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FA 2021: Freeports

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Freeports are not a new concept: their origins can be traced back to the Renaissance. They are separate areas within the customs territory of a given country where imported goods are not subject to customs duties and other import taxes. Import border formalities are often simplified. Goods in a freeport can then be stored, consumed or, more often, processed and re-exported. As such, freeports resemble another existing customs special procedure – inward processing – which does not require relocation to a specific area. 

There is a customs border around a freeport, and moving goods into the main territory of the country requires customs formalities and payment of tariffs. As such, another way of using freeports relates to tariff inversion which occurs when duties on inputs and components are higher than on finished products. This is one of the reasons why freeports are popular in the US. However, as the work of my UK Trade Policy Observatory colleagues shows, there is a limited scope for tariff inversion in the UK. In fact, with inward processing and limited customs benefits, the seven freeports the UK had until 2012 were shut down due to lack of interest. 

The government has, though, set extremely high expectations for this new generation of freeports. They are supposed to ‘create jobs, drive investment and regenerate communities’ and even ‘play a significant role in boosting trade … level up communities across the country through increased employment opportunities’. 

These promises should be treated with caution. While freeports offer many opportunities, they don’t necessarily have the power to transform the economy. One of the big unanswered questions is whether freeports will actually create new jobs and economic activity, or simply displace it from other regions in the country – a risk that was highlighted by the International Trade Committee

While customs incentives seem quite small, other benefits can include the simplification of procedures, ready access to advice and tax benefits. There is a package of tax reliefs for the new freeports, which the government hopes will be sufficient to encourage businesses to apply for authorisations to operate within the freeports’ customs sites.

Setting up the new freeports comes at a substantial upfront cost, and £175m of seed capital and additional funding for governance structures has been allocated to the ports planned in England. This, combined with the fact that landowners will also be eligible for tax reliefs and based on the government’s assessment of potential benefits, has caused many ports to apply for a freeport status. The hope is that businesses will follow. It remains to be seen whether the incentives generate sufficient interest to offset the initial investment and in fact ‘boost trade’.

Dr Anna Jerzewska, director of Trade & Borders
Issue: 1540
Categories: In brief