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BRIEFING PAPER

Number 8823, 21 February 2020

Freeports By Dominic Webb

Contents: 1. Introduction 2. Government policy on

freeports 3. Issues 4. Further reading

2 Freeports

Contents Summary 3

1. Introduction 4 1.1 Background 4 1.2 What are freeports? 4 1.3 Examples of freeports 5

Freeports in the UK 1984-2012 5 Freeports in the EU 5 Freeports around the world 6

2. Government policy on freeports 7 2.1 Introduction 7 2.2 The Government’s Consultation 7 2.3 The Government’s proposals 7

Location 7 Customs 8 Tax 8 Planning 8 Regeneration 8 Innovation 9 How will the Government decide on the location of freeports? 9 Devolved administrations 10

3. Issues 11 3.1 Displacement 11 3.2 Uncertainty over UK’s trade regime 11 3.3 Risk of illegal activity 11

4. Further reading 13 4.1 UK Government 13 4.2 UK Parliament 13 4.3 US, EU and International Organisations 13 4.4 Think tanks 13

Cover page image: Photo by Shunya Koide on Unsplash (image cropped)

3 Commons Library Briefing, 21 February 2020

Summary What are freeports?

Freeports are designated areas where goods can be imported from outside the UK without paying customs duties. Customs duty becomes payable only when the goods, possibly after processing, enter the domestic market. Other incentives on tax, planning and reduced red tape may also be available.

There are over 70 freeports in the EU and freeports existed in the UK before 2012. Supporters of freeports argue that their effectiveness is reduced by EU rules on state aid. They go on to argue that leaving the EU means freeports will be able to provide greater opportunities for the UK. The Government has said that the UK will not be subject to EU state aid rules but this is likely to be one of the most difficult areas in the negotiations over the UK’s future relationship with the EU.

Government policy on freeports

The Conservative Party Manifesto included a commitment to create up to ten freeports around the UK. According to the Government, the aim of the policy is to “boost trade, jobs and investment with a view to building innovative business clusters that benefit the local area and level up the economy across the UK.”

The Government published a consultation paper in February 2020. This sought views on the Government’s proposals, including policies on customs, tax, planning, regeneration and innovation. Some of these policy areas are reserved to the UK government but others include areas which are devolved. The Government has said it intends to work with the devolved administrations so that freeports can be created in Northern Ireland, Scotland and Wales.

According to the Government’s consultation, airports, rail ports and sea ports could be considered. Freeports could be located next to ports or inland. Two or more ports could collaborate to form a freeport.

How much of an advantage will freeports offer?

We do not yet know how much of an additional advantage freeports will offer the businesses that use them. For example, we do not yet know how high the UK’s tariffs on imports will be once the transition period comes to an end. The Government is currently consulting on the UK’s post-Brexit tariff regime. Both the UK and the EU have said that they wish to maintain zero tariffs on trade between them. However, the outcome of the negotiations on the future trade relationship is, at the moment, unknown. As the future tariff levels are not yet known, we do not know how big an advantage freeports will get from the ability to import with no tariffs.

Criticisms of freeports

Critics of freeports point to the risk that they will simply transfer business away from other areas of the UK without increasing the overall size of the economy. There have also been concerns about risks relating to money laundering and tax evasion.

4 Freeports

1. Introduction

1.1 Background Boris Johnson referred to freeports in his first speech as Prime Minister. He said:

as we prepare for a post-Brexit future it is time we looked not at the risks but at the opportunities that are upon us

so let us begin work now to create freeports that will drive growth and thousands of high-skilled jobs in left behind areas1

The 2019 Conservative Party Manifesto included a commitment to create “up to ten” freeports:

Freeports: We will aim to ensure that our new freeports benefit the people in each of the four nations. We believe that there are many places across the United Kingdom that have the opportunity to be successful innovative hubs for global trade.

[…]

As part of our commitment to making the most of the opportunities of Brexit, and levelling up the nation, we will create up to ten freeports around the UK, benefiting some of our most deprived communities.

