The Northern Ireland Protocol is already imposing significant costs on the economy of Northern Ireland, to the tune several hundred million pounds per year. But these costs are but a fraction of the heavy burden that would result from the protocol’s full implementation. This has been made clear by recent statements by the NI agriculture minister and by an EU audit of border processes which demands a dramatic tightening of Irish Sea checks. On top of this, NI faces being gradually severed from its main market and supplier by regulatory divergence with Great Britain over the longer term. Economic modelling suggests ultimate costs in the region of 3% of Northern Ireland’s GDP, equivalent to £1,600 per household – and even this could be an underestimate.
The issue of the costs and benefits of the Northern Ireland Protocol has moved to centre stage in recent days in the wake of an attempt by NI agriculture minister to halt checks on agri-food goods entering Northern Ireland (NI) from Great Britain (GB). Protocol supporters continue to claim the protocol offers significant benefits for the NI economy, while opponents cite estimates of high costs already imposed on Northern Ireland businesses by the protocol.
In our view, the protocol is a clear negative for the Northern Ireland economy. But crucially, the economic damage seen so far is likely to be only a fraction of the damage that would accrue if the protocol was implemented in its entirety.
Estimates of the current cost of the protocol are hampered by a lack of detailed data, specifically on GB to NI trade flows. But some estimates of the increased costs of moving goods from GB to NI are available from individual businesses. NI economist Esmond Birnie has collected a number of these (from firms including Marks and Spencer and Allen Logistics) and suggests border costs associated with the protocol are about 6% of trade values. With around £10bn of goods sent from GB to NI each year, this would amount to protocol costs of £600mn or 1.2% of NI GDP.
The 6% figure Birnie uses is not out of line with other estimates of the non-tariff barriers facing goods entering the EU from third countries. A range of 3-9% for such costs is reasonable in our view and this actually may be on the low side for some agri-food products. Whether it represents an accurate average across the whole range of goods entering NI from GB, including manufactures for which border processes are generally less onerous, is unclear. Still, we know that a subset of agricultural goods from GB such as trees, garden plants, and seed potatoes has effectively been shut out of the NI market. Meanwhile, a recent business survey also showed a quarter of NI firms reporting costs and difficulties bringing goods into NI and 20% reporting GB suppliers being unwilling to send products to NI. The UK BICS survey paints a similar picture, with a net 20-30% of GB firms reporting lower than usual sales to NI during 2021.
As agri-food goods are a significant chunk of goods crossing from GB to NI, it does not look unreasonable to estimate that the protocol is imposing border costs in the hundreds of millions of pounds, which will ultimately be borne by NI consumers in the shape of higher prices and reduced choice. But the total costs of the protocol, if fully implemented, would be much higher.
Currently, the full effect of the protocol is significantly diluted by two main factors. The first of these is ‘grace periods’ on full border checks for most foodstuffs, medicines and parcel deliveries. The second is that sufficient facilities and staffing for implementing even the smaller level of checks that are in place (and not suspended due to grace periods) simply do not exist. As a result, NI agriculture minister Poots has suggested some 90% of the border processes and checks the EU would like to see happening under the protocol are not taking place.
This point has been confirmed – quite dramatically – by a recently published audit by the EU of the operation of the protocol. This document lays out starkly just how restrictive the EU would like the checks on goods – especially agri-food goods – flowing between Great Britain and Northern Ireland to be. Among other things, it calls for –
- The expansion of border control posts in NI
- More detailed form-filling for GB to NI trade flows (e.g. more information on transport manifests)
- Charging fees for official controls on animals and SPS goods entering NI from GB
- Increased physical inspections on consignments of horses, other hooved animals, and chicks
- More restrictive labelling and certification on meat products from GB
- Increased documentary checks on and monitoring of supermarket goods
- Identity checks on all consignments of animal goods and a higher rate of physical checks
- Checks on the luggage of passengers arriving from GB and small consignments of goods arriving from GB by parcel or courier
- Checks on the movements of pets from GB to NI
There can be no doubt that if all these requirements were met, the level of border bureaucracy faced by GB to NI trade flows would increase steeply, as would the associated costs. As it is, around 200,000 checks of various sorts are now occurring on GB to NI trade flows, which is equivalent to around a fifth of all such checks occurring across the whole EU. If Poots’ estimate is correct, the theoretical level of checks that might occur under a rigorously implemented protocol would be around 2 million per year, which would be more than currently occur across the entire EU – and this level of checks would be for a trade flow that is a tiny fraction of total EU imports.
Such a level of border bureaucracy would almost certainly be impossible to implement (the staffing requirements for vets alone would be enormous) and the costs and delays associated with it would decimate trade flows between GB and NI, especially for agri-food goods where the EU border processes are particularly onerous.
