This blog on 'what effect has the protocol had on Northern Ireland's ecomomy?' is by NERI Co-director, Paul Mac Flynn.
You would be forgiven for thinking the Northern Ireland Protocol had been around for an awful lot longer than it has. One question I have been asked many times over these past 2 and a half years is “what effect has the protocol had on Northern Ireland’s economy?”
The short answer is that we don’t know. Evaluating the impact of trade deals and other similar events is the bread and butter of many economists, so I don’t admit defeat lightly. The first thing to be said is that, the protocol is a supply side issue. A supply side issue is one where an event, or policy change in this case, affects the economy’s ability to match overall supply with existing demand.
Attempting to measure the impact of supply shock to the economy becomes all the more difficult when that shock is sandwiched in between two other supply side shocks, namely covid-19 and the war in Ukraine.
In other circumstances, it would be possible to estimate the impact of the protocol by looking at output figures for industries impacted by the new trading rules. However, the effect of both of these global events has had a much larger impact on the supply capacity of the economy and therefore trying to isolate the impact of the protocol alone becomes highly problematic.
Even if we were to narrow our scope and focus just on trade figures, the picture is still very murky. The Central Statistics Office in Dublin have produced statistics measuring trade between Northern Ireland and the Republic of Ireland. They have shown massive increases in all-island trade since the protocol came into being. One would think this would be a clear indicator of the effect of the protocol. The only problem is that the latest statistics for Northern Ireland don’t show anything near the same effect.
In the year ending December 2021, the CSO showed that North-South trade increased by almost 65% while trade going South to North increased by almost 54%. The latest figures from the HMRC regional trade statistics show a much smaller increase of 27% in South- North trade but show a small decrease in North to South trade.
There is evidence that some of the recent increase in the CSO figures do relate to firms adjusting their supply chains, but more evidence that the advent of the protocol has introduced uncertainty into the collection of trade data. In reality, the gulf between these two sets of statistics is a long-standing issue. The main differences relate to GB to ROI trade that HMRC attribute to NI that the CSO does not, and the reporting threshold for exports, which is much bigger for the CSO than it is for HMRC.
Without official statistics to construct an evaluation some have resorted to looking in depth at the experience of individual firms and extrapolating this for the economy as a whole. While such analysis can be a good indicator of the ‘on the ground’ experience, it is, by its nature, a partial analysis.
Others have made efforts to estimate the impact of the protocol by analysing its effect on a model of the Northern Ireland economy. This is the most promising analysis to date, but it suffers from one fatal flaw. Every model that evaluates a policy change must have a baseline to compare it to. This becomes a problematic because there is no natural alternative scenario for the protocol to be judged against.
Most of the modelling work that has been done to date has compared the impact of the protocol against an alternative scenario where Brexit never happened. What does this really tell us? Is this really a credible comparison? What should the baseline be instead? A no-deal Brexit?
This is the reason the central question I posed at the beginning is so intractable. Even if you can account for the impact of other global events or the unpredictability of trade statistics, any economic evaluation of the protocol requires agreement about what the alternative was. A no-Brexit baseline is unrealistic but a no-deal baseline is unknowable.
I am willing to stick my neck out here and say that not only do we not know what the economic impact of the protocol has been, it is also quite likely that we will never know. Political negotiations will continue over the coming month and weeks and a lot will be said. Definitive pronouncements about the economic impact of the protocol, one way or the other, should be taken with a very large pinch of salt.
This article appeared in the Belfast Telegraph on Tuesday 7th June, 2022.