Trade: freeports and free zones

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What are freeports?

Freeports are a special kind of port where normal tax and customs rules do not apply. These can be airports as well as maritime ports. At a freeport, imports can enter with simplified customs documentation and without paying tariffs. Businesses operating inside designated areas in and around the port can manufacture goods using the imports and add value, before exporting again without ever facing the full tariffs or procedures.

If the goods move out of the freeport into another part of the country, however, they have to go through the full import process, including paying any tariffs.

Freeports are similar to free zones, or ‘enterprise zones’, which are designated areas subject to a broad array of special regulatory requirements, tax breaks and government support. The difference is that a freeport is designed to specifically encourage businesses that import, process and then re-export goods, rather than more general business support or regeneration objectives.

What is the UK proposing on freeports?

International Trade Secretary Liz Truss has proposed creating up to 10 freeports in the UK. The government has launched a Freeports Advisory Panel, which will include ministers and experts. Truss said, “Freedoms transformed London’s Docklands in the 1980s, and freeports 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.”

Does the UK need to leave the EU to create freeports?

No. The UK could create freeports as a member of the EU. Indeed, the UK has previously been home to several freeports, including Liverpool, Southampton, the Port of Tilbury and Glasgow Prestwick Airport. There was a total of seven freeports between 1984 and 2012, when the UK legislation that established their use was not renewed.

There are currently 80 free zones within the EU, located across 21 member states. There are 24 in England alone. These zones vary in design and can be geared towards particular industries, like bio-sciences at Manchester Airport or advanced manufacturing in Tees Valley.

Freeports and free zones in the EU have to comply with EU rules – for example, the EU state aid rules designed to ensure fair competition. This is because tax exemptions and financial incentives offered to businesses in these zones can, in principle, be considered as a state subsidy that distorts competition.

Are there economic benefits to freeports and free zones?

Freeports and free zones are intended to stimulate economic activity in their designated areas. Supporters argue that benefits can arise due to the government stimulus or tax breaks available. There can also be some benefits due to the ‘agglomeration effect’, which is where increased economic benefits are seen as a result of concentrating the economic activity of a particular sector, or related sectors, in one place.

Economic studies have found the main advantage of freeports is that they encourage imports by lowering duty and paperwork costs. Manufacturing businesses that are inside the freeport can benefit from cheaper imported inputs/components in comparison to those outside the area.

On the other hand, the UK Trade Policy Observatory (UKTPO) cautions that the evidence of wider economic benefits of freeports and other zones are mixed, as they depend heavily on the design, access to transport infrastructure, skilled labour and capital within the zone in question. There is also a risk that freeports and zones don’t create new economic activity but rather divert existing business into the area with the allure of tax breaks – at a cost to the taxpayer in the form of lost revenue.

Ultimately, the UKTPO concludes that “whilst some form of free zones could help with shaping export-oriented and place-based regional development programmes, policymakers should (i) devise measures that counteract possible diversion of economic activity from elsewhere, and (ii) offer a wider set of incentives than just free zones, while keeping within the WTO [Word Trade Organization] and any ‘level playing field’ obligations that arise from our trade agreements.”

Would freeports mitigate the economic effects of a no-deal Brexit?

The last government proposed to set UK tariffs at zero for 87% of goods (the big exception being agricultural produce). This suggests an economic benefit might be enjoyed from a reduction in paperwork, but little from the tariff exemption itself. As such, the benefits would depend on other tax incentives and subsidies – but this risks falling foul not just of EU rules (if that is where the UK intends to re-export) but also WTO rules.

Can free zones help solve the UK’s Brexit border issues?

In general, special economic zones or free zones do not remove the need for a border. In fact they create two borders, by requiring one set of (simplified) paperwork to enter the zone and then the full gamut of controls upon leaving the zone.

Nevertheless, special economic zones have been proposed by Prosperity UK’s Alternative Arrangements Commission to help solve the Irish border issue. The proposed zones, covering border regions such as Derry–Donegal, would be exempt from normal border requirements – but this wouldn’t remove the need for controls for goods entering and leaving the zones themselves.

It would also require the Irish government to create a new border inside its territory (between its side of the joint enterprise zone and the rest of its territory) and Northern Ireland’s Democratic Unionist Party (DUP) to accept joint economic regions between the north and the Republic. It is far from clear that this would be politically saleable on either side of the border. 

Do freeports risk increased smuggling and tax evasion?

In April 2019 the European Parliament called for freeports to be scrapped across the EU as a result of a report on tax evasion and money laundering. The report argues that freeports provide operators “with a safe and widely disregarded storage space, where trade can be conducted untaxed and ownership can be concealed.” The lack of scrutiny on imports means that high-value items like art, for example, can be bought and easily stored in freeports without the kind of checks and controls they would normally face.

Update date: 
Monday, August 5, 2019
Authors: Joe Owen