 18 months, Brexit opponents and Irish nationalists have repeatedly claimed that the protocol has enabled Northern Ireland’s (NI) economy to outperform that of the rest of the UK and/or that the protocol had “protected” the NI economy from the downsides of Brexit. The latest example of this assertion was that of Irish Deputy Prime Minister Varadkar this week.
In fact, the evidence we have points largely in the opposite direction. ONS gross value added data for Northern Ireland shows output fell slightly less than in Great Britain (GB) in 2020 during the covid lockdown and then recovered somewhat more rapidly. But once the protocol came into effect in January 2021, NI grew more slowly than in the UK – by 5.5% from Q4 2021 to Q2 2022 compared to 7.5% in GB over the same period (see graph 1).
Source: First estimates based on ONS model of regional gross value added (GVA) in regions of England, Wales, Scotland and Northern Ireland
Other evidence from high frequency indicators also shows that NI is underperforming in the UK. The PMI composite indices, which track business activity, show Northern Ireland’s private sector growth has consistently underperformed the UK as a whole since the start of 2021 when the protocol entered in force. The underperformance has been particularly noticeable over the past four months when PMI surveys show Northern Ireland’s output contracted while the UK’s continued to grow (see Chart 2). ).
Source: Markit, Bank of Ulster
Regional trade data from the ONS also contradicts the idea that NI either outperformed the rest of the UK or was “shielded” from the effect of Brexit by the NI protocol. In the four quarters to June 2022, UK exports to the EU were 23% higher than in the four quarters to December 2020 (i.e. the period just before the entry into force Protocol and ATT), compared to an 11% increase in NI exports to the EU. . Part of Britain’s relatively strong export performance is in mineral fuels exports, but even if we remove those, the picture is similar: Britain’s exports to the EU grew by 14% between Q4 2020 and Q2 2022, while NI’s only increased by 8%. % (Chart 3). The evidence therefore suggests that NI has underperformed Britain in terms of exports to the EU, despite the protocol – a particularly striking finding given that this is the main channel through which NI is believed to have been saying “protected” from the downside of Brexit.
Much attention has been focused on Irish data apparently showing a sharp increase in imports from NI and (possibly) NI companies gaining market share in Ireland over UK producers. We remain a little skeptical about these data. Over the years, Irish data has consistently recorded much lower cross-border trade flows with NI than NISRA data in NI, and some of the recent recorded increase in Irish imports from NI may simply reflect this reduction in trade. gap due to greater certainty.
Furthermore, it is likely that a large proportion of Irish imports recorded from NI are actually goods from Britain re-routed via NI to avoid increased border bureaucracy at Irish ports. It should be noted that a significant part of the recorded increase in Irish imports concerns only three “erratic” sectors – medical/pharmaceutical, electric current and “unclassified” articles (Chart 4). The increase in medical/pharmaceutical imports (which alone account for around a third of the total recorded increase in Irish imports from NI) is implausibly high given the modest scale of this industry in NI and is almost certainly redirected to UK goods.
Source: Irish CSO
The results of employment are just as disappointing. Until the end of 2019, NI generated jobs at about the same rate as England or Wales and faster than Scotland. But NI has seen greater job loss during the pandemic. In the protocol period since the start of 2021, there has been a minor recovery in employment compared to GB but employment in NI remains well below (4%) its 2019 peak unlike GB where the employment is closer to a full recovery (Chart 5).
In addition to the disappointing trends in key economic indicators presented above, there is also ample evidence of the additional costs imposed on NI businesses by the protocol. The UK’s Finance Secretary to the Treasury recently highlighted the huge burden the new administration is under because of the protocol, including more than ten thousand traders completing a million customs declarations to date. A variety of NI sectors, particularly in agriculture and horticulture, have had major problems sourcing goods from Britain, due to the outright ban on British goods entering the NI, higher costs or UK producers abandoning NI sourcing due to administrative burden.
Imposing heavy administrative burdens on NI’s trade with its largest trading partner to preserve trade with a much smaller partner (the EU) never made economic sense as we have argued before. Claims that the protocol offers NI “the best of both worlds” are neither supported by emerging empirical evidence nor by serious modeling work. By far the best modeling work done to date is that of the Fraser of Allander Institute. This study found that a fully implemented protocol would in the long term increase the cost of UK imports of NI by 8% (a figure similar to estimates collected from individual companies involved in NI trading) and lead to diversion of the trade in British goods. to more expensive products purchased elsewhere. Increased costs for NI producers and consumers would result in a loss of competitiveness for NI businesses and a loss of real income for NI consumers. The study’s estimate is that the long-term impact on NI’s economy will be a loss of 2.5% of GDP, or around £1,600 per household.
Source: ONS Employment Survey
The only reason the protocol hasn’t done much more damage to NI’s economy yet is that it hasn’t been fully implemented. Grace periods on the movement of key goods like supermarket supplies have prevented what would have been a potentially very large negative economic shock (we have previously noted that some studies suggest Irish supermarket prices are up to 20% higher higher than those of NI).
But it would be foolish to conclude that a rigged situation, in which these grace periods are made permanent, will allow NI to make a net profit from the protocol. As we have shown, NI’s economy already appears to be lagging behind the rest of Britain and there are further long-term costs to come. NI will remain subject to European product market regulations, some of which will harm its economic competitiveness, including in the crucial UK market. Regulatory divergences with the rest of the UK via regulatory changes in Britain will likely have a similar impact, as will the fact that NI will be substantially excluded from future UK trade deals by the terms of the protocol – deals that may for example open up new sources of cheaper inputs for UK growers.
In our view, the protocol is an unambiguous net economic negative for NI, with costs likely to rise steadily in coming years. As a result, it would be a huge mistake for the UK government to agree a deal with the EU on the protocol that leaves it substantially in place – as they now seem inclined to do.
The EU can for example agree to reduce border controls on GB-NI trade in return for improved information on the nature of GB-NI trade flows – but generating this information will require all the current administrative burdens. customs that GB and NI companies face. to stay in place (costs which weigh especially on small businesses which are more frequent in NI). It will be a cosmetic political change that will do little to reduce the economic burdens created by the protocol. Similarly, a deal to avoid the (absurd) situation where UK steel exports to NI could be subject to a 25% tariff would be welcome, but economically quite modest. Only a fundamental reform of the protocol, in the sense previously defined by the British government, will save NI from serious long-term economic damage – and from potentially serious social and political tensions.