The IEA said on Friday that a trade deal with the EU is “desirable but is not essential”, and that the UK should feel free to walk away from any bad deal offered by the EU.
It added that the primary goal of trade policy should be to put the interest of consumers ahead of producers and that would secure trade “as freely as possible with the rest of the world”.
Should no deal be reached, the discussion paper said, the UK would continue to trade with the EU under the umbrella of the World Trade Organization (WTO) “rather than be hamstrung by a protectionist and costly agreement”.
“It would then be up to the EU whether it wished to impose tariffs on imports from the UK, but WTO rules prohibit punitive tariffs against any trading counterparty,” it pointed out.
Kevin Dowd, the author of the paper, added, “Imposing tariffs on imports from the UK would be a major act of self-harm: EU consumers would face higher prices for British goods and the supply chains of EU manufacturers would be disrupted. It is, therefore, in the EU’s self-interest to seek free trade with the UK.”
The IEA called for a unilateral free trade agreement complemented by free trade agreements with countries like the US, Australia and Canada.
“This would bring us significant benefits including lower prices for consumers, increased productivity and higher wages by eliminating all barriers to imports,” it added.
The paper contradicts a report published by the Centre for Economics and Business Research (Cebr) late last year which said that all major sectors in the UK economy risk would be harmed if the government fails to retain access to the single market.
The research stressed that broad wealth-creating sectors within the UK economy, including manufacturing; retail and wholesale; administrative and support services; financial services; professional services; and energy would be negatively impacted by a hard Brexit deal.
It also refutes the WTO director-general's remarks in June last year, when he said that, although the UK would remain a WTO member, it would not have defined terms in the organisation for its trade in goods and services as it only has these commitments as an EU member.
Roberto Azevêdo said just weeks before the referendum that the current preferential trade relationships with the EU and the 58 countries with which the EU currently has free trade agreements would need to be re-established if British people voted for Brexit.
Jamie Whyte, research director at the IEA, said, “There are many myths being perpetuated about trade policy – and more specifically about the UK’s relationship with the EU – that must be debunked.
“Many people believe that disaster will befall us if we do not forge a deal with the EU. In fact, we could unilaterally eliminate all import tariffs, which would give us most of the benefits of trade, and export to the EU under the umbrella of the WTO rules. Then we can seek free trade deals with all major trading partners, including the EU.”
On Thursday, the British Chambers of Commerce (BCC) said that while exports have continued to put in a solid performance, wider economic factors are a cause of concern.
According to its quarterly international trade outlook, trade confidence fell by 2.25% on the quarter, but was still the third highest level on record.
Moreover, 68% of the manufacturers surveyed said exchange rates were a concern to their business, and 69% named lack of access to skilled manual or technical labour.
Adam Marshall, BCC’s director general, said, “Exporters continue to put in a solid performance but are keeping a watchful eye on volatile exchange rates, rising inflation, and ongoing skills shortages.
“Many manufacturers are capitalising on the advantages the fall in sterling has brought to overseas sellers since the EU referendum. That said, exporters also tend to import raw materials and product components, and are concerned that the sustained depreciation of the pound may erode their margins.”