Too big to ignore, too unstable to support broader aims – the UK-EU relationship must change

19 September 2024

David Henig is the Director of the UK Trade Policy Project at the European Centre for International Political Economy (ECIPE). 

The Conservatives seriously proposed a Brexit with no deals with the EU. Since the UK-EU Trade and Cooperation Agreement (TCA) has been in place, the EU has said it can’t be reopened in any circumstance. Now Labour wants a reset but would prefer a quiet one that nobody really notices.

What is it about the world’s second-largest trade relationship[i] that means it is talked down consistently? Similarly, an integrated UK and EU is surely crucial for European competitiveness and security, so why does neither side see this?

Why the UK and EU need each other

Most obviously, this is the ongoing aftermath of a divorce so messy that both parties simply want to pretend everything is now fine for them. Except, geography means the relationship can’t just be ended, not to mention a billion euros of annual trade, which is rather a lot of customers dependent on governments to help them. Then there’s Northern Ireland, which has already been called the unwanted child of a Brexit split. Not to mention, shared objectives for a transition to net-zero, and of course the need to work together to defeat Russian aggression on the eastern flank.

In reality, neither the UK nor the EU have got over the split, and putting to one side protestations to the contrary, that needs to change. There are simply too many shared challenges starting with the growth that both badly need. Global Britain or an EU-Mercosur trade deal are a poor substitute for that.

This is a relationship of almost unfathomable breadth. Beyond what’s mentioned above, there’s everything to do with mobility, for work or those under 30. Negotiations over specific arrangements for Gibraltar. Cooperation over sanctions and economic security, and indeed the shared incentive of ensuring strong supply chains. Data transfers and financial services in trade, and so on.

A better relationship needs mutuality

Improving cooperation across this piece requires, more than anything, a shared understanding and trust – of which there has been little sign since 2016. However, that’s not possible until the UK and EU are honest with themselves in their own ways. For the UK, “Take Back Control” is inevitably fettered for a trading economy in an interlinked world, and for the EU, that this will be a relationship of variable institutional structures rather than contained within a single arrangement.

Of course, a reset has to start with the implementation of what has already been agreed, but it also needs much stronger political relations that derive from regular summits at the level of leaders and senior politicians, and also building on existing institutions such as the Parliamentary Assembly and Domestic Advisory Groups.

Mutual understanding would ideally lead to a joint ongoing work programme. Start with the shared interests in security and energy. The UK should align with the EU Emissions Trading Scheme and EU CBAM, and the EU should facilitate this for the energy security needs of both parties. UK stakeholders hoping to find some hitherto even better solution or EU maximalists demanding the UK aligns with everything in return should not be the decisive voices.

Such a shared programme would show that there’s an ongoing relationship and not just one shot at improvement. A single undertaking makes sense for joining or leaving the bloc, not for the complex relationship we have now. Where there are things that one side or the other wants, we will need a process to find agreed solutions, and there will be some linkages. For example, fish and Sanitary and phytosanitary measures (SPS), mobility, and regulation. It will also require working groups with suitable reporting to the political level, some of which will be simple cooperation so as not to dive straight into the complex divisive issues. There are also unilateral decisions, such as the UK joining Erasmus, and EU data adequacy, to bring considerable goodwill.

The benefits of a better relationship and what needs to change

Thickening engagement can build the way towards the inevitably more difficult detailed negotiations on removing barriers to food and drink trade, which is likely to be a process more than a single event. Similarly, mutual recognition agreements around conformity assessment make sense where stakeholders of both sides agree.

All of this will need change from both sides. For the UK, it means moving into the 21^st century for negotiating, away from Whitehall knows best and let’s keep secrets, towards a team approach. There always has to be a realisation that everything will be reciprocal, and the correct answer to an ask from the EU is ‘we’ll listen’. Having a central coordinating team in the Cabinet Office with political leadership is crucial.

Meanwhile, the EU has to stop treating the UK like any other neighbour, because this is arguably the most crucial relationship for both sides given an allied US turning inwards, on which the UK and EU should also cooperate. There’s also a need to move away from the simplistic statements about not reopening the TCA, this provides a perfect foundation for expanding the relationship and avoiding another Swiss-style relationship.