While there are freeports in the EU (and were freeports in the UK until 2012), advocates of freeports argue that their effectiveness was limited by EU state aid rules. For example, in 2016, Rishi Sunak wrote:

Together, these rules [EU rules on state aid and the single market] have ensured that modern EU Free Zones amount to little more than storage and warehouse facilities with simpler customs formalities2

Outside the EU, and assuming the UK no longer aligns with EU state aid rules, supporters of freeports argue they will be more successful (see section 1.3 below).

1.2 What are freeports? Freeports are designated areas which enjoy various concessions on customs. They may also enjoy other tax and planning advantages and reduced bureaucracy.3

While being within a country’s geographical borders, freeports are effectively outside a country’s customs borders. Goods imported into a freeport are generally exempt from customs duties until they leave the freeport and enter the domestic market. No duty is payable if they are re-exported.

1 Boris Johnson’s first speech as Prime Minister in Downing Street, 24 July 2019 2 Rishi Sunak, The Free Ports Opportunity, Centre for Policy Studies, November 2016,

p18 3 There are some similarities with Enterprise Zones – see Commons Library Briefing

Paper Enterprise Zones

5 Commons Library Briefing, 21 February 2020

1.3 Examples of freeports Freeports in the UK 1984-2012 Seven free ports operated in the UK at various points between 1984 and 2012. In July 2012, the Statutory Instruments that set up the remaining five free ports (Liverpool, Southampton, Port of Tilbury, Port of Sheerness and Prestwick Airport) expired.4

It is worth noting that other schemes are available to help with customs. As recently as 2018, the Government noted the availability of alternative ways of securing the customs advantages of freeports, as shown by this PQ:

Andrew Rosindell: To ask the Chancellor of the Exchequer, what assessment the Government has made of the potential merits of introducing free port schemes across the UK.

Mel Stride: The Government has been clear that it is open to ideas that deliver economic advantages for the UK. Section 100A of the Customs and Excise Management Act 1979 (CEMA) provides the legal basis for the designation of free zones by HM Treasury and will continue to do so following UK withdrawal from the EU. Applying for designation as a free zone will be a commercial decision to be taken by private port operators. It is worth noting that many of the customs-related benefits of free ports are already available through existing customs facilitations, for example inward processing relief.5

Freeports in the EU There are over 70 free zones in the EU. It has been argued, however, that the operation of these zones is limited by EU state aid rules. 6 Professor Catherine Barnard and Emilije Leinarte of Cambridge University have written:

Approvals for FZ are also subject to EU state aid rules. Under EU law, it is illegal for member states to give financial help to some companies and not others in a way which would distort fair competition. State aid must be approved by the European Commission, which effectively holds a monopoly on the decision for the creation of FZ.

The difficulty of obtaining an FZ status can be illustrated by the Shannon FZ in the Republic of Ireland. The Shannon FZ was successfully launched in 1958 but, upon Ireland’s accession to the EU in 1973, the incentives in the Shannon FZ were limited in order to comply with EU state aid rules (e.g. the 0% corporate income tax was increased to 10%).7

The Government has said that the UK will not be subject to EU state aid rules but this is likely to be one of the most difficult areas in the negotiations over the UK’s future relationship with the EU. In any event, the UK will remain bound by the World Trade Organization’s rules on state aid, although these are a lot less stringent than the EU’s rules.

4 Free Zones, HC Deb 19 October 2012 c540W 5 PQ 190815, 21 November 2018 6 For more on state aid, see Commons Library Briefing Paper, EU State aid rules and

WTO Subsidies Agreement 7 Catherine Barnard and Emilije Leinarte, Free Zones, 7 October 2018

6 Freeports

Freeports around the world Statistics on the number of free ports globally are hampered by the lack of a universally-accepted definition. Terminology used across countries varies greatly with terms such as free zones, special economic zones, free trade zones, export processing zones, free economic zones and free ports all used inconsistently.8 Bearing this in mind, UNCTAD estimate that there are over 5,000 such zones worldwide.

