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UK freeport incentives could amount to unfair export subsidies: UKTPO

Exporters operating in the UK’s new freeports could be deemed in contravention of rules that safeguard a level playing field for trade, according to a new paper from the UK Trade Policy Observatory (UKTPO).

The paper, which analyses the extent to which the customs and tax benefits offered by the UK government’s freeports policy may hinder rather than help businesses’ export opportunities, finds that the tax reductions enjoyed by businesses operating in the sites could be viewed as export subsidies.

The reductions – among them stamp duty land tax relief, enhanced structured and buildings allowance, enhanced capital allowances and employer national insurance contributions rate relief – could be seen as an unfair advantage for firms manufacturing goods that are then exported. This could leave exporters open to counter measures being deployed by the UK’s trading partners under provisions in free trade agreements or the World Trade Organization (WTO) rules, the UKTPO says.

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“Freeports currently offer few new benefits for UK exporters,” says Peter Holmes, UKTPO fellow. “And even where there are benefits, trade partners could use anti-subsidy measures to offset any perceived unfair advantage.”

This is not the first criticism to be levelled at the UK’s freeports. The Conservative government made a commitment to establishing the sites – 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.

The March 2021 Budget announced eight freeports in England: East Midlands Airport, Felixstowe and Harwich, Humber, Liverpool City Region, Plymouth and South Devon, Solent, Teesside and Thames.

Almost immediately afterwards, 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), released findings from a year of research and consultation on the UK freeport policy. The committee concluded that benefits and savings to businesses were likely to be “limited”, especially given 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, which would make the value of any tariff concession within the freeport “very low”.

A few months before the first freeports began operations – the Teesside site in November 2021 and the Thames freeport a month later – Emily Thornberry, who was at that time shadow secretary of state for foreign trade, wrote to then-secretary of state for foreign trade Liz Truss flagging up the inability of exporters operating in freeports to claim preferential access in many countries with which the UK had rolled-over pre-Brexit trade agreements. This was because those trade agreements contained so-called prohibition clauses deals, which prevent manufacturers who don’t pay duty on their imports from getting lower tariffs on their exports. In short, exporters located in freeports would be shut out of the benefits of free trade deals that contain the clauses.

To assess the scope of this issue, the UKTPO studied the UK’s current trade agreements, finding that only eight did not contain prohibitions on trade from free trade zones or restrictions on duty drawback. These eight include the UK’s pacts with Australia, New Zealand, Japan and the EU – however the absence of an explicit prohibition clause may not be enough to protect exporters using freeports.

A key component of the EU-UK TCA is its “level playing field” requirement. Thrashed out over a series of increasingly terse negotiations between the two sides, the provisions are the most extensive seen in any free trade agreement to date, and require that preferential status can only apply where goods have been manufactured without the benefit of state aid or subsidy to the exporting party.

“In simple terms, these provisions mean that companies cannot export goods with preferential origin if all or some of the non-originating inputs were under a duty suspension procedure,” says the UKTPO.

In order to give more certainty to exporters, and ensure that the UK government’s freeport policy has a better chance of meeting its stated aim of “turbo-charging” the country’s post-Brexit trade, the UKTPO calls for government negotiators to address these issues explicitly, either during free trade agreement negotiations, or if it is too late for that, during the implementation phase. Otherwise, UK exporters could find themselves entangled in disputes that will require international arbitration to resolve.

A request for comment made by GTR to the DIT, which is responsible for negotiating market access and trade deals, went unanswered.

The post UK freeport incentives could amount to unfair export subsidies: UKTPO appeared first on Global Trade Review (GTR).

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Published 23 November 2022