Business and politicians Wary of UK Plan For Low-Tax Trade Zones

14-07-2020

Government edges closer to creating freeports, but critics question their benefit. Chancellor Rishi Sunak has been warned that his plans for 10 low-tax “freeports” in the UK could drain investment from other parts of the country and become a magnet for money laundering.

Freeports have been lauded by Boris Johnson as a key feature of his “levelling-up” agenda to regenerate left-behind areas in northern England and the midlands, but critics dismiss the zones as “glorified industrial parks” that amount to a “largely symbolic” gesture to deprived regions.

The Treasury launched a public consultation in February into how freeports might work, which concludes on Monday, and it is expected to use the autumn Budget to invite applications from candidate areas, with a 10-site cap.

A freeport is a zone considered to be outside its home country for customs purposes, meaning that goods or components can come in and out tariff-free, only incurring duties at the point of export. Supporters promote freeports as hubs for high-value manufacturing and innovation, but sceptics cite research showing that they tend to shift jobs and investment around a country, rather than generate new business.

Mr Sunak supported freeports as a backbench MP, writing in a policy paper in 2016 that the zones “increase manufacturing output, create employment regionally where it is most needed, and promote trade”.

However, Adam Marshall, head of the British Chambers of Commerce — who sits on the government’s freeport advisory panel — said business was wary. “Many are excited about the prospects for investment but nervous about the possibility that jobs could be displaced,” he added.

Bob Sanguinetti, head of the UK Chamber of Shipping, said the test for freeports must be that they drive new economic activity “rather than the relocation of such activity”.

The Treasury conceded in its consultation paper that “there is evidence in some cases that zone-based policy can have a displacement effect”, with lower employment in nearby areas not covered by the freeport.

Research by the Financial Times indicates that at least 21 different locations are vying for freeport status, including not only seaports but also some airports. They range from London Gateway to Bristol and Milford Haven.

Richard Ballantyne, chief executive of the British Ports Association, urged the government to drop the 10-site cap and focus the scheme broadly to take in southern areas like Dover and Southampton that also have high levels of deprivation.

He insisted that allowing more freeports would not make a “huge dent” in the exchequer because the main attraction would be simpler planning laws rather than tax cuts.

Among the expected applicants is the port of Liverpool which is the conduit for huge volumes of trade with North America: it estimates that freeport status would add £739m to Liverpool’s economy every year and create 12,000 jobs.

Associated British Ports wants to make three bids — for the Humber, Southampton and a stretch of south Wales.

Ministers in the devolved administrations in Edinburgh, Cardiff and Belfast are encouraging candidates for freeports, even though they fear a deregulatory “race to the bottom” with England.

The Scottish government wants more evidence about the economic benefits of freeports as well as a say over their location and design.

“We remain concerned that the focus of freeports may be positioned to compete on low-cost, low-wage, low-value opportunities with which they are often associated globally,” said Ivan McKee, Scotland’s minister for trade and investment.

The contest to secure freeport status will prompt intense contests at a regional level — for example pitting Tees Valley against Tyneside in north-east England.

Tees Valley is a frontrunner given that its Conservative mayor Ben Houchen has long championed freeports. It wants to regenerate 4,500 acres — a mix of despoiled wasteland, abandoned industrial buildings and active facilities — south of the river Tees.

Mr Houchen believes the project could bring 32,000 jobs to the area. “We are yet to see a credible economic argument to suggest displacement will be an issue,” he said.

But less than 40 miles to the north is Tyneside, which has proposed a rival “digitally enabled free trade zone” comprising not only port land but also some existing industrial sites, such as Nissan’s car plant in Sunderland.

Tyneside’s advocates believe this would give existing inward investors, such as Nissan, protection from a sudden increase in tariffs after the Brexit transition period.

Among the unusual proposals is one for a freeport at East Midlands airport, linked to the nearby Toton rail hub. Likewise, Doncaster Sheffield airport has joined with the town’s two rail freight terminals.

Heathrow airport, London, is seeking “associated freeport status” to link with a site elsewhere in the UK.

The Treasury consultation paper set out potential benefits of freeports including “tariff-inversion” under which — if duties on a finished product are lower than on the components — a company could pay tax on the former instead of the latter.

But Peter Holmes, author of a paper on freeports for Sussex University’s UK Trade Policy Observatory, said the zones seemed “largely symbolic” and a gesture to “left-behind places”.

He added that historically free ports had succeeded in highly regulated or closed economies — like China’s special economic zones in the Deng Xiaoping era, or Ireland’s Shannon site in the 1960s — but that was not a situation that applied to the UK in the 2020s.

Dr Holmes said the UK’s global tariff schedule due to take effect after the Brexit transition period set low rates on most products, so there was only minimal advantage to deferring payment of duties or using “tariff inversion”.

The Treasury consultation paper also conceded that there were global concerns about “links between freeports and a number of illicit cross-border activities”, including smuggling.

Tax Justice UK, a campaign group, said the policy would create “micro tax havens”, with the potential for both tax avoidance and money laundering. Robert Palmer, the group’s director, said: “For all the rhetoric of buccaneering Britain I expect we will get a few glorified industrial parks on the edge of Tory target seats in the north and midlands.”

Source: Financial Times