8 UNCTAD, World Investment Report: Special Economic Zones, June 2019

Number of Special Economic Zones, 2019

Developed Economies 374

Europe 105 North America 262

Developing Economies 4,772

Asia 4,046 China 2,543

Africa 237 Latin America and Caribbean 486

Transition Economies 237

Total 5,383

Source: UNCTAD

7 Commons Library Briefing, 21 February 2020

2. Government policy on freeports

2.1 Introduction As noted above, a commitment to create up to 10 freeports was included in the 2019 Conservative Manifesto. Freeports were already on the Government’s agenda in the previous Parliament. Liz Truss identified freeports as one of her top three priorities as Secretary of State for International Trade. The Government’s Freeports Advisory Panel met for the first time on 6 September 2019.

2.2 The Government’s Consultation The Government published its Freeports Consultation in February 2020.9 This put forward proposals for freeports. The consultation asks for feedback on all aspects of the proposals and contains a total of 68 questions. The consultation was originally due to close on 20 April. On 8 April, the Government announced an extension to 13 July due to Covid-19.

The consultation document sets out the following objectives for the freeports policy:

• Freeports to be national hubs for global trade and investment across the UK

• Promote regeneration and job creation: creating high-skilled jobs in ports and surrounding areas, prioritising deprived communities

• Create hotbeds for innovation.10

2.3 The Government’s proposals The Government’s consultation says:

The Government is considering a bespoke UK Freeport model which would include multiple customs zones located within or away from a port, to maximise flexibility for port operators and businesses, as well as an SEZ-style zone designated over or around the customs zones, to encourage the maximum number of businesses to open, expand and invest in our Freeports.11

SEZs are Special Economic Zones which can include tax breaks, more flexible regulation and investment in infrastructure.

Location Freeports could be located inland. Businesses wishing to move goods from a port to an inland freeport without paying duty would need a customs guarantee. The Government’s consultation paper describes a

9 There was also a written statement on freeports (HCWS103, 10 February 2020) 10 P10 11 P9

8 Freeports

customs guarantee as “a form of insurance which covers the duty that would be owed if the goods never arrived at the inland site.”12

Customs The Government is proposing that goods brought into a freeport from abroad would not pay tariffs, import VAT or excise until they leave the freeport and enter the domestic UK market. There would also be simplified customs procedures and customs declarations.

Freeport areas would be secure with perimeter fences. Freeport operators would be responsible for security and keeping records of goods entering and leaving the site and whether goods had been subject to manufacturing processes on site.

Tax On tax, the Government says it wants to learn from the experience of Enterprise Zones and from international experience. Tax incentives under consideration include:

• Business rate discounts

• Stamp duty land tax

• R&D tax credits

• Employer National Insurance Contributions

• Facilitative solutions on VAT and Excise Duties for goods within freeports

• Enhanced Capital Allowances

Planning On planning, the consultation paper says:

Planning liberalisation can help bring more land forward for development, speed up the planning process and allow ports to respond more rapidly to new demands, for example by building new facilities. We believe that both the Government and local planning authorities have a role to play in supporting the functioning of Freeports and their ability to boost trade and investment through planning and development management, and we are considering a number of options to support this. The Government wants to consider the role that planning freedoms, permitted development rights, zonal planning and National Policy Statement for Ports can play in supporting Freeports. We also invite views on additional planning measures which could be used to support development in Freeports.13

Regeneration The Government describes freeports as “a key part of delivering our ambition to level up the economy across the country.”14 Local areas will be asked for proposals explaining how a freeport could contribute to their regeneration and complement other investment. They point to

12 P13 13 P19 14 P23

9 Commons Library Briefing, 21 February 2020

infrastructure, skills and housing as being important in ensuring freeports maximise their potential.

