Small towns in the Midlands and North are among the areas likely to suffer most from the bare-bones trade deal Boris Johnson is seeking with Brussels, according to a respected economic thinktank.
The areas cover many of the so-called “red wall” seats – like Bolsover, Workington, Bassetlaw, Bishop Auckland and Blyth Valley – which gave the prime minister an election landslide in December by switching from Labour to Conservatives for the first time in decades on the back of his promise to “get Brexit done”.
The Institute for Fiscal Studies said there could be long-lasting damage to incomes and well-being in areas which rely on manufacturing for well-paid jobs, many of which are still feeling the blow from the deindustrialisation of the 1980s.
And the thinktank’s director Paul Johnson said it was “intriguing” that the PM was pursuing a hard Brexit outcome, despite saying that he wants to “level up” areas of the country dependent on manufacturing jobs.
“Clearly the overall story here is one of significant risks,” said the IFS director. “If there is a concentrated impact in certain industries and those are concentrated often in the sort of regions that suffered overly in the 1980s… these effects can be very long-lasting in terms of earnings and well-being to people in those areas.”
Looking ahead to UK/EU trade talks due to start in Brussels on Monday, he said: “If you are really worried about levelling up in a trade deal, there is a good case for spending 80 per cent of your time on the goods bit and not services. If you are worried about levelling up, you really, really want to focus on the manufacturing goods side of it.”
Meanwhile, the IFS dismissed claims from the prime minister’s chief negotiator David Frost that the UK is not subject to the general rule that looser trade agreements result in a decline in commerce.
Academic studies show that members of the EU’s single market do 223 per cent more trade with one another than those with no formal deal, compared to 45 per cent for a basic Canada-style free trade agreement (FTA) of the kind sought by Mr Johnson or 15 per cent for those operating on World Trade Organisation terms similar to the “Australia-style agreement” which the PM has said he will accept.
In a high-profile speech in Brussels last week, Mr Frost said such studies had “highly limited” relevance to the UK, as they were often based on the experience of developing countries or post-Communist states entering world markets for the first time.
But IFS senior research economist Peter Levell described the figures as “very robust” and said that none of Mr Frost’s criticisms applied to them.
The PM’s reference to an Australian-style settlement was a “euphemism” for trade on WTO terms, which the Treasury’s most recent estimates suggest could hit Britain’s economy by 9 per cent of GDP over the long term, he said. While EU single market agreements cover 44 out of 52 issues deemed to present an obstacle to trade, its current relationship with Australia covers none.
Speaking at an IFS pre-Budget briefing in London, Mr Levell said that the form of trade deal secured in negotiations with the EU would have “important implications” for the economic fortunes of the country and for the regional inequalities which the PM has promised to tackle.
“It is likely that diverging from the UK’s main trading partners is going to be costly and these costs are likely to be uneven,” he warned.
The effect of any new barriers to trade resulting from the negotiations are likely to fall “disproportionately on a small group of workers” concentrated in manufacturing industry, and particularly in the sectors of transport equipment; clothing and textiles; chemicals, pharmaceuticals and refining; and machinery, said Mr Levell.
Although goods account for just 12 per cent of the UK workforce, they make up 59 per cent of exports to the EU, making them particularly vulnerable to any reduction in trade volumes, he said.
“It is manufacturing which we expect to be most exposed to new trade barriers and manufacturing is very regionally concentrated,” said Mr Levell.
“In London and the South-East it is less than 5 per cent… but in parts of the West Midlands, North East and North West, manufacturing accounts for 20-40% of employment.
“And that means that if some of these manufacturing industries shrink, it will happen in areas where workers have reduced outside options in their own local labour markets.
“Manufacturing is a particularly important employer for people with fewer qualifications. And people with fewer qualifications earn more in manufacturing than in other sectors of the economy. And when you look at the literature on how different workers are affected by trade shocks … it suggests that, particularly for this group, adverse shocks can have quite long-lasting impacts.”
IFS associate director David Phillips, who has conducted a study of geographical inequalities in the UK, said that any hit to trade was most likely to effect “peripheral manufacturing towns” which are not close to a large city offering alternative employment.
Mr Levell acknowledged that there could be economic benefits from the freedom for the UK to decide its own regulations – which the PM regards as the key gain from Brexit – but said these were “very difficult to quantify” as no country had previously left a trade bloc in this way.