The EU fears the UK’s new freeport regime could lure investment away from the bloc in the latest clash between the two over London’s post-Brexit policies.
EU officials want to ensure the policy championed by British prime minister Rishi Sunak since he was a backbench MP is in line with post-Brexit trade deal and will raise its concerns at a meeting this week, according to people briefed on the matter.
The UK has designated eight areas as freeports, allowing them to benefit from tax breaks and simplified customs controls. London hopes they will become manufacturing hubs, with components imported tariff-free.
The post-Brexit Trade and Cooperation Agreement (TCA) allows tariff and quota free trade between the UK and EU. The UK declined to harmonise its regulations with Brussels but agreed to prevent “distortions of trade or investment” by ensuring a “level playing field for open and fair competition”.
The two sides set up a number of joint committees to monitor the level playing field and address other concerns about the smooth running of the agreement. The European Commission will raise its concerns over freeports in the trade partnership committee meeting on Thursday in Brussels.
The potential problems with the policy were raised last month in a briefing paper by the UK Trade Policy Observatory (UKTPO) at Sussex University. It warned that the “tax incentives offered by the UK freeports may be perceived by an importing partner as unfair export subsidies”.
The UK’s independent spending watchdog, the Office for Budget Responsibility, said last October that freeports were likely to cost the Treasury £50mn to fund tax breaks and would have little positive impact on the economy.
Peter Holmes, fellow of the UKTPO, said that given such independent assessments of the value of freeports, it was “highly unlikely” they would prove distortionary to trade, but that the commission would need to show it was being alert to the risk.
“I would be astonished if there was any significant impact on exports from these subsidies, but the commission will need to show it is being vigilant, not least so it can say it is being even-handed when dealing with other subsidising trade partners, like China,” he added.
Under the TCA UK goods can enter the EU tariff-free if a sufficient percentage of their content — around half — is “made in the UK”.
The agreement does not prohibit goods with inputs that benefit from so-called “duty clawback” schemes, like freeports, qualifying for that zero-tariff access to the EU — but includes a clause that allows this to be reviewed after 2023.
Sam Lowe, a partner at consultancy Flint Global specialising in trade, said it was “difficult to see” how freeports would become a problem between the EU and UK.
“The EU has explicitly exempted goods that benefit from ‘duty drawback’ in other trade deals, so the commission knew what it was getting into — and it has the mechanism in the TCA to address this, if it becomes a problem,” he said.
Brussels has previously complained about UK energy policy in the specialised committee. Last year it accused London of skewing subsidies towards offshore wind farm developers who bought turbines partly made in the UK.
In March, it launched a case over the matter at the World Trade Organization, but the case was dropped in July after the UK clarified its policies.
The commission declined to comment. The UK’s business department did not return a request for comment.
Source: Economy - ft.com