Innovation The Government intends to use freeports to boost innovation. They are intended “to be dynamic environments which enable innovators, start-ups, businesses and regulators to generate and test new ideas and technologies across a range of sectors, from customs, to the aviation, rail and maritime sectors.”15

How will the Government decide on the location of freeports? The allocation and governance of freeports is discussed in chapter 9 of the consultation document. This says:

We are committed to running a fair, transparent and robust allocation process to select up to 10 Freeports across the UK. We want all the nations of the UK to be able to share in the benefits of Freeports. As much of the policy is devolved, the UK Government will work closely with the devolved administrations to develop a distinct allocation and governance process for each of Scotland, Wales and Northern Ireland.16

The Government proposes that there will be a competitive bidding process. Detailed criteria are set out on pages 34-35 of the consultation document. In summary, proposals will need to show how they will:

• Establish freeports as national hubs for global trade and investment across the UK

• Promote regeneration and job creation

• Create hotbeds for innovation.

The Government has said it will be looking for evidence of:

• Strong leadership

• Clear evidence of collaboration between all stakeholders

• Clear willingness from all partners (public and private sector) to commit resources in support of their plan.

Freeport bids could be submitted by a Mayoral Combined Authority, or Combined Authority. Where these do not exist, the bid could be submitted by the Local Enterprise Partnership and upper-tier authority containing the site.

An alternative approach would be to allow ports to submit bids but this would be likely to need the support of a local authority. The Government is calling for feedback on this approach. The consultation document says:

We also expect that under any model, the port, upper-tier authority, LEP, and other local partners, including the private sector, would form a joint board to support the application for

15 P26 16 P33

10 Freeports

Freeport status and collaborate on matters relating to the Freeport.17

Devolved administrations The consultation document says the following about the territorial scope of the freeports policy:

Territorial scope

This consultation sets out the proposals we would like you to consider as we develop the UK’s Freeports policy. This includes policies which relate to the whole of the UK, as well as some which are devolved. Where a policy is devolved, the proposals in this consultation apply to England; responsibility for policy development and implementation in Scotland, Wales and Northern Ireland lies with the devolved administrations. The UK Government intends to work in partnership with the devolved administrations to develop proposals which enable the creation of Freeports in all nations of the UK.

Tariffs and Customs – Customs and tariffs policy is reserved to the UK Government. The opportunity for customs and tariff benefits would be available UK-wide.

Tax – Some aspects of tax policy are devolved in Scotland, Wales and Northern Ireland. This section consults on tax policies which vary in scope, with some applying UK wide, some in England and Northern Ireland, and others in England only.

Planning – Proposals on permitted development rights and zonal planning relate to England only. Proposals on the National Policy Statement for Ports relate to England and Wales.

Regeneration – Infrastructure, skills and housing are devolved matters and the proposals cover England only. Trade and investment promotion is a “concurrent” power. This means that whilst the UK Government has primacy over trade and investment promotion in the UK, the devolved administrations also pursue promotion activity on behalf of businesses in their nations.

Innovation – Innovation policy is UK wide; although some aspects of university funding are devolved matters, we hope to hear from stakeholders across the UK on these proposals.18

17 P36 18 P11

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3. Issues

3.1 Displacement One of the main criticisms of freeports is that they risk moving economic activity from one place to another rather than increasing growth overall. This risk is referred to in the Government’s consultation document which says:

There is evidence in some cases that zone-based policy can have a displacement effect, leading to reduced job opportunities in areas which are not Freeports. We welcome your views on the risk of this, and ways to mitigate it.19

Peter Holmes, reader in economics at Sussex University and the author of a 2019 report on freeports, said that the main effect of freeports was to divert business into the port from the surrounding area, rather than creating new jobs.20

3.2 Uncertainty over UK’s trade regime The details of the UK’s future trade policy are still being developed. For example, the Government is consulting on the UK Global Tariff (the tariffs which will apply to imports from countries with which the UK does not have a free trade agreement).

One of the main benefits of freeports is that no tariffs are paid on goods imported into the freeport (although they are paid on goods exported from the freeport to the domestic market). The value of this concession is uncertain as the level of the UK’s future tariffs is not yet known.

