What are the economic implications of the Windsor Framework?
Published 20 April 2023
The Windsor Framework was formally adopted in March 2023 and regulates trade of goods between Northern Ireland, the EU, and Great Britain. The framework aims to simplify the movement of goods from Great Britain to Northern Ireland whilst safeguarding the EU single market and the UK single market. Crucially, it gives Northern Ireland the unique opportunity to be part of the EU single market for goods and simultaneously have access to the UK internal market.
In 2021, we wrote about the potential impact of Brexit and the new Northern Ireland Protocol in an article for Regional Studies. Today, we want to revisit our analysis to understand some of the implications of the new framework.
The impact of the Northern Ireland Protocol
In our 2021 analysis, we used a simulation economic model informed by Input-Output data containing information about purchases of inputs by industries in Northern Ireland and sales of output. The model, based on data for 2017 (pre-Brexit), was used to simulate a counterfactual economy where the trade costs of both inputs that Northern Ireland’s firms buy from Great Britain and sales of services to the EU are increased.
The dataset for our model includes some important information. First, about 75% of Northern Ireland’s imports come from Northern Ireland. About 30% of intermediate inputs used in production are purchased from Great Britain, with 58% being domestically produced and the rest imported from the rest of the world including the EU. This makes the region particularly exposed to trade shocks with the rest of the UK. Intuitively, non-tariff barriers in intermediate inputs increase the costs of production for industries and this may result in increased prices. In addition, households in Northern Ireland purchase output from industries that are dependent on trade with Great Britain. For example, 29% of spending on domestically-produced goods occurs in the wholesale and retail industry which is a major importer in the economy.
The results from the analysis show how increasing trade barriers with Great Britain negatively impacts the economy of Northern Ireland. All other things being equal, GDP may contract by up to 2.6% with 80% of this impact coming from trade barriers between Great Britain and Northern Ireland. All other things being equal, this is particularly important, because our model considers Northern Ireland in isolation, and this means that the production cost of inputs produced outside the region, including Great Britain, is assumed to be fixed, and also that no further trade agreements are implemented. In proportionate terms, industries that primarily trade goods such as agriculture forestry and fishing and food and drinks are expected to see a greater contraction whereas industries mostly trading services, such as financial services, are less exposed, although still negatively impacted.
How would the results differ today?
Considering the changes introduced by the Windsor Framework we have decided to revisit our results to illustrate what our results may look like if we had conducted the analysis today. There are three crucial areas in which the Windsor Framework facilitates movements of goods from Great Britain to Northern Ireland: agrifood retail trade, movement of goods destined to Northern Ireland’s market only, and shipment of personal parcels from Great Britain to Northern Ireland. To provide an accurate impact estimate we would need information about the share of imports from Great Britain to Northern Ireland destined for Northern Ireland only by industry, and an estimate of the cost of trade associated with the new Framework. However, in the absence of such information, and with the view that the number of checks is expected to fall significantly compared to the Northern Ireland Protocol, we simulate an illustrative counterfactual scenario where no non-tariff barriers are applied to goods traded between Northern Ireland and Great Britain in the following industries: agriculture, forestry and fishing, food and drinks and wholesale and retail. In addition, we assume that final demands for direct imports (including by households) do not change following Brexit.
Figure 1 % change in gross value added compared to a pre-Brexit baseline under the Windsor framework and the Northern Ireland protocol (FTA)
Results are presented in Figure 1. The blue bars represent the simulated change in gross value added from our 2021 analysis. The pink bars are the revised results. Under the hypothetical Windsor Framework scenario, the fall in gross value added is 3 percentage points smaller in agriculture, forestry and fishing and 4.4 percentage points higher in food and drinks. Wholesale and retail improves by 0.6 percentage points. Importantly, sectors such as food and accommodation services significantly improve their position due to the relief of supply chain pressure. Overall, the aggregated impact on regional GDP goes from negative 2.1% to negative 1.3%. Notably, the Consumer Price Index increases by only 0.5% compared to 2.3% in the original simulation indicating reduced pressure in the cost of living generally.
These results should be read with caution due to a series of limitations. First, to ensure comparability with our original paper we are using a model calibrated on 2017 data. Secondly, the original analysis had limitations due to data availability which are discussed in the full paper. Thirdly, and most importantly, we have assumed a most optimistic scenario in which all non-tariff barriers for three key industries are removed for trade between Great Britain and Northern Ireland. However, as Birnie (2023) notes in a recent article for the Economic Observatory custom forms will still be necessary when goods are moved from Great Britain and Northern Ireland even if the required paperwork will significantly reduce.
An increasingly asymmetric UK
One interesting aside to debates about the specific trade and economic implications of the Windsor Accord is what this means for the increasingly asymmetric and fragmented devolution framework within the UK.
This new framework further cements the distinctive internal and external market framework that Northern Ireland will operate within, relative to all other parts of the UK. The Scottish Government has repeatedly made the case for a similar deal for Scotland, although that now seems unlikely. In contrast however, Northern Ireland has yet to gain devolved fiscal powers equivalent to those of Scotland (or indeed, Wales). This too seems unlikely given the lack of a government administration at Stormont. Then, of course, we have the situation in England with limited regional devolution from either an economic or fiscal perspective.
As a result, the UK is becoming an increasingly asymmetric policy entity with different responsibilities across the regions of the UK. This does not just carry the potential for regional variations in policy, with knock-on implications for trade but it also means that national decisions on trade policy (such as future trade deals) will likely have different consequences across different regions of the UK depending upon their unique devolved settlement. Whether this makes sense from a policy or economic perspective is open to debate.