June 21 2023
Peter Holmes is a Fellow of the UK Trade Policy Observatory and Emeritus Reader in Economics at the University of Sussex Business School. Guillermo Larbalestier is Research Assistant in International Trade at the University of Sussex and Fellow of the UKTPO.
This is an extract from a paper first published on The Review Of European Law journal on may 5, 2023. To read it in its entirety, click here.
In the extract below we suggest that there are few trade benefits to be had. Is there something else that enhances economic viability? Is it as “regulatory sandboxes”? The present regulations require adherence to international environmental and financial standards. So what about R&D? There are some wind turbine, carbon capture and “Green Hydrogen” projects but not much linkage to Freeports. We don’t address the recent accusations of financial irregularities, yet clearly, property speculation is the other way to profit.
Freeports and FTAs: Preferences and Origin
Could Freeports promote exports? A factor often overlooked is that the customs position of goods exported from free ports is very complicated. Whether or not a product manufactured, assembled or processed in a free port can take advantage of bilateral FTA preferences depends on a number of factors including whether production is deemed to be originating in the territory of the exporting country, how the bilateral arrangements treat “duty drawback” (i.e., goods exported without paying duty on their inputs), and whether the incentives offered by free ports are such as to be liable to anti-subsidy action under FTA or WTO rules.[1]
In other words, the output from Freeports may be excluded from preferential access to trading partners due to duty drawback bans and they may be subject to anti-subsidies penalties if they are thought to be getting an unfair advantage.
Firms considering operating in UK Freeports may have to choose between using the benefits offered by the policy or seeking preferences under an FTA. Most post-Brexit FTAs contain duty drawback bans so products from Freeports will be denied preferential access if they make use of the tariff exemptions. Interestingly, the UK-EU Trade and Cooperation Agreement (TCA) does not contain any bar to exports from Freeports being granted preferential access. However, there are provisions for the EU to retaliate against any form of subsidy that may affect trade, and Article 53 (Chapter 2, Section I) in the TCA provides for duty drawback provisions to be reviewed in 2023. The EU has already raised the question of Freeport subsidies in the Partnership Council.[2]
HMRC data on Overseas Trade Statistics for 2022 suggest that 30% of UK exports and 38% of UK imports transited a port located in a Freeport. But it is difficult to estimate with precision what fraction of UK trade may be affected (whether positively or negatively) by the Freeports policy. This is mainly because it is only the merchandise passing through customs sites that will benefit from customs exemptions, not necessarily all goods entering the ports located within the wider Freeport area.
Deregulation and R&D in Freeports
Our argument is that there are very few benefits from UK Freeports from a trade perspective. So, what are they for?
On the one hand, the subsidies offered are modest, but it remains to be seen the sort of investment that it will attract. This will, in turn, determine the number and quality of jobs it may create. On the other hand, Freeports could provide scope for “regulatory sandboxes”. This raised fears that Freeports would entail massive deregulation in the areas of money laundering, contraband, workers’ rights, land use or environment. However, the Freeports Bidding Prospectus states that Freeports must commit to compliance with the soft law OECD “Code of Conduct for Clean Free Trade Zones” to prevent money laundering. Similarly, bids were required to show compliance with existing environmental regulation and standards, and the policy was branded as an opportunity to drive the decarbonisation agenda.[3]
The experience of free ports showed that they are only really effective when trade and trade-related activities are subject to excessive regulation and over burdensome restrictions on imports, which is rarely the case in the UK. There may initially have been an agenda to use Freeports as models for “Charter Cities” but no evidence has since appeared of an intention to go down this road.[4] Overall, the Freeport plan was introduced with no new primary legislation thus making it hard to make very big changes in internal regulations.
This leaves one final possible benefit from Freeports, namely the promotion of R&D. On the face of it, run-down coastal areas are the last place where cutting edge innovation would occur. There is little to attract digital business and, at least presently, a lack of pull factors to create the necessary cluster effects for innovation to thrive. Nevertheless, recent events have shown that there are areas where Freeports could play a role, namely marine-related environmental research activity. There have also been developments to increase wind turbine production in the Humberside and Teesside Freeports, and planned projects on carbon capture and hydrogen production in Freeports.[5] The question, however, is whether Freeports help with this and if it makes sense for designated Freeports to be prioritised for funding for such activity.
Interestingly, the Scottish “Green Freeports” plan essentially chose places where there was already hydrogen production activity.[6] But, Scottish Government Cabinet Secretary Michael Matheson MSP told the House of Commons Scottish Affairs Committee that the Green Freeports “will not play a key part in helping to deliver and realise our ambitions for the hydrogen economy in Scotland”.[7]
Conclusion
In a nutshell, the trade dimension of the Freeports policy is limited when tariffs are low and regulations are unconstraining. Any gains that could come on the import side present few benefits beyond those of bonded warehouses; anti-dumping duties will still be levied on items entering a Freeport. On the export side, goods produced in Freeports risk being denied preferences and subject to countervailing duties or penalties under WTO or FTA rules.
It remains to be seen if tax incentives are enough to attract investment and create new jobs; but the key issue is whether any new jobs attracted to Freeports would be net job creation or just job displacement. Moreover, deregulation is worth little if regulations are already relaxed; and Freeports were developed with no new primary legislation that would allow big regulatory changes.
There are some indications of environmental R&D in Freeport areas but there is little evidence that they were generated by the Freeport schemes. Lastly, investment in infrastructure is crucial for regional development, but public funding is limited.
Footnotes
[1] Holmes, P., Jerzewska, A. and Larbalestier, G. (September 2022) “Exporting from UK Freeports: Duty Drawback, Origin and Subsidies.” UKTPO Briefing Paper 69.
[2] Second meeting of the Trade Partnership Committee under the UK-EU Trade and Cooperation Agreement, 1 December 2022: Minutes.
[3] Section 4.1: “Contribution to decarbonisation and environmental impact;” and Section 4.2: “Preventing illicit activity” in the Freeports Bidding Prospectus.
[4] See UKTPO blog post by P. Holmes and G. Larbalestier (August 2022).
[5] More information in the UK Freeports Programme Annual Report 2022 by Gov.uk (December 2022).
[6] See also https://ukandeu.ac.uk/scotlands-freeports/.
[7] See House of Commons Scottish Affairs Committee Report on “Hydrogen and carbon capture in Scotland” (paragraph 24).
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