Experts Wary of Effectiveness of New UK Freeports

Experts in the United Kingdom are expressing a skepticism over the effectiveness of Britain's new freeport system, questioning the ports' ability to attract new investment and provide duty relief for imports. They point to accusations of the political nature of the system's execution and the fallacy that the U.K. couldn't have set up the freeports when it was part of the EU, when in fact they existed on England's shores from 1984 to 2012. A lot of “magical thinking” goes into freeports, Steptoe & Johnson's Christophe Bondy said.

A freeport is an area around a port or airport with “simpler planning, infrastructure funding and cheaper customs” based off the U.S. foreign-trade zone model (see 2103040027). The U.K. government is marketing the idea as part of its effort to “level up” the country and spread economic benefits to underserved areas, Bondy said. Brexit supporters say that this couldn't happen with the U.K. in the EU. The freeports are the East Midlands Airport, Felixstowe and Harwich, Humber region, Liverpool City Region, Plymouth, Solent, Thames and Teesside, with the latter in England's north housing the biggest one.

The main benefit of freeports is in the form of tariff inversion -- a process in which component goods are imported tariff-free into the U.K. at a freeport, then transformed to the final good at a manufacturing plant within the freeport, where the finished goods then are levied import duties, which indicates a restructuring of trade rather than an increase in it. The idea is that the tariff rate on the final good will be less than the combined duties paid on every component part, creating a tariff arbitrage opportunity for the importer. Citing a study from the U.K. Trade Policy Observatory, Bondy said less than 1% of goods entering the U.K. would benefit from this process. “It may in some cases be beneficial for a company to restructure its supply chain so that components arrive at the freeports," where they "are transformed ... and the good finally enters the country in that final form,” Bondy said. “But given the low tariffs on most goods entering the U.K. under its Generalized Scheme of Preferences, those opportunities are very few and far between.”

Charlotte Sallabank, a transactional tax planning partner at Katten and Muchin, said the freeport experiment runs the risk of simply concentrating trade in those ports and pulling it away from other communities. It's possible, though, that businesses expanding may take advantage of the freeports, she said. “Whether people will actually move existing businesses to freeports, I doubt it, but if they’re expanding, they might think, ‘Oh, well rather than expand on this current side, we’ll expand on this other side instead at the freeport,'” Sallabank said.

Sallabank expects increased business from construction companies looking to use the freeports to skirt England's Stamp Duty Land Tax. Bondy said that's not enough. “Sure, it’s going to create jobs in the area relating to infrastructure works, but the point is that in effect, that’s a subsidy, and it’s not something that generates net wealth in the entire economy," he said. "For the people who are in the areas newly designated as freeports, they might feel like they won the lottery because someone’s going to come around and improve the roads, and it’s possible that investment in infrastructure may have ancillary benefits from the perspective of drawing industry into an area from another location in the country, but the freeports in and of themselves, based on every study that’s ever been done on them, are not going to be a transformative net addition to the overall wealth of the U.K.,” Bondy said.

Also, the U.K. does not now have unfettered power to provide zero business rates or pay companies to move into the new freeport zones. Under Brexit, the U.K. remains restricted on how it can structure its economy, particularly on subsidies. The scope of the freeports may be limited due to the U.K.'s state aid commitments with the EU and the World Trade Organization, Bondy said. For him, it's all politics. “It may be effective politics so that if there’s enough subsidies to that area, even though it may just be shuffling the same amount of money from [doing it] one way to another, in some ways it feels like, 'Oh, look at the benefits of Brexit,'” Bondy said.

Another concern about freeports is money laundering and other illicit activities. Taking advantage of the lax tax and business oversight, criminals have found a safe haven in freeports around the world, Sallabank said. “Things like artworks, cars, jewelry, there is a concern that it will just be a cover for the black market in these sorts of goods," she said. “While there can be legitimate activity, there can also be a lot of illegitimate activity, so when paintings are stolen, they can then sort of disappear from the radar for quite a lot of time, and it’s really difficult to trace them.”