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27 February 2019

Ilona Serwicka is Research Fellow in the economics of Brexit and Peter Holmes is a Reader in Economics at the University of Sussex. Both are Fellows of the UK Trade Policy Observatory.

There are proposals to relax customs rules and duties in specially-designated areas known as free ports or more generally free zones. But these would make little impact on rebuilding the UK economy after Brexit, reveal Dr Serwicka and Dr Holmes in our latest Briefing Paper ‘What is the extra mileage in the reintroduction of ‘free zones’ in the UK?’

The creation of free zones, which would give companies the ability to defer payment of taxes on imported inputs and in some circumstances even avoid them altogether, have been mooted as a way to create thousands of new jobs, rebuild the nation’s manufacturing industry and regenerate deprived areas of the country once the UK leaves the EU Single Market and Customs Union.

But our analysis states that potential benefits and savings for businesses operating in free zones with simplified customs procedures, relief on customs duties and tariff inversion are likely to be limited in the UK.

While free zones could in some circumstances help increase export opportunities after Brexit, the academics warn that any economic benefits brought to free zones could simply be diverting economic activity from elsewhere. In the US their main impact has been to promote imports.

Dr Serwicka, Research Fellow in the Economics of Brexit at the University of Sussex, said:

“While some form of free zones could help with shaping export-oriented and place-based regional development programmes, UK policymakers will need to devise measures that counteract the possible risk that economic activity will simply be diverted from elsewhere. They will also need to offer a wider set of incentives for trade and jobs while keeping within the WTO and any ‘level playing field’ obligations that arise from new agreements.”

Our analysis questions previous research claiming free zones in the UK could generate up to 150,000 new jobs, add £9bn a year to the UK economy and narrow the North-South divide. We believe a smaller proportion would be genuine additional jobs and economic activity rather than just redistributed from elsewhere in the UK.

We find that while free zones in the US prevent “tariff inversion” costs, where tariffs on intermediate goods exceed tariffs on finished goods, such opportunities are slight in any likely UK trade policy scenario. The briefing paper also warns that free zones have costs as well as benefits.

The researchers observe that to have any noticeable effect, UK trade policymakers would need to offer a wider set of incentives in addition to just free zones. Yet, such incentives could be limited in scope by World Trade Organisation rules and “level playing field” obligations (state aid rules) included in a future trade agreement with the EU that the UK would be bound by.

Analysis of free zones operating within the US by Drs Serwicka and Holmes suggested limited evidence on their ability to create genuinely new jobs rather than just encourage companies to shift jobs from other parts of the country.

Dr Holmes, Reader in Economics at the University of Sussex, said:

“The UK Government will have to be innovative and inventive if it’s to build fruitful new trading relationships as a sovereign nation outside the EU.

“Free zones alone can’t do very much to promote overall regeneration.

“They will need to be incorporated into a far more comprehensive plan alongside other regional incentives to revitalise areas hollowed out by de-industrialisation and in need of services jobs as well as manufacturing.”

The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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