'This isn't magic': Doubts raised over UK plan for post-Brexit 'freeports'

Key Points
  • The U.K. government launched a consultation document on so-called "freeports" on Monday.
  • Deregulated tax havens such as freeports exist in many countries around the world.
  • Some see the benefits of freeports as limited in nature.
As incoming lorries disembark from the ferry other lorries line up ready for departure inside the Eastern Dock of the Port of Dover is where the cross channel port is situated with ferries departing here to go to Calais in France on the 29th of January 2020 in Dover, Kent, United Kingdom.
Andrew Aitchison

U.K. plans to boost trade and growth by building tax and customs free zones at 10 ports around the country is facing early skepticism from trade experts and opposition lawmakers.

The U.K. government launched a consultation document on so-called "freeports" on Monday which claims that fenced off areas that exist on the British mainland but aren't subject to import duties can support jobs, trade and investment in the post-Brexit world.

Goods that move into the freeport wouldn't pay duties as they enter the area, but would pay once they either fully move into the U.K. customs territory or set sail for another country.

Tax would be paid on the finished good rather that the component part. The logic is that, with the total tariff due likely to be cheaper on the finished and assembled good, it should encourage global manufacturers to move new facilities into the zone in order to perform assembly.

Once the U.K. consultation is finished, different port operators around Britain will be encouraged to bid for the status with full operation slated for 2021.

U.K. Chief Secretary to the Treasury Rishi Sunak said in a statement that freeports would "unleash the potential in our proud historic ports."

Speaking to CNBC Monday, the former diplomat and trade negotiator, Dmitry Grozoubinski, said freeports and special economic zones could be a place to roll out innovative policies, but it was important not to get carried away by their potential.

"Just declaring an area a 'freeport' doesn't do much in terms of jobs and growth," said Grozoubinski in a telephone call, before adding: "This isn't magic. Otherwise there would be 40 million freeports worldwide."

The trade expert, who also helped found, said there was little hard evidence that freeports attracted manufacturers and other businesses who otherwise were not planning to operate in that country.

Labour Member of Parliament and Shadow Finance Minister John McDonnell accused the government of stripping regulation and the country's tax base.

"There is very little solid evidence that so-called freeports create jobs or boost economic growth, showing this up as another ideological move from a far-right government," said McDonnell.

"This plan only represents a 'levelling-up' for the super-rich, who will use freeports to hoard assets and avoid taxes," he added.

The trade association representing most of the larger commercial ports in the United Kingdom, UK Major Ports Group, cautiously welcomed the move but noted that freeports were more than just tariffs. It said "planning, connectivity and skills" would all be key to success.

One other potential drawback is World Trade Organization rules that dictate that if countries that import goods from free trade zones can demonstrate that the manufacturers enjoyed unfair subsidies then off-setting duties can be imposed.

U.K. freeports existed until 2012 and EU legislation does not prevent member countries from having them. As of February 1 2020, there were around 70 operating in the customs territory of the European Union.

However, such zones do have to comply with EU rules on areas such as state aid. This means the zones are likely to become a contentious area as Brussels and London attempt to agree a future trade deal.

Grozoubinski said many European lawmakers also worry that they allow scope for limited oversight on the movement of goods.

"The major concern is that they become a haven for smuggling and avoiding tax," he said.

Deregulated tax havens such as freeports exist in many countries around the world. In the U.S., they are termed "foreign trade zones" while in other parts of the world they are called "export processing zones."

Often there are additional benefits to these zones such as looser planning rules and other tax breaks.