Two key things to know about Freeports

About the Author: Nick Phipps

Published On: 25 February 2021Categories: UK - Non EU, UK- EUTags: free ports, free zones, tariffs

25 February 2021

Peter Holmes is a Fellow of the UKTPO. Guillermo Larbalestier is Research Assistant in International Trade at the University of Sussex.

The Government’s competition for proposals to create ten Freeports across the UK came to a close earlier this month with an announcement of the successful locations expected soon. Freeports are areas within a country that are outside its customs territory. Goods coming into the country via Freeports are exempt from paying tariffs until they enter the mainland or are shipped to another country. In the UK Freeports model^[1] these areas may also be subject to special regulatory, tax, or subsidy rules. Such features may make the terms Enterprise Zone, Special Economic Zone or, the more general, Free Trade Zone more appropriate. The full details of all bids have not been published but summary reports indicate wide variety of business cases.

1) Freeports are useful in countries with high tariffs, especially on intermediate goods. But, in the UK, tariffs on intermediates are low

One of the most discussed benefits of free trade zones occur if businesses operating within them can import intermediate components duty-free and then assemble them into final goods that are subject to lower tariff rates. This type of customs benefit is known as tariff inversion. In the US, these zones are known as Foreign Trade Zones and have been labelled as ‘success stories’ for many businesses in the automobile and pharmaceutical industries, among others, in great part due to the US’ high tariffs on intermediate goods.

In the UK, however, 47% of all tariff lines in the UK Global Tariff (UKGT), its external tariff schedule, are tariff-free and the average tariff rate for all products is 5.7%. The average tariff rate for industrial goods is even lower: 2.5%, and 57% of tariff lines in this category are tariff-free^[2]. This is in line with a key objective of the UKGT to reduce tariffs on intermediate imports below the EU’s Common External Tariff (CET) rates to cut costs for producers. On top of this, trade with the EU (the UK’s largest trading partner) is already tariff-free and the UK is part of, or is working on, numerous trade agreements that seek to lower or eliminate tariffs. Hence, in the UK, duty saving opportunities from freeports are small.

The UKTPO assessed the scope for tariff inversion in the UK for the Financial Times and found that it is almost non-existent. The notable exceptions were for products in the manufacture of dairy, starch and animal feeds sectors, which account for approximately 1% of the UK’s total imports in 2019. Another product that might benefit from such duty saving was canned dog food. The Daily Express reproduced the story but reversed the meaning in its headline claiming that “Rishi Sunak’s freeports plan could hand vital boost to critical UK sector after Brexit.” The correct significance of our results was highlighted by Shadow Chief Secretary to the Treasury, Bridget Phillipson MP, who mirrored our opinion of Freeports as “something of a Dog’s Breakfast” by saying that “the Chancellor is making a dog’s dinner of this crisis – we just didn’t realise it was literally true .”

There is also a pending question on how Freeports will benefit from preferential trade agreements. One of the government’s key objectives is to establish Freeports as national hubs for global trade, which also entails promoting high value exports. This, however, leads to a whole further range of issues related to rules of origin principles that we understand to be unresolved. For example, if Freeports are outside the UK’s customs territory would their products be able to benefit from UK trade agreements? The answer to this question is likely to lie in the importers’ own rules.

2) Regeneration is not a given

The government’s Freeport package is not simply about customs procedures but it promises other benefits, not fully spelled out, not dissimilar to those offered by Enterprise Zones. The government proposes “regulatory sandboxes” where revised, and possibly experimental, land use rules, new infrastructure or special tax rules may apply. Tax reductions may cover Stamp Duty Land Tax (SDLT) Relief, Enhanced Structured and Buildings Allowance (SBA), Enhanced Capital Allowances (ECA), Employer National Insurance Contributions (NICs) Rate Relief, Business Rates Relief and Local Retention of Business Rates^[3]. The government states that it is anxious to avoid ‘wild west’ deregulation that can create opportunities for illicit activities such as money laundering or storage of stolen goods^[4], which are commonly associated with Freeports. But, there are also those who fear that this is the logic of Freeports and a pathway to creating “mini tax havens”, and those who doubt the claims made as to the benefits of freeports.[5]

The London Docklands regeneration^[6] rested on the non-customs part of the Enterprise zone plan. The services that grew there had nothing to do with customs benefits; and would not have been helped by the “robust security measures” that operational sites within the Freeports boundary will require. Areas within the boundary with tariff-free status, known as customs sites, will have to have customs fences. The other operational areas, known as tax sites, that benefit from special tax or regulatory regimes will be subject to regulatory scrutiny but not fencing requirements (unless they overlap with a customs site).

Once Freeports are under way and it becomes clear what kinds of regulatory or fiscal innovations work best, the full benefits would come by doing the same elsewhere. If this happens, the country as a whole can benefit, but the pioneers would lose their special status. From an overall efficiency viewpoint this might be a good thing but the dilemma remains: confining the benefits to just a few areas lessens the overall impact but extending the benefits dilutes them.

The point of Freeports should not be to attract jobs into one declining area at the expense of others. Job displacement is a serious risk. A study by the Centre for Cities showed that in the first five years of Enterprise Zones in the UK (2012-2017) only a quarter of the jobs predicted by the Treasury were “created”, of which one third came as a result of displacement, and were overwhelmingly low-skilled. Freeports inevitably present a delicate trade off: what happens to the similarly deserving areas beyond the perimeter, including those just outside?

Freeports will not be a silver bullet. The tariff benefits will be small, but the UK Government promises an array of other measures designed to promote innovation and trade. It remains to be seen if they can be delivered, and whether freeports are the best means of delivery.