Commentators and stakeholders have their part to play to support a much more informed public debate recognising a relationship evolving, but where progress is possible. Equally, we need to ditch the idea that this can all be fixed with the UK joining something like the Customs Union, Single Market, or the EU since all of these will be difficult and lengthy negotiations requiring strong political support which is not currently present on either side. For stakeholders, it also means focusing on the practical.

None of this relationship deepening will happen easily. Negotiations are rarely an easy ride. Where there is so much politics, there will be constant tensions and miscommunications. We’re already seeing this over the EU ask on youth mobility. The UK media is likely to continue to be hostile, and this is all the more reason why coordinators on both sides will need regular contact.

Diplomats know the challenges, that’s why they often talk of a load-bearing structure, like negotiators are actually engineers. Perhaps that’s not the worst analogy: Brexit replaced multi-modal links with a single-lane road and rail connection. It must next be dualled and double-tracked, and there are a lot of parts to such a project, you can’t just expect the structures to support expansion.

Notwithstanding the issues, there is goodwill. There are many on both sides that would like improvement, almost certainly including Prime Minister Keir Starmer and EU President Ursula von der Leyen. That should, however, never be mistaken for the expectation of special deals.

In truth, geography requires more from the UK-EU relationship, and the most likely outcome is that it will slowly happen. This probably won’t be the dramatic single event so many want to see, but a gradual evolution to something a little better.

• Negotiating Uncertainty by David Henig

Footnotes

[i] US-EU is the world’s largest trade relationship. UK-EU and US-Canada compete as the second largest.

Disclaimer:
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 the UK Trade Policy Observatory.

Republishing guidelines:
The UK Trade Policy Observatory believes in the free flow of information and encourages readers to cite our materials, providing due acknowledgement. For online use, this should be a link to the original resource on our website. We do not publish under a Creative Commons license. This means you CANNOT republish our articles online or in print for free.

Charlotte Humma September 19th, 2024

Posted In: Uncategorised

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Whatever happened to Freeports? Trade and Local Development in the General Election

3 July 2024

Tom Arnold is a Researcher at the Heseltine Institute for Public Policy, Practice and Place at the University of Liverpool; Patrick Holden is a Reader in International Relations at the University of Plymouth; Peter Holmes is a Fellow of the UK Trade Policy Observatory and Emeritus Reader in Economics at the University of Sussex Business School; and Ioannis Papadakis is a Research Fellow at the Centre for Inclusive Trade based at the University of Sussex.

Introduction

Freeports have been a central part of the UK Government’s regional development policy over the last five years. The 2019 Conservative Party manifesto pledged to create “up to ten Freeports around the UK”,[1] emphasising their potential to create new jobs and additional income streams for local government. They were also promoted as key to improving the UK’s international trade prospects following its exit from the European Union. UK government has specified three economic objectives for Freeports: to establish them as hubs for global trade and investment; to promote regeneration and job creation; and to create hotbeds for innovation.[2]

Despite this, Freeports have not featured strongly in the current general election campaign. The 2024 Conservative manifesto includes a promise to “create more Freeports and Business Rates Retention zones”, emphasising their potential to create new jobs and provide additional income streams to local government.[3] While the opposition Labour Party pledges to develop Local Growth Plans aligned to national industrial strategy, there is no mention of Freeports.

The UK Freeport programme looks likely to continue in some form, regardless of the outcome of the election. The 2023 Autumn Statement extended tax relief funding for English Freeports from 2026 to 2031, meaning Freeport operators and occupiers will benefit from reliefs on stamp duty, business rates and employer national insurance until this ‘sunset date’. Nevertheless, several concerns will need to be addressed by the next government. This piece sets out the key issues for Freeports over the coming months and years, and suggestions for improving on the current model.

