FT premium subscribers can click here to receive Trade Secrets by email.
Hello, and greetings from London, where “levelling up” is the watchword for all new policy initiatives — including when it comes to trade. Ministers have just published a consultation for a grand plan to create a series of freeports around the UK, which they say will be a cornerstone of efforts to regenerate deprived areas and make sure globalisation works for poorer communities. They also claim to have come up with a “bespoke” model that will recreate the best aspects of international freeports.
So in today’s Trade Secrets, we take a closer look at the international examples the government is citing — and explain why none of them bears much relation to the UK. Our policy watch looks at the news that Britain is expecting border controls with the EU from next year, while our chart of the day looks at EU trade with Cambodia ahead of its decision on trade privileges for the country this week.
Don’t forget to click here if you’d like to receive Trade Secrets every Monday to Thursday. And we want to hear from you. Send any thoughts to trade.secrets@ft.com, or email me at delphine.strauss@ft.com.
The freeport problem: from Delos to Dubai
When a government consultation document opens with a reference to the classical example of Delos — awarded tax-free status by the Romans in the second century BC — it is hard to avoid a suspicion that the policy itself is more rhetoric than substance. One has to hope so, at least when it comes to the “Delosian model” — since the island was largely a centre for piracy and slave trading at the time.
But ministers have also drawn inspiration from modern day examples — in the UAE, US and China, among others. Many of these freeports are well-established and successful; the trouble is, they generally exist in order to solve problems the UK does not have, or offer incentives the UK cannot.
The basic idea of a freeport is to create an enclave, inside a country’s land border but outside its normal customs regime, where companies can import, process and re-export goods duty-free — paying customs duties only if selling them on into the domestic market. Many countries have also offered tax breaks, lighter regulation, easier bureaucracy and investment in infrastructure as inducements to persuade businesses to set up shop, aiming to pull in foreign investment, boost trade and create jobs.
Dubai is the pre-eminent example: its free zone around Jebel Ali Port, which transformed a desert outpost into a global financial hub, has become the template for freeports around the Middle East, Africa and beyond.
But the UK is not about to follow Dubai’s model of zero corporate and personal taxation, widespread state aid and minimal labour market regulation — with no restrictions on employing foreign workers.
As Anna Jerzewska, an independent customs and trade adviser, points out: “The policy measures that make freeports a success around the world wouldn’t work in the UK.”
Sam Lowe, at the Centre for European Reform, says the case for establishing freeports is often much clearer in developing countries, where the environment for doing business may be more difficult, with higher tariffs and bigger bureaucratic obstacles. “You can see value in countries that have real rule of law and governance issues, an unwieldy business system, lots of patronage . . . You can make a much better argument for them in a developing context.”
Dubai has created a template with its free zone around Jebel Ali Port © Reuters
Among advanced economies, the US is the country with the best known model of freeports, with almost 300 “foreign trade zones” operating in all states. But they work largely because US tariffs on inputs such as crude oil or car parts are often higher than the tariff on finished products. Manufacturers have a strong incentive to get around this “tariff inversion” by setting up production in the free zones — but even then, the evidence on whether companies are creating genuinely new jobs, or simply shifting them from elsewhere, is mixed.
For the UK, Lowe says, the recurring question is “What’s the point?”
One answer might be to use freeports as a test bed for new policy approaches that could later be rolled out nationwide. The consultation floats the idea that they could become “regulatory sandboxes” where companies could trial new technologies with fewer regulatory requirements.
There is certainly international precedent for this idea, notably the Shanghai free trade zone, originally intended as an area where Beijing could experiment with financial liberalisation — within a firewall — before deciding whether to extend new policies to the whole financial system.
But China’s clampdown on capital flight means the Shanghai FTZ has so far disappointed original hopes (although in common with some other freeports, it has apparently become a magnet for the trade and storage of high-value art). It is hard to imagine the UK launching a similarly radical experiment on Teeside.
Despite all this, a UK policy on freeports could still prove a success if it becomes a way to focus investment, new infrastructure, high tech R&D and broader efforts to improve skills and local housing on the areas that need it most.
But calling this regional strategy a freeport is largely semantics. “It can be a way to redirect national activity into an area you want to specifically target as a hub,” says Dmitry Grozoubinski, a former Australian trade negotiator. “The actual freeport itself doesn’t do any of this.”
Charted waters
As the deadline looms for the EU to decide whether to revoke trade privileges for Cambodia due to human rights concerns, figures show the bloc has slowed its imports from the Asian nation of late, with imports from Myanmar and Laos on the rise.
Policy watch
Michael Gove confirmed the UK would introduce import controls on EU goods when the transition period ends © AFP via Getty Images
So much for the idea — always dubious — that there would be no checks at UK borders after the country voted to leave the EU. George Parker writes in the FT that cabinet office minister Michael Gove has admitted that a new “smart” border to cut post-Brexit trade friction with the EU will not be ready until 2025, sparking warnings that exporters and importers will face big costs at the end of the year.
Gove confirmed on Monday that Britain would introduce import controls on EU goods when the post-Brexit transition period ends and the UK leaves the EU customs union and single market from January 2021. That means the UK would in effect treat EU goods in the same way as imports from any third country.
Authorities on both sides of the border will collect customs, value added tax and excise duties and check the safety of goods crossing a frontier that has — under Britain’s EU membership — been largely friction-free.
There is a plan on the upside: UK government officials said that by 2025 Britain would have the “best, smartest and most efficient border in the world” — with new simplified systems in place (Trade Secrets is holding its breath on this one). In the meantime, Gove said money would be available to help cope with the bureaucracy, including recruiting more customs agents.
Don’t miss
- Thanks to Brexit, Ireland risks having to cope with different time zones under EU plans to scrap changing the clocks every spring and autumn, a House of Lords committee has warned — as it called on the British government to carry out an assessment of the probable economic impact on trade.
Read more - Australia’s three-decade unbroken run of economic growth could be under threat, economists are warning, as the coronavirus affects its largest trading partner, China, and the country grapples with wildfires.
Read more - Cambodian prime minister Hun Sen said on Tuesday that his country “will not bow down” to foreign demands, Reuters reports, a day before the European Union decides whether to end the country’s special trade preferences due to human rights concerns.
Read more
Tokyo talk
The best trade stories from the Nikkei Asian Review
- South-east Asia is gradually waking up to the potential of the “space economy”, as a handful of young upstarts look to make their mark in a multi-billion-dollar industry traditionally dominated by governments and Western multi-national corporations.
Read more - With the world now evermore dependent on Chinese high-end manufacturing, the coronavirus “overreaction” risks disrupting business far beyond China, writes FT alumnus James Crabtree.
Read more
Source: Economy - ft.com
