With the coronavirus crisis subsiding, the UK government is now focusing on how to kick the British economy back into gear. Agreeing a good deal with the EU on future trade access when the UK recovers its regulatory and trade freedom from January 1 is obviously very important in the short run, but in the longer run, there is more to do.
An absolute priority should be the creation of so-called “freeports”, which has now been announced by Chancellor Rishi Sunak. The UK government is planning to create 10 of those, by introduce sweeping tax cuts and an overhaul of planning laws in selected areas, so they would be fully operational by April 2022.
Labour has dismissed the plan out of hand, pointing to problems at some of the EU’s freeports, but this is shortsighted. The UK has an opportunity to learn from continental mistakes and build a bespoke freeport model that brings tens of thousands of jobs to disadvantaged areas in the UK.
As International Trade Secretary Liz Truss has put it: “freedoms transformed London’s Docklands in the 1980s, and free ports will do the same for towns and cities across the UK. They will onshore enterprise and manufacturing as the gateway to our future prosperity, creating thousands of jobs.”
Freeports are already widespread—there are around 80 freeports in the European Union and some 3,500 worldwide. The UK once had seven of the facilities, including in Liverpool and the Port of Tilbury, but all had closed down by 2012.
The crux of a freeport’s economic potential is its special customs status. When goods arrive at a freeport from abroad, no tariffs or taxes are collected on them, unless they leave the facility. Some freeports also contain factories, which produce goods mainly meant for export, taking advantage of the fact that tariffs are often higher on raw materials than on finished products.
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The EU’s freeports have been restricted by the bloc’s state aid rules, which consider the tax or tariff exemptions granted to freeports to a large degree to be an unfair “subsidy” to businesses. Such an interpretation may be considered a violation of the spirit of state aid rules, and on occasion, the European Commission has been overruled by EU judges for its tendency to qualify tax breaks as “state aid”, most notably in the recent case regarding Apple and Ireland. In any case, once the UK regains its regulatory independence, it will be free to create freeports under more lenient WTO rules.
Opponents have suggested that the free trade zones could open the UK up to financial crime. According to Labour MP Peter Dowd, the EU’s existing freeports serve as “tax-free warehouses used to hoard art, wine and gold”.
Freeports on the continent have indeed been the subject of repeated allegations that they’re havens for money laundering and tax evasion. Opponents often single out the one in Luxembourg, called “Le Freeport Luxembourg”. It is owned by Yves Bouvier, a Swiss art dealer, who has been investigated in his home country for evading hundreds of million of Swiss francs in taxes and was once accused of cheating a former client out of $1 billion. Bouvier’s Luxembourg freeport claims to strictly respect all anti-money laundering rules and to have three customs officials stationed permanently at the complex.
Members of European Parliament who visited the facility, however, were sceptical of these claims. One described it as a “black hole”, while another suggested that customs checks were “extremely perfunctory”.
In addition to drawing policymakers’ ire, the freeport model popularised by Yves Bouvier doesn’t appear very profitable. The chairman of the board of the Freeport Luxembourg, a former socialist MEP, recently stepped down as the facility faces millions of euros in losses. The former editor-in-chief of a newspaper which extensively covered the facility, Fabien Grasser, has even claimed that he was fired because of his newspaper’s critical take on the freeport.
In their haste to demonise the UK’s freeport plan, however, detractors have failed to recognise that it’s very different from the flawed facilities abroad. Rather than emulating Yves Bouvier’s freeports in Luxembourg and Singapore, the post-Brexit UK will seek to establish something closer to the original idea of a freeport, replicating in Europe some of the success of Shenzen in China or the “Jebel Ali Free Zone” in Dubai. This is in line with suggestions made by former MEP Ana Gomes, who urged the Commons to introduce a so-called “Bouvier rule”, forbidding the storage and sale of artworks above a certain value.
The facilities would not become boltholes for priceless art. In fact, the UK government has clearly stated it “does not intend to designate freeports for the purposes of High Value Luxury Storage”, such as art works. Instead, the focus will be on creating an attractive business environment in disadvantaged areas.
Some arguments against freeports are that these would not fulfill that aim, as the facilities would merely drive away business from other parts of a country and not create any new economic activity in net terms.
There are two responses to this. First, even if this were true, it would surely not be the end of the world to see more jobs growth in less well-off parts of the UK, like the North. Secondly, it’s factually incorrect to claim that there wouldn’t be extra business opportunities if the effective tax and tariff burdens are also lower, meaning that both London and the North would reap gains.
The UK is already in a good position to make sure that the economic benefits of freeports are evenly distributed. As Chancellor Rishi Sunak wrote in a 2016 policy paper:
“Unlike many other countries with often just a single (taxpayer-funded) super port, the UK contains dozens of successful, large-sized ports; all privately financed. These are spread around the country and are already home to manufacturing clusters.”
While the plan to establish ten freeports across the UK is still in the consultation phase, several applications have already arrived. One is from Tees Valley in the North East of England, whose Mayor calls it a “fantastic opportunity to turbocharge our local economy and bring much-needed jobs, growth and investment”.
Tees Valley is already an “enterprise zone”, meaning it enjoys certain tax concessions, infrastructure incentives, and reduced regulations. Combining the benefits of such an enterprise zone and a freeport would let businesses import, process and export goods without costly customs bureaucracy.
The benefits for regions like Tees Valley could be substantial. Consultancy and construction group Mace has estimated that creating seven “supercharged freeports” could boost UK international trade by £12bn annually, as it would also add £9bn to UK GDP after 20 years and lead to 150,000 extra jobs.
While establishing freeports, the UK government should continue with the strategy to turn them into areas with minimal customs duties, import VAT, and national insurance contributions, rather than warehouses for luxury goods. In this way, the initiative could turn into the United Kingdom’s prime benefit derived from Brexit. Perhaps Europe might even be inspired.
Pieter Cleppe is a non-resident fellow of the Property Rights Alliance, based in Brussels.