Esmond Birnie: Claim that NI could become the UK and Europe’s Hong Kong is hard to square with the data

Significant though all of that is, probably more important if largely invisible to immediate detection, will be a continuing process of re-alignment of the NI economy. This began when the Northern Ireland Protocol came into operation at the start of 2021. NI is shifting from being a regional economy which is highly integrated within the UK into a more hybrid economy with a high degree of integration with the Republic of Ireland (RoI) and the rest of the EU. This is particularly in terms of supply chains and a general diversion of NI trade away from GB and towards RoI.

Any such fundamental adjustment to trade produces winners but also losers. A difficult question is whether the overall gains will outweigh the losses. One would like to think that the UK government designs policy to ensure an overall or net gain to the NI economy. Unfortunately, as most economists would argue and a myriad of examples illustrate (think Trump’s tariffs in 2017 or Poland’s current trade dispute about Ukrainian grain) trade policy often represents the triumph of short term political expediency over the common good.

The protocol, which came into force at the start of 2021, created various frictions (that is, higher costs) relating to the movement of goods from GB to NI. The Windsor Framework will almost certainly increase those frictions. This is because the various exemptions and grace periods, particularly relating to moving food products, now end. The statistics strongly suggest so-called trade diversion whereby NI’s trade with the RoI is growing at an extraordinary rate. So high in fact that this is probably at the expense of what had previously been trade with GB. If the protocol has had such an impact expect more to come under the Windsor Framework.

2021 was the first year in which the protocol was in force (importantly, the protocol applies only to goods and not services). During that year NI’s purchases of goods from most parts of the world increased, in some cases rapidly. However, the post-protocol growth in purchases from RoI was much higher than that for goods coming in from GB: 27% compared to 14%. This does not prove trade diversion but strongly suggests it was taking place.

A superficial analysis would say there is nothing to worry about: that we should celebrate a bonanza in terms of higher North-South trade. Some businesses have gained but this is not the whole story. If the pre-protocol/pre-framework was what economists would call the lowest cost “equilibrium” then the introduction of the trade disruption will be accompanied by higher costs, both to businesses and consumers. Is there any evidence to suggest that such a harmful impact may occur? Yes.

It is almost certainly the case that retail food prices are much higher in RoI than in NI. The direction of most cross-Border shopping flows confirms this. Food items matter a great deal in this context since we know this is where the greatest frictions relating to the Windsor Framework tend to be. In a comparison of 30 identical goods sold in Tesco stores North and South in 2014 RoI prices were 20% higher (Irish Times 25 August 2014). In 2020, using Eurostat figures RoI food retail prices were 34% higher than the UK average. A large number of cost of living comparison websites demonstrate that RoI prices were still much higher in 2022 or 2023.

Some of that price difference is probably attributable to the difference between RoI and UK food retail logistics of supply chains. This point has been confirmed by experts within the road haulage sector. Why would costs for the RoI supply chains be higher? Partly, because of the smaller market size (five million compared to about 68 million) hence implying less economies of scale and, secondly, because transport distances tend to be longer (RoI to continental Europe as compared to GB to NI). Under the protocol we have already seen some evidence that NI to GB supply chains are being replaced by NI to RoI ones.

So, for the period since the protocol came into operation we have strong indications of trade diversion. There are considerable grounds for believing that the long run implication of such diversion will be higher prices to consumers. What was true under the protocol is likely to apply under the Windsor Framework.

Claims have been made during the last two plus years that the NI economy is out-growing the UK average. The influential UK think tank the National Institute for Economic and Social Research (NIESR) drew the conclusion that this is a consequence of NI’s unique dual market access to both the EU single market and the UK internal market. “Partly driven by the Northern Ireland Protocol, NI rode the Brexit shock better than the other devolved nations and the English regions” (National Institute for Economic and Social Research 22 May 2023). But what do the data really show?

On 1 September 2023 the UK statistical body (ONS) published revised and improved UK GDP growth figures for 2020 and 2021. They reinforce the result that during period since January 2021, i.e. when the protocol Brexit trading arrangements for NI began, NI’s economic growth has actually been lower than rest of UK.

In Quarter 2 (i.e. April-June) 2023 the volume of output was 8.2% higher than at the start of 2021 (using the most recent data, published on 28 September 2023) but UK GDP was 11.2% higher. The further post-Covid recovery in NI during 2021 was much less pronounced than was the case in terms of the UK average. Since the start of 2022 growth has been limited in both NI and the UK.

During the recent NI Investment Conference the UK government claimed that under the Windsor Framework NI could become the UK and Europe’s Hong Kong. This claim is very hard to square with the data.

Dr Esmond Birnie, Senior Economist, Ulster University Business School