Esmond Birnie: Cross-border trade suggests ‘all-island economy’ is more of a slogan

This discussion related to my article ‘Trading Places: Continuity and Change in Northern Ireland’s trading relationships’ in Irish Studies in International Affairs.

Three main areas of focus were: the extent of NI’s trade growth; the extent to which trade integration with the Republic of Ireland (RoI) was growing relatively quickly (hence, how far was there development of an all-island economy?); and use of the data results for the final two years 2021 and 2022 as a sort of early “test” of impact of the post-Brexit (protocol) arrangements.

One stand-out result from the data was the notably poor growth performance of goods sold from NI (sales of goods dominated by manufacturing products). Total external sales, in volume (i.e. adjusted for inflation) terms in 2022 were about one-eighth lower than in 2011. Goods exports also declined. Sales of services grew very impressively during the 11 years. They more than doubled.

There was some ‘de-globalisation’. Surprisingly, the NI economy was becoming more dependent on the regional market rather than sales to the rest of the world beyond the region.

What was going on in terms of this differential performance between manufacturing and services?

In part, there was a collapse in NI’s sales of goods to GB during 2016-19 (this decline pre-dated either the practical impact of Brexit or covid). During this period a number of very significant producers in NI shut down (e.g. Michelin, Gallahers/JTI, Wrightbus) or down-sized substantially (e.g. Caterpillar). This could explain much of the decline in overall sales outside of NI.

In terms of NI’s much better performance in services, we both agreed that NI is benefiting from the fact that the UK is, after the USA, the world’s second largest exporter of services. NI has been strongly linked to GB in services such as legal and consultancy. Indeed, to a sort of ‘Anglo-sphere’ including the USA and Australia too.

We had some discussion about the performance and prospects for the aerospace sector in NI. Professor FitzGerald suggested NI could benefit from Airbus taking advantage of NI’s continued membership of the EU single market. I added that NI probably did have to think, if possible, about linking with all the major players including, notably, Boeing. Lack of economies of scale would remain a challenge.

It was noted that the January 2024 commitment (in the Safeguarding the Union agreement) by the then Conservative UK government to remove the statutory duty to promote the all-island economy was unlikely to be observed by the current Labour government.

I argued that the NISRA data, and hence measures of trade integration, cast doubt on the extent to which currently we had an all-island economy. That said, even if the baseline has been low, there had been strong growth towards greater north-south trade integration during 2011-22. Professor FitzGerald said that he was inclined to think the term more of a slogan.

I stressed that the post-Brexit trading arrangements did not kick in until January 2021 – and that the protocol applied to goods rather than services (that said, the ‘reach’ of EU laws is being felt in the service sector too).

I further argued that the narrative about Brexit being a catastrophe for overall UK trade was overblown. True, comparing end 2019 to end 2023, the volume of UK goods sold to the EU dropped by about 11% but then so did the volume of goods sold to non-EU countries.

During 2020-22, coinciding with the start of the protocol’s operation, the volume of goods purchased by NI from RoI increased by 35.5% but the volume coming in from GB grew by only 1.6%. This was very suggestive of a negative impact from protocol/’Irish Sea border’ trading frictions. Indicative, in fact, of trade diversion whereby NI purchasers were switching from GB-based suppliers to RoI/rest of EU ones.

Would trade diversion matter? I said it probably would matter. Two reasons:

If to any extent pre-Brexit NI were using lowest cost suppliers then the post-Brexit diversion would probably imply an increase in costs.

The protocol and associated trade diversion may be favouring certain sectors, e.g. food processing, and dis-favouring other sectors, e.g. parts of engineering (all to do with the extent to which traditionally there has been reliance on inputs from GB or RoI/rest of EU). This could imply a structural shift in the economy and probably a shift to lower productivity sectors. Economic regression rather than progress.

Is ”dual market access” a big bonus after all?

It has been claimed that NI will now reap great rewards from having a foot in both the EU single market and the UK single market. Of course, this dual market access is not without an economic price. That price being the frictions in the Irish Sea relating to GB which is NI’s largest outside source of material inputs.

The available, up-to-date evidence casts doubt on whether there has been any gain from the double market access. Recent EY (Ernst and Young) survey evidence relating to numbers of Foreign Direct Investment projects show the number of projects coming into NI has, at best, remained flat and NI’s proportion of the UK total has been in decline. Professor FitzGerald concluded, regarding dual market access, that it was “worth selling but not such a big difference”.

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Dr Esmond Birnie is senior economist at University of Ulster