The government could be forced to “manage the decline” of industries like car manufacturing and dairy farming in the event of a no-deal Brexit, two highly respected think-tanks have warned.
A “very, very large” number of sectors would feel the impact of trade barriers like tariffs and regulations if the UK leaves the EU without a deal, Institute for Fiscal Studies (IFS) deputy director Carl Emerson said on Monday.
Ministers would be forced to target support at industries that would suffer the most, and choose whether to manage their decline or help them navigate the initial shock in the belief that they could adapt and thrive.
Under a unilateral free trade approach backed by hard Brexiteers like David Davis, with zero tariffs on all imports, industries like dairy farming would all but disappear, the Institute for Government’s (IFG) chief economist Gemma Tetlow suggested.
It comes after HuffPost UK reported last week that the government was looking at potentially cutting all tariffs on imports to zero.
The pair were responding to questions at a Westminster event about how the government might respond to the UK leaving the EU without a deal on March 29 and reverting to World Trade Organisation rules for trade.
The response would be multi-pronged, Emmerson said, with increased spending for certain departments like HM Revenue and Customs so it could manage the introduction of checks at borders.
If there was a big shock to consumer and business confidence, ministers could look to stimulate demand by cutting interests rates.
But this may not be possible as interest rates are already very low at 0.75%, so the chancellor could take measures such as temporarily cutting VAT or announcing a future rise in VAT, as both would encourage spending by making goods cheaper in the short-term, Emmerson said.
Businesses could be helped by more direct public sector investment and cuts to corporation tax, he added.
Emmerson warned however that government and IFS analysis shows certain industries which import components from Europe and then export products, such as car manufacturing, would be “particularly hard hit” by trade barriers.
He went on: “You might imagine those industries suffering particularly badly in the near term and you might want to have some measures that kind of alleviate that pain – either because you want to kind of manage the decline in those industries in a slightly better way or if you think actually some short term support can have better longer term outcomes.
“Perhaps if you can get the industries through the first couple of years they will manage to survive.”
Emmerson gave the example of a low educated man working in the car industry in the West Midlands with a very specific set of skills and good pay as someone who would benefit from that kind of support, as they could struggle to find a job elsewhere.
“There are certainly a lot of sectors which would suffer from the trade barriers, our analysis suggests very few will gain, so it’s a very, very large number of sectors,” he said.
“You are really wanting to look at which ones are suffering particularly badly, where perhaps the employees are going to suffer particularly badly because they will find it very difficult to move into alternative work very quickly.”
Tetlow meanwhile warned that the only option for entire industries under a blanket zero tariffs regime would be managed decline.
“If you were to go down the unilateral free trade approach that some people advocate that would certainly suggest that the UK dairy industry would be pretty uncompetitive in the world in future because it would be open to competition from the entire rest of the world, in which case you are talking about managing the decline of an industry,” she said.
“If the government has some different longer term plan you are talking about helping that industry navigate the next few years until we are in a position to renegotiation those free trade deals.”
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