The UK will have a “catastrophe” on its hands unless Boris Johnson and cabinet ministers stop repeatedly claiming that there will be no checks in the Irish Sea as part of the special Brexit arrangements, manufacturing leaders and local politicians have warned.

“If they don’t there is going to a horrible crash at the end of this year, and if not, then in four years,” said Stephen Kelly, the chief executive of the business group Manufacturing Northern Ireland.

Speaking at a debate on Northern Ireland protocol at the Institute for Government thinktank in London on Wednesday, he added: “We are potentially facing some pretty catastrophic outcomes if we don’t get this right.”

Under the withdrawal agreement, special trading arrangements will apply in Northern Ireland from 1 January whether Johnson strikes a trade deal with the EU or not.

They are part of the agreement to prevent a hard border returning to the island of Ireland and involve checks, customs declarations and tariffs on goods going between Great Britain and Northern Ireland.

Stephen Farry, the MP for North Down and deputy leader of the Alliance party, said it was a fiction to think that a wide-ranging free-trade agreement with the EU would wash the checks away.

“There is this wishful thinking that a free trade agreement is going to fully eliminate the need for some degree of checks. Even the most far reaching deal you can imagine isn’t going to fully address that,” he said.

If Johnson reneged on the deal he would have a “cowboy economy” and a “no man’s land” in which neither British nor EU rules would be enforced, warned Farry.

The conference heard that the software needed to manage the new arrangements would not be ready within 10 months and that Johnson’s apparent “tearing up” of the Northern Ireland arrangements, one month after signing them, would fuel mistrust of Britain when it came to negotiating trade deals around the world.

Johnson and a succession of cabinet ministers have insisted the Northern Ireland protocol can be applied without physical checks or extra paperwork.

The EU has rubbished this assertion as a misleading representation of the protocol, warning that not implementing the new rules would be a formal breach of an international treaty.

Local businesses say that while the EU is correct, its position is unhelpful and will just delay the breach of the Brexit deal until it is too late.

Kelly said the EU would face a recurring nightmare if the bloc did not get this right because the Stormont assembly has a vote on the arrangements every four years.

But the EU is also facing warnings from local businesses that it must do better to head off a disaster for the region.

“The EU are waiting for No 10 to come forward to say this is how it [the Northern Ireland protocol] will work. But they have a responsibility as well, they need to show as much flexibility … towards Northern Ireland,” Kelly said.