The UK government has long cited the establishment of Freeports in the UK as one of the opportunities offered by Brexit. As we reported in February, it has launched a consultation which identifies its policy objectives and its current thinking about the key elements, and invites comment. The consultation closes on 13 July. In this note, we set out the key elements, both by way of reminder of the final opportunity to submit views and a look ahead to proposals that we can expect to follow after the consultation closes.
What is a Freeport/free trade zone?
Freeports and free zones are a well-established concept; they exist in many different forms in many different countries, including in the European Union and the US. At its simplest, a Freeport is a designated area that is physically inside a country, but in which different customs rules apply such that it is not inside the customs border. Typically, goods do not attract any tariffs or duties when entering a Freeport and the administrative burdens are also reduced. Businesses such as manufacturers can operate within Freeports, allowing them to manufacture, import and re-export goods free of tariffs (and allowing for duty inversion on imported products). Many countries offer a wider range of elements to develop "special economic zones" such as wider tax incentives and regulatory flexibility, allowing whole ecosystems to develop within the free trade zone.
What sorts of business might benefit from the establishment of Freeports?
Freeports are most immediately of interest to importers, exporters and manufacturers, as they allow the import of materials and their manufacture or incorporation into items which are then exported, all without incurring tariffs and with minimal regulation. There will also be opportunities for businesses supporting these supply and manufacturing activities, such as shipping companies, as well as for those supporting the infrastructure of the Freeports, such as construction companies and a range of service providers (although there is little reference in the consultation to the benefits available for services). The precise breadth of benefits will depend on the model that the UK chooses to adopt. Indirectly, the government hopes that these Freeports will not only attract investment, but also generate hubs of expertise and create jobs, thereby bringing prosperity to surrounding areas – part of its levelling-up agenda. There are also opportunities for businesses in the operation of the Freeports themselves.
The government's objectives
The government cites three objective for its Freeports, which will help to determine the model it ultimately develops:
- to serve as national hubs for global trade and investment across the UK;
- to promote regeneration and job creation; and
- to create hotbeds for innovation.
While tariff flexibility and simpler customs processes will be at the core of the proposal, the government is envisaging an "ambitious UK Freeport model" which will include an economic zone around the customs zone to "encourage the maximum number of businesses to open, expand and invest in our Freeports".
The benefits envisaged by the UK's model
The government's consultation identifies four core customs and tariff benefits:
- Duty suspension: Tariffs and VAT on UK-destined items to be due on entry into the UK domestic market, not into the Freeport.
- Duty inversion: Where the finished product attracts lower UK import duties than its components, a company which manufactures in the Freeport before shipping to the UK domestic market will pay only the lower import duties.
- Duty exemption for re-exports: The import of goods to the Freeport, manufacture in the Freeport and subsequent export of a finished product would not involve UK import duties at any stage.
- Simplified customs procedures: While there will be some tracking of goods in and out, the customs process will be lighter than for full entry into the UK market. The consultation asks for views on this aspect in particular.
Some limitations on these benefits are noted, including where the UK has applied countermeasures (additional import duties in response to dumping etc.) in relation to certain goods, and also certain categories of goods that will be excluded from Freeports.
The consultation also identifies a range of possible wider initiatives with a view to incentivising business to use Freeports and to support their success. These include:
- other tax incentives (e.g. business rates discounts, enhanced capital allowances that are already available in Enterprise Zones in the UK);
- planning liberalisation (e.g. extending permitted development rights, Local Development Orders etc. and potentially a National Policy Statement for Ports, all to encourage more land to be available for development and, in turn, for Freeports to respond more rapidly to new demand);
- improved connectivity and related infrastructure (especially road and rail links); and
- the creation of "regulatory sandboxes" to facilitate the trialling of new technologies within Freeports.
The operation of Freeports
The proposal envisages that Freeports will likely be run by public-private collaborations of local partners, or by existing (private) ports with support from a local authority. Applicants will need to demonstrate their proposals for achieving the three government objectives. Operators will also need to demonstrate their ability to ensure compliance with the various requirements, subject to government supervision. Areas for which operators will likely be responsible include the perimeter security of the Freeport, and record-keeping through an electronic inventory system. Prospective Freeport operators will want to watch the final proposals for the extent of regulatory expectation and oversight. At the same time, the government is inviting "innovative approaches" from prospective operators to address the operational barriers to running ports efficiently. Applications for Freeport status will be invited through a competitive bidding process.