Issues with the current Freeport model

In April 2024, the House of Commons Business and Trade Committee published the findings of its inquiry into the performance of Freeports and investment zones in England, to which some authors of this article contributed evidence.[4] The report summarises the benefits and limitations of the UK Freeport model, highlighting evidence which suggests:

• The customs benefits available to Freeports are limited. Businesses in Freeport customs sites can utilise tariff inversion – calculating import duties based on the value of inputs rather than the value of the finished product. However, analysis by the UKTPO found that only 1% of the value of UK imports would benefit from this practice.[5] Bluntly, as UK tariffs are already very low, the customs benefits derived from location within the Freeport for business, would not be very high. Moreover, if Freeports did benefit UK competitiveness, trading partners would be entitled to invoke “duty drawback” provisions in FTAs to deny preferences to the UK or to use anti-subsidy countervailing duties.[6]
• There are some tax benefits at Freeport sites that may contribute towards attracting employers and creating new jobs. Government estimates suggest Freeports have created 5,600 jobs in England since their creation.[7] However, evidence provided to the Committee suggests that around two-thirds of these jobs may not be ‘new’, but jobs that would have been created regardless, or displaced from elsewhere.[8]
• There are concerns about governance and transparency. While all English Freeports are governed through partnership boards incorporating both the public and private sectors, the level of business involvement and degree of control by local government varies. The well-documented allegations of financial mismanagement linked to the Teesside Freeport highlight the risks posed by complex governance and weak accountability.[9]

Making Freeports work

Despite these concerns, we argue that the UK Freeport experiment should not be abandoned, but may need modification. Given the limitations of the customs benefits associated with Freeports, the government should focus on the role they can play as part of an active, place-based industrial strategy. While Freeports have been portrayed as a central element of the government’s ‘Levelling Up’ regional development policy, the relationship with broader government objectives on key national issues such as net zero is unclear.

This confusion is partly a result of the dual purpose of the current UK Freeport model, which aims to both boost international trade and operate as traditional Special Economic Zones with a focus on attracting jobs and regenerating ‘left behind’ places.  Aligning Freeports more closely with national policy targets and providing greater certainty about the purpose of regional policy could help to clarify their purpose. This could be particularly significant in places which continue to face acute socio-economic problems following the mass decline of industry in the second half of the 20^th century.

UK Freeport and Investment Zone locations

To achieve this, we highlight five areas for improvement in the current government’s strategy for Freeports.

Align with other special economic zones. In addition to Freeports, there are two other main special economic zone (SEZ) programmes currently operational in the UK: Investment Zones (introduced in 2023, with 13 across the UK); and Enterprise Zones (introduced in 2011 and expanded in 2016, with 48 across England only). The presence of three different types of SEZ presents complexities for local government in attracting investment and developing industrial strategy, particularly in areas where all three are present (such as Liverpool City Region). As part of a broader industrial strategy, the government should be clear about the purpose of each SEZ and where possible align governance of SEZs under a single accountable body (such as a Mayoral Combined Authority. Where appropriate SEZs could be merged to create clusters with complementary activities – comprising universities, ports and dynamic SMEs. There is particular potential to align Freeport activity with national and local objectives to achieve net zero carbon emissions, particularly through decarbonisation of freight transport.

Assess the value of customs benefits. The government should review whether customs reliefs are worth retaining or should be wound down to save money and time for local authorities and to allow more focus on the place-based industrial policy elements of the programme. Policies and funding could be focused more narrowly on other Freeport priorities such as improving infrastructure and upskilling local workers. The UK Freeport model should be understood more accurately as a type of SEZ rather than a focus on international trade.

Enhance governance. The Business and Trade Committee report recommends that accountability for Freeports should be held by a single leader, in the form of an elected ‘metro mayor’. This can offer clarity for businesses, the public and other stakeholders. However, only three English Freeports are currently located in areas with a mayoral combined authority (East Midlands, Liverpool City Region and Teesside). For Freeports without an elected mayor, it is less clear who the single accountable figure should be, but local authority leaders may be most appropriate for this role. While Freeports should be enabled to exercise flexibility in shaping policies to align with local aims and objectives, the UK government should retain overall scrutiny of the Freeport programme in England.

