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Update: What has been the economic impact of the Northern Ireland Protocol?

A parliamentary bill seeks to override parts of the Northern Ireland Protocol. The proposed changes would be likely to have different effects across sectors. Recent discussions have called into question whether the Protocol has supported economic growth in Northern Ireland.

The Northern Ireland Protocol has been a source of political and economic uncertainty since it came into effect in early 2021. Ahead of the recent turmoil at Westminster, on 13 June 2022, the UK government introduced a parliamentary bill to alter the agreement between the UK and the European Union (EU), which allowed Northern Ireland to remain part of the EU’s single market and customs union after Brexit.

 The bill would enable the government to override parts of the Protocol. In particular, it would end or reduce customs and regulatory checks relating to goods moving from Great Britain to Northern Ireland, and remove EU constraints on tax and subsidy policy in Northern Ireland. It would also end the jurisdiction of the European Court of Justice.

A few days after the bill was introduced, the EU retaliated by beginning legal proceedings against the UK government. But the Westminster legislation is subject to considerable uncertainty: how quickly will it proceed and how far will it be amended in both Houses of Parliament? Whoever ends up replacing Boris Johnson as Conservative leader and prime minister could also influence the future of the agreement.

It is possible that there is some bluff and brinkmanship in the current proposals. The UK government would prefer not to act unilaterally but hopes that the threat of legislation will push the EU to make further concessions while enticing the Democratic Unionist Party (DUP), one of the big political parties in Northern Ireland, to permit the re-establishment of devolved government.

Given a backlog of cases, it may be at least a year before the European Court of Justice considers the alleged infringements of the Protocol. The EU may in fact welcome this delay. For the time being, it can engage in rhetorical threats such as ending the Trade and Cooperation Agreement with the UK that governs post-Brexit economic relations or removing Northern Ireland’s privileged access to the single market.

For at least a year, the UK government has argued that the Protocol contributes to both political instability in Northern Ireland and considerable trade diversion.

The latter point refers to its interpretation of the apparent rapid growth in trade between Northern Ireland and the Republic of Ireland (Central Statistics Office, 2022). The EU, for its part, has expressed bemusement as to why the UK government is moving to breach an agreement it made as recently as late 2019.

Leaving to one side the questions of how things got to this point or whether the proposed UK legislation will be applied in any case, the UK government’s proposals have some merit as means to reduce the frictions that the Protocol has imposed on the movement of goods from Great Britain to Northern Ireland (Duparc-Portier and Figus, 2021).

The UK government is proposing a reversal of a presumption in the Protocol, meaning that it would now be assumed goods coming across the Irish Sea will remain in Northern Ireland.

There would be green and red channels, and self-declaration for checks would only apply to the latter – that is, goods moving on to the Republic of Ireland and the rest of the EU. It would be an offence in UK law to sell on into the single market/customs union without following the appropriate regulations.

As a result, the UK government is turning to some of the proposals made at earlier stages of the debate about how to handle Northern Ireland’s position post-Brexit. This includes alternative arrangements, trusted traders and mutual enforcement (Prosperity UK, 2019; Verfassungsblog, 2019).

Critics argue that such approaches are unusual and would require the EU to have a high degree of trust that the UK government will act as its agent to protect the integrity of the single market. Yet this point could also be made about the existing arrangements under the Protocol.

Views of the Protocol are also being shaped by perceptions of economic performance. Commentators including the Irish deputy prime minister and the Scottish first minister, as well as the National Institute of Economic and Social Research (NIESR) and the Financial Times, have claimed that Northern Ireland’s recent economic growth performance is better than the UK average. They go on to argue that this indicates that the Protocol has been a net economic benefit.

Both parts of that proposition – that Northern Ireland has had above average growth and that the Protocol is the explanation – are questionable (see Figure 1).

Figure 1: Recent growth of GDP in Northern Ireland compared with the UK average, 2020 Q1 = 100

Source: Northern Ireland Statistics and Research Agency (NISRA) and Office for National Statistics Note: Volume of GDP in Northern Ireland (NI) represented by the NI composite economic index.

Note that the first quarter of 2020 was the last period before the pandemic had any substantial impact on the economy. Similarly, the last quarter of 2020 was just before the implementation of Brexit (on 1 January 2021), when Great Britain left the single market but Northern Ireland remained, given the Protocol.

It is true that compared with pre-pandemic output levels, Northern Ireland has registered significantly more growth than the UK average. But much of the explanation for this pre-dates the application of the Protocol.

The Northern Irish economy suffered much less from Covid-19 than the rest of the UK (possibly because it has a larger public sector). During the year since the fourth quarter of 2020, with the Protocol in operation, Northern Ireland’s growth (5%) fell short of the UK average (6.6%).

The Protocol is likely to affect different sectors or industries in various ways. It may hurt sectors that are dependent on inputs coming to Northern Ireland from the rest of the UK but help those that buy from or sell into the Republic of Ireland or the rest of the EU. Given this, it is worth looking at the pattern of growth within manufacturing during the period of the Protocol (see Figure 2).

Figure 2: Output growth in Northern Irish manufacturing sectors, 2020 Q4 to 2022 Q1 (2020 Q4 = 100)

Source: NISRA

There is a lot of volatility in the data and other factors that may be influencing these figures. For example, the rapid decline in chemical and pharmaceuticals may reflect a reduction in Covid-19 testing.

That said, the contrast between the recent performance of food, drink and tobacco (predominantly food processing), which has most likely benefited from the trade diversion effects of the Protocol, and that of electrical engineering, which is heavily reliant on inputs from Great Britain, is striking (Duparc-Portier and Figus, 2021).

It is also worth noting that if a structural shift is happening, it is one from sectors that generally have high productivity levels – for example, branches of engineering – to ones that are generally lower value added per person, such as food products (Forth and Aznar, 2018).

It remains uncertain whether this current bill will pass. But whatever happens, any new prime minister will still need to address the challenges thrown up by the Protocol, and Brexit more generally.

Where can I find out more?

Who are experts on this question?

  • Arnab Bhattacharjee, Research Lead at NIESR and Professor and Head of Economics at Heriot Watt University
  • Graham Brownlow, Management School, Queen’s University Belfast
  • Geoffroy Duparc-Portier, Fraser of Allander Institute
  • Giole Figus, Fraser of Allander Institute
  • Graham Gudgin, Honorary Research Associate Centre for Business Research at Cambridge Judge Business School
  • Esmond Birnie, Senior Economist, Ulster University Business School
Author: Esmond Birnie
Editor’s note: This is an update of an article published on 28 April 2022.
Photo by Leonid Andronov from iStock
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