Where will the Freeports be?
The government envisages establishing "up to 10" Freeports in the UK. It is not yet clear where these first Freeports will be (the geographical spread will be a factor in the bidding process), although the government expects that they will generate employment opportunities in "some of our most deprived communities around the UK". Freeports are generally located in the areas around or close to ports – including, for this purpose, rail or airports as well as seaports. However, they need not be located at the port, so long as a distinction can be maintained between goods in the Freeport and goods which have entered the UK's customs zone.
The government wants "all the nations of the UK to share in the benefits of Freeports", suggesting that at least one Freeport will likely be established in each of the four UK nations. As some aspects of Freeports are devolved matters, there may be variances in the set-up, scope and operation of Freeports between England, Scotland, Wales and Northern Ireland, depending on the choices made by the UK government and the devolved administrations.
WTO compliance and Free Trade Agreements
As noted, Freeports and free trade zones are a well-established concept. However, in developing its concept, the government will need to ensure adherence to WTO law and, in particular, the Agreement on Subsidies and Counterveiling measures (the SCM Agreement), which sets certain parameters on the types of "subsidy" (i.e. government financial contribution, including in the form of tax break or provision of a service) that a government may offer. Nothing in the current consultation necessarily falls foul of the SCM Agreement constraints, but they will be a factor in the assessment of possible models, as will the commitments that the UK makes, or may wish to make, in its various FTA negotiations (such as on state aid, a key issue for the EU).
Use of Freeports for illicit activity
A common cause for concern with Freeports and free trade zones is their potential use for a range of illicit activities. For example, Global Financial Integrity recently labelled them "a pandora's box for illicit money". Different (lighter touch) customs rules are part of the perceived attraction of Freeports, but this same feature risks compromising on the protections against illicit activity that otherwise exist. This risk is recognised in the government's consultation, although few specific solutions or preventative measures are identified. Certain high-risk uses of Freeports (e.g. as storage locations for high-value luxury goods) are explicitly ruled out, and further measures to guard against these risks are to be expected as the proposals are developed.
Will they be a success?
While it is too early to predict the prospects for the Freeport model, it is possible to make some observations:
- The tariff avoidance and postponement measures and customs simplification have some attraction, but may not prove enough of an incentive in themselves – only in the case of tariff inversion is any avoidance of duties available, with the main benefit being postponement and potential customs simplification. The UK proposal also envisages a range of wider enterprise-zone-style further incentives, and the nature and extent of these further incentives may be the key determinant in the success of the initiative.
- It is notable that the consultation offers no incentives aimed at service industries. If it is to develop Freeports into "national hubs for investment" and "hotbeds for innovation" that are cited as objectives, it may want to find opportunities and incentives for service industries (the bulk of the UK economy) to invest in and benefit from them, as well as for goods-based industries.
- There are many areas (including some stated benefits of Freeports, such as supporting decarbonisation, fostering conditions for trialling new ideas) which are touched upon in the consultation but without, as yet, much detail. Similarly, while the heightened illegality risk is identified and the commitment to tackling it clearly stated, few specific measures are proposed.
It is to be expected that the ideas put out to consultation are high level and raise questions more than they provide answers. The final model proposed (to be expected later this year) will no doubt address many of these issues, and will likely better help businesses to identify whether there are opportunities for them, either in contributing to the development of the Freeport infrastructure, bidding to be part of a Freeport's operation, or in taking advantage of the incentives that Freeports may ultimately offer.
- Freeports Consultation: Boosting Trade, Jobs and Investment across the UK – February 2020↩
- Note, however, that the European Parliament has recently requested the European Commission to develop a proposal for "the urgent phasing out" of Freeports across the EU in its "Report on Financial Crimes, Tax Evasion and Tax Avoidance" (2018/2121(INI)), 8 March 2019 at para 211.↩
GFI: "A pandora's box for illicit money"; 7 October 2019.↩
- RUSI recommendations in its paper "Free Ports, not Safe Havens: Preventing Crime in the UK's Future Freeports" indicate the risks and some possible measures to address them.↩