In particular, freeports are often thought to be of particular benefit when tariffs are higher on components than on the finished product. Under these circumstances, there is an advantage in importing components tariff-free into the freeport, processing them into the final product and then exporting to the domestic market, paying the lower tariff on the final product. This situation, where tariffs are higher on components than the finished article is known as “tariff inversion”. Peter Holmes of Sussex University has pointed out that, at the moment, there is relatively little tariff inversion in the UK.21

Both the UK and EU have said that they wish for there to be zero tariffs on trade between them. The outcome of the negotiations on the future relationship between the UK and the EU is not yet known.

3.3 Risk of illegal activity The Guardian reported recently that the EU had introduced new rules to clamp down on free ports “after identifying that their special tariff and

19 P31 20 Experts sceptical on Johnson’s plans for regional freeports, Financial Times, 5 July

2019 21 Ilona Serwicka and Peter Holmes, What is the extra mileage in the reintroduction of

‘free zones’ in the UK? UK Trade Policy Observatory Briefing Paper 29, February 2019, p9

12 Freeports

duty status has aided the financing of terrorism, money laundering and organised crime.”22

This followed a 2018 report by the European Commission which said:

Free-trade zones may pose a risk as regards counterfeiting, as they allow counterfeiters to land consignments, adapt or otherwise tamper with loads or associated paperwork, and then re-export products without customs intervention, and thus to disguise the nature and original supplier of the goods.

The misuse of free-trade zones may be related with infringing intellectual property rights, and engaging in VAT fraud, corruption and money laundering.23

The Government’s consultation notes that there have been concerns about links between freeports and illicit cross-border activities such as smuggling.24 The Government has said that all necessary safeguards will be in place.

There are concerns that the art market could be used for money laundering purposes.25 The Government’s consultation says that freeport operators are considered art market participants when works of art exceeding a certain threshold are stored in a freeport. Under these circumstances, freeport operators would have to register with HMRC for anti-money laundering supervision if they take part in this regulated activity.

22 EU clamps down on free ports over crime and terrorism links, Guardian, 10 February

2020 23 European Commission, Report from the Commission to the European Parliament

and the Council: on the assessment of the risk of money laundering and terrorist financing affecting the internal market and relation to cross-border activities, 24 July 2019, p5

24 P30 25 British Art Market Federation, Guidance on Anti Money Laundering (Approved by

HM Treasury), 24 January 2020, p3

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4. Further reading

4.1 UK Government HM Government, Freeports Consultation , CP222, February 2020

4.2 UK Parliament Westminster Hall debate on freeports 11 October 2018

International Trade Committee one-off oral evidence session on freeports 4 September 2019

Commons Library Briefing Paper, Enterprise Zones

Commons Library Briefing Paper, EU State Aid Rules and WTO Subsidies Agreement

4.3 US, EU and International Organisations Congressional Research Service, US Foreign-Trade Zones: Background and issues for Congress, 19 December 2019 (R42686)

European Parliamentary Research Service, Money laundering and tax evasion risk in free ports, October 2018

European Parliamentary Research Service, Public economic support in the EU: State aid and special economic zones, February 2020

UNCTAD, World Investment Report: Special Economic Zones, June 2019

4.4 Think tanks Catherine Barnard and Emilije Leinarte, Free Zones, UK in a Changing Europe, 7 October 2018

Peter Holmes, Free ports – preparing to trade post-Brexit, UK Trade Policy Observatory blog, 26 September 2019

Abbas Panjwani, What’s a free port, and does the EU have them? Full Fact, 2 August 2019

Ilona Serwicka and Peter Holmes, What is the extra mileage in the reintroduction of ‘free zones’ in the UK? UK Trade Policy Observatory Briefing Paper 29, February 2019, p9

Alex Stojanovic, Trade: freeports and free zones, Institute for Government, 10 February 2020

Rishi Sunak, The Free Ports Opportunity, Centre for Policy Studies, November 2016

BRIEFING PAPER Number 8823 21 February 2020

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