Improve transparency. While fears about the disconnection of UK Freeports from democratic accountability are exaggerated, public concern is understandable given the shortage of publicly available information about their geographies and powers. Efforts should be made to ensure all Freeport bodies publish clear, accessible and easy to digest information about site locations, governance arrangements and mechanisms for allocating retained business rates.[10] Making this information publicly available will facilitate learning about the effectiveness of UK Freeports.

Improve evaluation. The government should work with Freeports to develop metrics tracking benefits to businesses, the effectiveness of Freeport policies, and the costs and benefits of tax reliefs. The current Freeport programme has a strong monitoring and evaluation system in place at the national level, but there are challenges in the provision of local data and developing sound counterfactuals.

Conclusion

While Freeports have not featured strongly in the 2024 general election campaign, the issues the current UK Government purports that they resolve – particularly improving economic prospects in ‘left behind’ places – will remain central to the success of the next government. We suggest not throwing the baby out with the bathwater but reassessing the UK Freeport model as part of a broader place-based industrial strategy, including due scepticism regarding the trade effects.

Footnotes

[1] Conservative Party manifesto (2019) https://assets-global.website-files.com/5da42e2cae7ebd3f8bde353c/5dda924905da587992a064ba_Conservative%202019%20Manifesto.pdf (p.57)

[2] HM Treasury (2020) Freeports: bidding prospectus. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/935493/Freeports_Bidding_Prospectus_web_final.pdf

[3] Conservative Party manifesto (2024) https://public.conservatives.com/static/documents/GE2024/Conservative-Manifesto-GE2024.pdf

[4] House of Commons Business and Trade Committee (2024) Performance of investment zones and freeport in England. https://committees.parliament.uk/publications/44455/documents/221158/default/

[5] Peter Holmes and Guillermo Larbalestier (2021) Two key things to know about Freeports. https://blogs.sussex.ac.uk/uktpo/2021/02/25/two-key-things-to-know-about-Freeports/

[6] Peter Holmes, Anna Jerzewska and Gullermo Larbalestier (2022) ‘Exporting from UK Freeports: Duty Drawback, Origin and Subsidies.’ UKTPO Briefing Paper 69. https://blogs.sussex.ac.uk/uktpo/files/2022/09/BP-69-Freeports-FINAL-28.09.22.pdf

[7] House of Commons Business and Trade Committee (2024)

[8] Business and Trade Committee (2023) Oral evidence: the performance of investment zones and Freeports in England. https://committees.parliament.uk/oralevidence/13744/html/ (Q9)

[9] Tees Valley Review (2024) https://assets.publishing.service.gov.uk/media/65ba58ec3be8ad0010a081a9/Tees_Valley_Review_Report.pdf

[10]  Nichola Harmer, Patrick Holden and Guillermo Larbalestier (2023) Written evidence submitted to the Business and Trade Committee inquiry into the performance of investment zones and freeports in England. https://committees.parliament.uk/writtenevidence/124415/html/

Additional Information

The authors would like to thank Guillermo Larbalastier for earlier research input and advice. Guillermo is not responsible for any views expressed in this article. The opinions expressed in this blog are those of the authors alone and do not necessarily represent the opinions of the University of Sussex or the UK Trade Policy Observatory.

Republishing guidelines:
The UK Trade Policy Observatory believes in the free flow of information and encourages readers to cite our materials, providing due acknowledgement. For online use, this should be a link to the original resource on our website. We do not publish under a Creative Commons license. This means you CANNOT republish our articles online or in print for free.

Charlotte Humma July 3rd, 2024

Posted In: Uncategorised

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“There Ain’t No Rules in a Knife Fight” and probably not enough in the WTO

Share this article: 23 February 2024

Peter Holmes is a Fellow of the UK Trade Policy Observatory and Emeritus Reader in Economics at the University of Sussex Business School. Sunayana Sasmal is a Research Fellow in International Trade Law at the Observatory.

The World Trade Organization (WTO) dispute settlement system is in crisis. Here, and in a comprehensive working paper, we discuss one potential solution to one of the many issues confronting it. Non liquet is a legal principle that allows a tribunal to decline rendering a ruling when there is no law. We think this concept could partially address the major issue of judicial overreach. But first, some background.

