After several years at the centre of Brexit arguments, Northern Ireland is now seen as the inevitable loser, whether there’s a deal or no deal. But while the Brexit debate has caused painful discussion about politics and identity, there could be a silver lining in economic terms.
Should no further agreement be reached, the UK will leave the EU without a deal. Under the current arrangements, that means Northern Ireland will effectively remain in the EU when it comes to trade in goods while the rest of the UK will leave it.
Goods produced in the EU and in Northern Ireland will be able to continue circulating freely, as they do at the moment, without any formalities, additional costs and tariffs. But the additional checks will be needed between the Great Britain and Northern Ireland so that businesses in Great Britain and the EU don’t free-ride on the arrangement and can’t simply use Northern Ireland as a gateway for exports in either direction without paying the necessary customs charges that will come into force as a result of Brexit.
All this means that more red tape and additional costs are about to apply to trade between Great Britain and Northern Ireland.
Any checks or formalities between Great Britain and Northern Ireland will create costs for businesses. For those that operate beyond the UK, these extra costs may be avoided if they re-shape their supply chains. In particular, if they deliver their products to Northern Ireland not from or via Great Britain, but from or via the Republic of Ireland – or from other EU member states – they will avoid any such additional costs. Economists call this effect “trade diversion”.
Let us use the example of Amazon. It is a huge multinational. Those of us who use it may have experience of goods being sent from Amazon distribution centres in Spain or Germany, even though orders were placed on Amazon.co.uk. Given unavoidable extra costs in trade between Northern Ireland and Great Britain, it will be only rational for Amazon to re-shuffle its logistics and supply Northern Ireland from or via the Republic of Ireland, not Great Britain.
Even Tesco, a leading UK grocery chain, is likely to do the same since it is well established in the Republic of Ireland. In more general terms, Northern Irish retailers are likely to look to other suppliers based outside Great Britain.
The all-island economy
In effect of the most likely trade diversion, consumers in Northern Ireland may not be as badly affected as often thought. It is true that some prices will go up, since not all businesses will be able to re-channel deliveries and that the re-channelling may result in some adjustment costs which are likely to be passed on to consumers.
However, re-channelling of trade will also strengthen the all-island economy. In effect, the market may actually become more competitive, leading to lower, not higher prices, after a necessary adjustment. Strengthening the all-island economy may also lead to better supply and broader range of goods on offer in Northern Ireland.
Under the current rules Northern Ireland consumers and producers alike will retain custom-free access to the EU Common Market. As a result, Northern Ireland may become an attractive investment outpost for British manufacturers, also those previously not operating in Northern Ireland.
This mechanism will work the other way as well. Northern Ireland will carry similar attractiveness to EU businesses wishing to explore opportunities in Great Britain. These opportunities, if seized, could bring more jobs and prosperity to these parts.
Adjusting to the new regulatory framework will be challenging for many businesses as there are many unknowns. However, the future need not be entirely gloomy. It is possible for Northern Ireland to emerge better off at the end of this process.