Economist: When it comes to the Northern Ireland Protocol, you ain’t seen nothing yet

There has been much criticism of the economic impact of the Northern Ireland Protocol.

By Esmond Birnie
Friday, 11th February 2022, 1:26 am
Updated Friday, 11th February 2022, 1:34 am
Checks at Belfast Port this month. But the rigour of the protocol has so far been greatly reduced by unilateral exemptions introduced by the UK (grace periods re. meat products, lower value parcels etc.)
Checks at Belfast Port this month. But the rigour of the protocol has so far been greatly reduced by unilateral exemptions introduced by the UK (grace periods re. meat products, lower value parcels etc.)

But in two main ways, you ain’t seen nothing yet.

First of all, at the moment we are debating the impact of a still only partially implemented protocol. The EU’s self-declared position would imply that in the future we could all face many more costly and intrusive checks: vet checks, personal baggage, parcels and pets.

Secondly, NI may be largely blocked out from any benefits from a range of policy initiatives: Free trade agreements, some forms of tax devolution and a freeport. Whilst we could have another debate about how beneficial any one of those policy options might be it would be nice to think these were options a Stormont Executive could draw on rather than areas where NI had become a mere ruler-taker relative to the European Commission.

Understandably, the economic debate around the protocol has concentrated on short and medium term effects — higher costs on bringing in goods across the Irish Sea but possibly also some, partly, compensating benefits in terms of any favourable impact on North-South trade and/or inward investment.

Over the long run, however, there may be some very severe costs and or constraints on what any NI Executive can do.

• What fuller implementation of the Protocol could involve:

Very importantly, during 2021 the rigour of the protocol was greatly reduced by unilateral exemptions introduced by the UK government (grace periods re. meat products, lower value parcels etc.). The EU has, so far, acquiesced in these. However, we have an indication of their negotiating position (possible ‘red lines’) in the recent document a Report to the European Commission Draft Report of a Commission Control Carried out in the UK from 21 to 30 June 2021 on the System of Official Controls on Entry of Animals and goods into Northern Ireland and verification of Compliance etc.

This report argues that actual number of checks (and the related vet staff numbers) are well below – at only 30%– the number they should be. Similarly, this report to the commission recommends new or additional checking re. port or airport personal baggage of travellers, parcels and pets. So, if in 2021 the protocol represented a significant addition to costs of bringing things in from Great Britain, that cost could well escalate depending on the outcome of the negotiations.

• In the long run we need to think about how policy options may be closed off:

This relates to three potentially important policy areas:

1. NI being able to fully participate in the benefits of any UK free trade agreements (FTA).

2. NI being able to exercise options regarding tax devolution (and cutting, think corporation tax, as suggested as far back as 2011) without being hit by reductions in the Block Grant to Stormont.

3. NI being able to join the UK-wide process of creating freeports through designing an appropriate incentive package which would benefit business operating within that freeport area.

• Free Trade Agreements

FTAs have become something a “holy grail” for the UK government’s pursuit of “global Britain”. Typically what they have so far involved (eg. Australia and now New Zealand) is the UK opening up its market for food products in order to gain reciprocal advantage for the UK’s manufacturing and service businesses [Note 1], and in the future the ultimate FTA would be with the USA and/or a broader group of Pacific rim economies.

But, if under the Protocol, NI remains bound to maintain EU animal and food standards what can it bring to the table of such negotiations? Unless, a future American administration [Congress — Note 2, below] decides to be very generous to NI we could find ourselves cut out of a FTA [Note 3].

• Tax devolution, especially Corporation Tax

In their recent interim report, the Fiscal Commission recommended that a reduction in NI’s regional rate of Corporation Tax should still be considered subject to the important caveat such a reduction should be achieved without also reducing the NI Block Grant. The problem is, however, if NI remains subject to Single Market rules it is still subject to EU law re. tax devolution, that law makes a block grant reduction mandatory (the Azores judgement at the ECJ).

What we may well find is that the Protocol reduces the tax policy options open to the NI Executive. We end up with the reverse of “No taxation without representation” i.e. “taxation without representation”.

Creating an effective freeport in NI supported by a meaningful incentive package

The London government has repeatedly said every region of the UK including NI should have a freeport as one more part of the levelling up agenda. In reality [Note 4] a freeport benefits regional GDP and jobs to the extent a strong and meaningful incentive package (grants, de-regulation) applies. But, and therein lies the rub, given maintenance of EU State Aid rules how much discretion would NI really have? It is very unclear. Obviously, some freeports do exist across the EU but many of them pre-date the Single Market and NI would be dependent on the “kindness of strangers” in getting the Commission to agree to any arrangements we had [Note 5].

• Dr Esmond Birnie, Senior Economist Ulster University Business School

Notes

1. All based on the standard and old economic theory of comparative advantage. Countries, like individuals, should specialise in the activities they are relatively best at. If they all do this and trade amongst themselves, at least in theory all countries end up better off (importantly, individual producer groups, think possibly farmers in England or NI, may be worse off but even notwithstanding that the overall national or regional economy gains through trade).

2. Under current constitutional practice in the USA Congress, particularly the Senate, as much as the President has say over trade policy.

3. Of course, a further complication is that some Congress members have implied that they would make UK implementation of the Protocol a condition of their signing up to any UK-USA FTA!

4. There is some controversy about how much real impact freeports have. Some previous experience (the 1980s-90s Enterprise Zones in NI and GB) suggest a high degree of displacement: firms up sticks and move a few miles down the road to get the incentive benefits, hence additionality could be limited.

5. One of the EU’s largest freeports was Hamburg but that pre-dated the EU/EEC and even German unification in 1871 (part of the early 19th century German customs union process). Interestingly, Hamburg’s freeport status was given up in 2013

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