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Charlotte Humma February 23rd, 2024

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Some goods (and some less good) news from UK trade

16 February 2024

Michael Gasiorek is Director of the UK Trade Policy Observatory and Co-Director of the Centre for Inclusive Trade Policy. He is Professor of Economics at the University of Sussex Business School. Nicolo Tamberi is Research Fellow in Economics at the University of Sussex and Fellow of UKTPO.

HMRC has just published statistics for trade in goods for December 2023, giving us three years of data after the implementation of the Trade and Cooperation Agreement (TCA) with the EU in 2021. This blog reviews trends in UK trade with the world and the effects of the TCA on UK-EU trade.

There is good and bad news for UK trade in goods. Starting with the bitter pill, the UK’s trade in goods with the world has underperformed compared to other comparable countries over the last few years. Figure 1 shows the exports (panel a) and imports (panel b) of the UK, marked in red, and other OECD countries in blue, together with the series for the OECD total in dark blue. While during the period 2013-16, the UK was in line with the OECD total, the UK’s imports and exports started to slow down since the Brexit referendum in June 2016. For exports, the gap with the OECD total increased substantially with the Covid-19 pandemic. Imputing causation in this setting is not easy; most likely, the Brexit referendum, a slow recovery from the pandemic and the UK’s exit from the EU all contributed to the underperformance of UK trade. (more…)

Charlotte Humma February 15th, 2024

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What can be learnt from the Labour Party’s consultation on Trade?

Share this article: Michael Gasiorek is Director of the UK Trade Policy Observatory and Co-Director of the Centre for Inclusive Trade Policy. He is Professor of Economics at the University of Sussex Business School. Justyna A. Robinson is a Reader in English Language and Linguistics at the University of Sussex and a Director of Concept Analytics Lab.

In early 2023, the Labour Party launched a National Policy Forum. It comprised a series of public consultations across six core policy areas, with the stated aim of helping the Labour Party to ‘build their policy platform’.  A key part of the consultation process was to invite written submissions on these policy areas. One of the six policy areas was entitled Britain in the World, (to which the UKTPO/CITP also responded), which posed a set of seven questions all of which related to trade and trade policy.

Questions

The consultations were due to lead to a set of policy documents to be agreed in July 2023. With any consultation exercise, including those undertaken by the UK Government on the UK’s Free Trade Agreements, it is hard to know how seriously the consultation is being taken and which if any of the diverse views and responses are being listened to, and how selectively. Consulting with stakeholders and members of the public in the formulation of policy are important if taken seriously, and so consultations such as this are, in principle, welcomed.

So, on the eve of the Labour Party conference, we have analysed all the submitted responses to identify the key issues raised.  There were 310 responses submitted which varied considerably in length. Most submissions were less than 500 words, but some were as long as 10,000 words. It is important to note that the consultation was open to anybody: individuals as well as organisations and companies. The chart below shows that 35% of the submissions were submitted by non-Labour party members (labour guests).[1]

Analysing the data is a challenge because the responses vary enormously in length and scope – with some private individuals submitting short sentences on a couple of issues, to larger organisations and companies submitting lengthy responses. Fortunately, there are tried and tested methods (and smart) software which provide a means for using corpus and natural language processing techniques for the analysis of such textual responses and controlling for different lengths of responses, so that individual lengthy responses do not dominate the analysis.

A key aspect of the analysis is to identify the frequency with which submissions raise particular issues. This is done by comparing the frequency of given words or groups of words in the submissions, relative to the frequency with which those words would appear in ‘normal’ usage. Hence words that appear relatively more frequently are those that prima facie raise issues that the respondents care about. In the jargon, this is called the ‘keyness’ score. We also need to control for the fact that certain terms may appear more frequently in individual responses. So, we want to be able to identify how often an issue is raised but to adjust for those issues being raised frequently in a small number of responses. This is done by producing something called the ‘average reduced frequency’ (ARF).

