As the UK government prepares to roll out its new freeports policy to “turbo-charge” post-Brexit trade, a report released today by the International Trade Committee questions the real impact of the special trade zones on British exports.

The Conservative government made a commitment to establishing freeports – areas that are inside the geographic boundary of a country, but are legally considered outside the country for customs purposes – in its 2019 election manifesto, as part of wider plans for post-Brexit Britain.

During his budget speech last month, Rishi Sunak, chancellor of the exchequer, announced eight freeport locations in England, saying that they would “encourage free trade and reinforce [the UK’s] position as an outward-looking, trading nation, open to the world”.

The International Trade Committee, a cross-party parliamentary body that examines the spending, administration and policy of the UK’s Department for International Trade (DIT), launched an enquiry into the freeports proposal in April last year, and since then has been collating submissions from a panel of experts about what benefits freeports can offer.

“The intention that freeports play a role in increasing the UK’s international trade and investment has been a key focus for us throughout this inquiry,” the committee says.

After holding its final evidence session in February, at which it heard from the chief secretary to the treasury and the minister for regional growth and local government, the group of 11 members of parliament (MPs) has now published its final findings.

As part of its inquiry, the committee considered the government’s stated objectives for the freeports policy, and how achievable they are, and its conclusions are underwhelming.

The government’s vision is for the UK’s freeports to become “international hubs for manufacturing and innovation”, with tariff and customs benefits incentivising businesses to locate manufacturing and processing of imported goods in the sites, which have been named as East Midlands Airport, Felixstowe and Harwich, Humber, Liverpool City Region, Plymouth and South Devon, Solent, Teesside and Thames.

“[We can] use that opportunity of Brexit to do the kind of things that we’ve been precluded from doing for decades, including free ports,” said Conservative party chairman James Cleverly in an interview broadcast by BBC Radio Four in August 2019.

While several freeports do exist across the EU – a list produced by the European Commission puts the number at 80 – EU rules governing trade and state aid mean that the UK’s model, which includes customs concessions and tax incentives, is only permissible now that the country has left the bloc.

Among the benefits to companies are duty suspension, whereby no tariffs, import VAT or excise will be paid on goods brought into a freeport from overseas until they leave the freeport and enter the UK’s domestic market; duty exemption for re-exports; and duty inversion, whereby if the duty on a finished product is lower than that on the component parts, a company could import the components duty free, manufacture the final product in the freeport, and then pay the duty at the rate of the finished product when it enters the UK’s domestic market.

However, this raft of measures is unlikely to move the needle when it comes to boosting trade figures, according to the committee’s findings.

While it heard evidence from the UK Major Ports Group (UKMPG) that “the development of freeports provides a strong base for supporting existing UK trade with the world and creating more capacity and capability to boost trade further”, the committee concluded, in the face of research provided by the UK Trade Policy Observatory (UKTPO), that benefits and savings to businesses from the trade elements were likely to be “limited” in the UK context.

“The value of the concessions on customs duties is clearly related to the height of the duties that would otherwise be paid,” says Peter Holmes, fellow at the UKTPO, in evidence cited by the committee. Pointing out that the UK global tariff, the EU-UK Trade and Cooperation Agreement (TCA), and the rollover of continuity trade agreements already mean zero tariffs on more than half the UK’s imports, he adds: “the value of the tariff concession will be very low, and would do little to encourage economic activity within the freeport”.

After determining that “freeports focused solely on tariff benefits would be unlikely to be successful in the UK”, the committee goes on to examine the potential economic impact of the sites. A 2016 report authored by Sunak provided indicative figures based on employment in free zones in the US which suggested the creation of as many as 86,000 jobs in the UK, but Steve Barclay, chief secretary to the treasury, told the committee that “it is very difficult to model exactly what the impact on jobs, inward investment, and innovation will be”, and that “economic benefits will vary between sites and sectors”.

DIT involvement

The committee also raised questions about the apparent lack of engagement by the DIT in the government’s freeport policymaking.

“The objective to establish freeports as national hubs for global trade and investment across the UK is of particular interest to us. This objective, and the Department for International Trade’s role in supporting businesses to grow internationally, means that it should have a central role in the development and implementation of the freeports policy, yet this appears to have diminished over time,” says the committee in its report.

As the ministerial department responsible for promoting international trade, the DIT did hold initial responsibility for the freeports policy, however this was signed over to HM Treasury in mid 2020.

“Despite the inclusion of the objective to establish freeports as national hubs for trade and investment, DIT’s role in the policy appears to have diminished over time and is now focused on the provision of business support,” says the committee, adding that ministers from both the DIT and HM Treasury initially declined to provide oral evidence on the policy, with each suggesting that it would be more appropriate for the other to attend.

“We are concerned that, in light of the disagreement between HM Treasury and the Department for International Trade about which department was best-placed to give evidence to our inquiry, the necessary cross-departmental collaboration and clear accountability required to implement the policy is absent,” says the committee, calling for the government to set out how it will ensure effective accountability and cross-departmental collaboration in the implementation of the freeports policy.

Noting that the DIT has not yet set out how it will seek to engage with successful freeport bidders or what specific support it will provide to businesses operating within freeports, the committee suggests that the DIT be put in charge of the administration of the UK’s freeports to support businesses to grow internationally. Among other recommendations, the committee also calls for the DIT to provide further information about how it will support the government’s objectives for freeports, and how this will fit in with its current export strategies.

A Delosian delusion?

Interestingly, the ministerial foreword to the UK government’s freeports consultation document, which was published last year, starts with a reference to the ancient freeport on the Greek island of Delos, which was established in 166 BC by the Romans in part to damage the trade of nearby Rhodes, with which Rome had had a political squabble.

According to the history books, the strategy was successful: after removing duties and flinging open its doors to all-comers, Delos became one of the world’s greatest hubs of transit trade between east, west, north and south, while its erstwhile rival crumbled into economic ruin.

Although the foreword concludes by saying: “We have just turned the page on a great new chapter for this country. Freeports will let us sail onto our next, great, prosperous destination”, the findings of the International Trade Committee show that the country has some work ahead of it if it is to aspire to be the next Delos.

“We welcome the government’s ambition to increase international trade and investment through its freeports policy. However, it remains to be seen how successful freeports will be in achieving this objective,” says committee chair and Scottish National Party MP Angus Brendan MacNeil.