The ability of free ports and free trade zones to drive development in poorer cities of the UK post Brexit has been questioned by a new report.
The idea of free ports has been promoted by supporters of Brexit. But Ilona Serwicka and Peter Holmes of the UK Trade Policy Observatory argue that the benefits of free trade zones may be limited. They make the case in ‘Any free port in a storm: Analysing the potential of free zones in post-Brexit Britain’.
The report notes that EU regulations require that all measures used for free zones and enterprise zones must be compliant with the EU state aid rules as tax exemptions and fiscal incentives are regarded as a form of subsidy. This has fired Brexiters demands for the establishment of free ports.
However, the economists argue that free zones should not be seen through the prism of post-Brexit opportunities as a tool that – unfettered by the EU state aid rules – can deliver a major boost to economic growth potential after Brexit.
They argue that the current policy direction will require the UK to abide by many elements of EU state rules and/or possibly face action at the World Trade Organisation.
They also say that many of the disadvantages which free trade areas address are not significant for the UK. For example, the UK has a relatively low tariff regime which it is likely to maintain. In addition, inverted tariffs – the tariffs levied on inputs to the manufacturing process – are of much less concern than in some other economies such as the US.
Finally they note that UK has embraced enterprise zones, with the free port licences of Belfast, Birmingham, Cardiff, Liverpool, Prestwick and Southhampton not being renewed after 2012. The UK has therefore moved to a system that helps with rate discounts, improved capital allowances and infrastructure i.e the enterprize zone model not the free port model.
Overall, the benefits are minor compared with the detrimental impact of more friction in trade with the EU.
The report gives the following reasons in detail.
When tariffs are low the direct benefits of free zones are small
The report adds: “Freeports do not allow suppliers to obtain duty-free access to final markets and they merely defer any duty payments, a small gain to cash-flow. Although there are potential benefits and savings that businesses can accrue from simplified customs procedures, and relief on customs duties and tariff inversion, we believe that such benefits will be very limited in the UK context.”
Bigger gains from enterprise zones
To the extent that the advantages are ‘hidden subsidies’, the academics argue that Brexit would not widen their scope very much as the UK would still be subject to WTO Subsidies Agreement rules and to any commitments to EU state aid rules under ‘level playing field provisions’. These have generally been included in recent EU Free Trade Agreements and would certainly be included in any post-Brexit trade deal. This encompasses all attempts to upset the ‘level playing field’ and the EU would almost certainly be concerned about any relaxation of labour or environmental standards, and object to tax breaks.
In consequence, the EU could invoke Anti-dumping or Countervailing duties, even though the UK White Paper of 2017 declared that it does not wish to include tax rules in the agreed state aid regime.
Net benefit of free zones is limited
The report argues that the US experience is not very illuminating adding that whilst there are many jobs in the US Foreign-Trade Zones, there is little evidence of how many are net creations. The main purpose of the US Foreign-Trade Zones appears to be to supply the domestic market without having to pay high tariffs on imported inputs.
The economists conclude: “It would seem to be that whilst some form of free zones could help with shaping export-oriented and place-based regional development programmes, policymakers should devise measures that counteract possible diversion of economic activity from elsewhere, and offer a wider set of incentives than just free zones, while keeping within the WTO and any ‘level playing field’ obligations that arise from our trade agreements.
“Free zones added as another layer to existing enterprise zones may indeed simplify some trade in goods, although starting to think more of the 80% of the UK economy – i.e. services – which to date has largely been ignored is more urgent.”