Consider the chart below. This gives the ARF score for the top 10 identifiable trade issues raised in groups of up to three words[2].  We see that the issue of trade and human rights is the primary concern, on average across the responses. Care has to be taken in interpreting the height of the bars – just because a bar is twice as high does not mean that the issue was perceived as twice as important. Nevertheless, it is clear that human rights were perceived as considerably more important than supply chains and economic growth.

Top issues raised by respondents (ranked byARF)

Relatedly, if one takes the importance of individual words, the word ‘promote’ has a high ARF score. On its own, it is not clear what the respondents want promoting, and so we look at the collocation of words. This identifies that the key objective here was to promote growth, followed by rights, values, trade, and development in order of importance.  Another word with a high individual score was ensure which co-occurs most with security (of supply chains), rights, and access (markets, supply chains), suggesting that these are of high importance for trade policy.

Of course, the frequency of some of these words will have been driven by the specific questions posed by the consultation exercise, as given above, which specifically asked about growth, supply chains and human rights for example. Even so, the rankings are significant as they indicate which of these issues appear of greater concern to respondents.

More depth in the analysis can be obtained by considering the nature of the responses to the individual questions posed. Hence, the responses pertaining to the role of international trade in promoting domestic economic growth, boosting jobs and driving up wages illustrate different perceptions of what trade policy is for. While some responses highlighted the role of trade in boosting productivity, innovation and access to supply chains, as well as emphasising trade with the EU; others focused on the role of trade (deals) in building relationships, soft power, and trust with third-party countries. Additionally, some demonstrated concern for objectives which are not focused on economic growth and economic efficiency such as the regional dimension, worker and human rights, or environmental protection.

With regards to the regional dimension, there is a clear message that international trade, especially services trade as well as ‘green’ trade, could and should be used to reduce regional disparities but that this also requires much more substantial investment in infrastructure and transport networks, as well as policies to mitigate negative impacts if it is to be successful. There was general acceptance of the importance of building more resilience in supply chains with a focus on the need to build trust with partner countries and reorienting supply chains to more trusted countries as well as protecting cyber-security. Interestingly, there was an overlap here with environmental and rights concerns with several respondents calling for more due diligence requirements in supply chains and moving to net-zero supply chains.

Environmental protection and cognate terms such as green technology, carbon emissions, energy, due diligence come up widely in the responses with widespread support for a better environment and net zero, even if it means renegotiating existing deals. Interestingly, the desire to use trade deals to lead to better outcomes in these regards does not pertain just to the UK, but that the trade deals should be used to influence and change practices in partner countries.

The responses highlight the importance of taking into account how trade may negatively impact a range of outcomes, be this with regard to the environment, regions, agriculture and animal welfare, older workers, disabled workers, or women. However, such concerns did not lead to opposition to trade deals, but rather to suggesting that (a) consideration of such impacts should form a (more) explicit element in the evaluation of proposed trade deals; and importantly (b) that there should be much more widespread inclusive consultation processes with affected groups, sectors, and regions in the formulation of trade policy and the negotiation of agreements.

Given the range of questions posed in the consultation exercise, it is perhaps not surprising that there is considerable heterogeneity in the answers. One clear message, however, which emerges is the recognition that trade is good for growth and an important element in raising productivity, but that at the same time, trade policy needs to be value driven. While these are not necessarily mutually exclusive there are trade-offs in trying to meet all the objectives. Hopefully publication of a trade strategy by the Labour Party may provide some insights on their approach to those trade-offs, and maybe the forthcoming conference may also shed some more light.

Footnotes

[1] Categories as defined by the Forum, see bottom of this page for all categories:  https://www.policyforum.labour.org.uk/commissions/britain-in-the-world

[2] Note that we have excluded here terms that came up but do not, of themselves, shed meaningful light on trade issues, such as ‘UK government’ or ‘Labour Party’

Disclaimer:
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.

Republishing guidelines:
The UK Trade Policy Observatory believes in the free flow of information and encourages readers to cite our materials, providing due acknowledgement. For online use, this should be a link to the original resource on our website. We do not publish under a Creative Commons license. This means you CANNOT republish our articles online or in print for free.

Charlotte Humma October 6th, 2023

Posted In: Uncategorised

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