What should the Liberal Democrats do about Boris’s freeports idea? It is alleged that 85,000 jobs will be created.
What is a freeport?
It is a simple idea as old as customs duties themselves. Countries designate an area of land accessible in some way from outside their territory, as outwith their national boundaries for the purposes of customs, taxes and regulations. This means the freeport is a quasi-foreign territory free of all taxes and inspections, even though physically it is inside the host country.
The point is that goods or materials can come into the territory without paying any duties and taxes or having to conform to certain regulations, and then can be re-exported without any export red tape. Companies operating in the freeport area are usually not subject to any corporate income taxation.
This is useful for storage of goods, if for example there is sudden glut, or to defer taxes, or for factories in labour intensive industries like textiles or footwear, where all the goods produced are for export only. Nations with very low wages, monopolistic markets, and high import tariffs, constitute the majority of freeport hosts. Goods produced in the freeport have duty payable if they are ‘exported’ across the freeport border into the ‘host’ country territory proper.
The first problem with Boris’s freeport policy for the UK is that if companies are intent on using freeports they have the choice of thousands of low wage locations globally. In addition, some freeport locations (Singapore and Bremen are often cited) are used more for their logistical efficiency and special location.
Importantly, lower tariffs and fewer discretionary non-tariff barriers are now more prevalent across the OECD, much reducing the benefits of duty free imports & exports in freeports.
For these and other reasons freeports in the UK (and many across the EU) have closed. The last remaining ‘British’ freeport is in the Isle of Man, which follows UK and EU rules.
In attempting to dovetail freeport policy with Brexit, on behalf of their backers, some on Boris’s freeport advisory group have peddled the fiction that the UK would still have freeports if it wasn’t for the EU; which has ‘prevented’ them due to EU state aid rules.
There are still 95 freeports in the EU, however, mostly in lower wage Eastern European nations. Much of the duty-free benefits of freeports are actually within EU rules
What’s more, being outside the EU does not remove state aid rules. After a ‘no deal’ Brexit the UK will be subject to WTO rules on state aid, and would do well to note that many freeports have been subject to challenge by other WTO members, including the EU, on state subsidy grounds.
Thus freeports is a policy suited to low wage, high tariff, administratively bureaucratic, monopolistic countries which are not themselves markets for the goods being produced. It’s not exactly a UK-friendly idea.
Finally there is a much more important problem with freeports which has been driving the EU and now even Singapore, to review the basis of the policy. With goods able to be imported, stored and re-exported globally from freeports without customs checks, there has been a rapid expansion of their use for money laundering; typically senior kleptocrats purchasing multi-million dollar works of art and precious gems & metals, and storing them in specialist units in freeports.
So why has aristocratic Boris, with seemingly zero knowledge of industry, placed so much emphasis on this ‘miracle’ fantasy?
Two reasons. First, he is desperate for an impressive-sounding strategy to feed the optimism of the faithful, and get ‘no deal’ Brexit over the line; forgetting the 5+ years timeframe. For the second reason, observe carefully who is funding Boris’s freeport policy work. ‘Cui bono’ as Boris might say.
* Paul Reynolds works with multilateral organisations as an independent adviser on international relations, economics, and senior governance. He is an elected member of FIRC and an Executive member of Liberal International (British Group).