Indeed, a startling detail from the EU audit is that just 60 consignments of SPS goods entered Northern Ireland from non-GB third countries – for which grace periods and other easements do not apply – compared with over 55,000 consignments from Great Britain, where grace periods and easements are in place. So, a fully implemented protocol would likely see a drop in supplies of food to NI from GB of tens of thousands of consignments. NI would be cut off from its dominant (and natural) supplier of foodstuffs and be forced to look for alternative EU supplies that would inevitably be more expensive. As we have previously noted, Irish supermarket prices are up to 20% higher than in Northern Ireland according to some studies.
Over the longer-term, other costs to NI from the protocol would be likely to accrue. Birnie has also pointed out that at present, UK taxpayers are subsidising the operation of border processes between GB and NI to the tune of £250 million per year. This level of subsidy is not guaranteed to remain in place forever and could ultimately end up being a further cost to NI businesses and consumers.
On top of this, it is likely that a gradual process of regulatory divergence between GB and NI will increase trade barriers between GB and NI, raising costs for NI firms using GB inputs and damaging the competitiveness of NI manufacturers in their main market – GB. There would also be a range of sectoral distortions such as NI fishermen being treated as foreign boats in their own ports.
The best estimate so far for the costs of a fully-implemented protocol have come from the modelling work of Duparc-Portier and Figus which we previously reported in another article. Assuming non-tariff barriers to trade on GB to NI goods sales of 8% of trade values and additional barriers on NI services exports to the EU, these modellers estimate NI GDP would be reduced by 2.6% in the long term by the protocol. This is equivalent in today’s money of £1.3 billion or £1,600 per household in Northern Ireland. In our view, this estimate of protocol costs is reasonable, but arguably conservative, especially as it does not fully factor in the dangers of rising regulatory barriers over time.
Protocol supporters continue to suggest that NI is in fact benefitting from the protocol or will do so in the longer-term due to NI being attractive for foreign investors. But their arguments generally fail to stand up.
One recent claim has been that without the protocol, the losses to NI from Brexit would be much higher so that the protocol shields NI relative to the rest of the UK. Some simple arithmetic suggests this makes no sense. NI goods purchases from GB total 23% of NI GDP, while GB goods exports to and imports from the EU are less than 20% of GB GDP. The trade shock from a fully-implemented protocol for NI is unambiguously going to be bigger than that facing GB from Brexit – even if we assume no negative impact on NI sales to GB from the protocol, which is almost certainly wrong given the high share of GB content in NI exports (and the associated competitiveness losses on the GB market). Moreover, the large and diversified GB economy has more scope to substitute domestic for EU supplies at a reasonable cost than the small NI economy has and can also switch to cheaper non-EU supplies via freer trade with third countries – which the protocol also restricts NI from doing.
Another area highlighted by protocol supporters is the apparent sharp rise in cross-border trade. But as we have previously argued, this is less impressive than it seems. Much of the rise in imports from NI recorded by the Irish authorities is in erratic items, or items like medicines with no previous record of being sold from NI to the Republic and no significant production facilities in NI. A large chunk of these sales is likely to be GB goods re-routed via NI to avoid more expensive and time-consuming border processes at Irish ports. This will not add much, if anything, to NI output or employment.
Moreover, other data do not seem to support the notion of an export boom for NI from the protocol. Cross-border freight traffic has not risen in line with the rise in NI exports to Ireland reported by the Irish CSO. Regional UK trade statistics, meanwhile, show NI underperforming England in terms of total export growth in the year to Q3 2021 compared to the same period of 2019 and only slightly outperforming England in exports to the EU.
Talk of NI gaining from a surge in foreign investment by firms keen to exploit its ‘dual access’ to UK and EU markets is also not supported by any real evidence. It is certainly possible that some production facilities might be displaced by the protocol, but NI is not well placed geographically to achieve an investment surge that would need to rely largely on an EU supply chain.
Overall then, the costs of the protocol today are very real and considerable, although the lack of data makes a precise estimate difficult. The costs of a fully implemented protocol, however, would be much larger and would imply substantial hardship for what is already a relatively deprived region. While there will always be some firms that benefit from the distortion to trade between GB and NI that the protocol creates, NI consumers and businesses as a whole are going to be losers. The potential upsides of the protocol talked up by its supporters are exaggerated and poorly evidenced and are not going to offset the enormous costs created by progressively cutting NI off from its main market and supplier.
The protocol is, as we have consistently said, unworkable and must be replaced. The EU’s recent proposals in response to the UK’s July 2021 Command Paper on the protocol are hopelessly inadequate. The claimed reductions in the levels of checks in the EU proposals are exaggerated and in fact the proposals as a whole would actually increase the net burden of checks from current levels. Nothing short of removing checks on GB goods bound for NI, or reducing them to a minimal level, will stop the protocol causing major economic and social problems for NI.