Freeports not possible In the EU? – Why Boris and Truss are spouting Bullshit that they make a case for Brexit

The department of International Trade announced the creation of 10 Freeports Today   here

They are also sometimes called Special Economic Zones

At the end it states

UN Source: “Free Trade Zones as originally conceived do not exist anymore in the EU”; United Nations Economic and Social Commission, Free Trade Zone Development

This might seem off.  The first freeport in the World was at Shannon which still exists, Spain has four, as a HOC Library note states, the legislation to set them up in the UK stills sits on the statute book .

The Treasury currently has the power to designate free ports by
Statutory Instrument under section 100A of the Customs and Excise
Management Act (CEMA) 1979.
Seven free ports operated in the UK at various points between 1984
and 2012. In July 2012, the Statutory Instruments that set up the
remaining five free ports (Liverpool, Southampton, Port of Tilbury, Port
of Sheerness and Prestwick Airport) expired.

However it fails to state that clauses of the act enabiling to trade within them outside the customs union were abolished by the Freezone Regulations 1991 which cited two european regulations.  Council Regulation (EEC) No. 2504/88(1) and Commission Regulation (EEC) NO. 2562/90(2) which state

Whereas free zones and free warehouses are parts of, or premises within, the Community customs territory, separate from the rest of that territory, in which there is generally a concentration of activities related to external trade; whereas, because of the customs facilities available in them, these free zones and free warehouses ensure the promotion of the aforesaid activities and, in particular, that goods are redistributed within the Community and elsewhere; whereas, therefore, the provision concerning them forms an essential instrument of the Community’s commercial policy;

Whereas free zones and free warehouses should not be given any competitive advantage where the application of import duties is concerned; whereas, on the other hand, the customs formalities in such zones or warehouses should, in view of the special circumstances, be simpler than those applying in other parts of the Community customs territory;

Whereas non-Community goods placed in free zones or free warehouses should be allowed to remain there for an unlimited period without the payment of import duties or the application of such duties and measures, the goods in these free zones or free warehouses should therefore be considered as not being within the customs territory of the Community;

I.e. Freeports are permitted in the EU, if you import into a Customs union , like the EU customs union, however you are charged, like any other freeport in the world.  The Treasury deletion of the freeport regs therefore would appear to be goldplating, or more likley an effort to increase revenue raising through increasing VAT liability.  Court of justice caselaw is clear that exporting from a freeport to outside the EU ios not a VAT liable event,

Freeports exist outside of any customs union in which the host country is a member of.  This means that goods an be exported and imported without tariffs.  Other exemptions from taxes or regulations might apply however these are not necessary to meet the definition.  They have an economic rationale where in makes sense to entrepot.  Where goods are imported, manufactured and then exported.  For example if a country was offshore to the European Union and a member of the customs union able to trade tariff free it would make sense to import goods, add raw materials and goods manufactured  in the UK and entrepot.  If you couldn’t do that Tariff free there would be little point.

The issue is can you operate free ports in the EU customs Union?  As the HOC note states

In the majority of cases, these free ports “existed before the host state
became a member of the EU and retained their status after accession to
the Union.”3 56 of the EU’s 83 free ports are located in states that
joined the EU post-2004.

In many cases as in Spain they explicit state they lie inside the Customs Union preventing tariff free entreopt with states outside the European Ciustioms Union that does not have a free trade agreement.

The argument goes that European Single Market and State Aid rules prevent creation of ‘full’ freeports.  However the restriction imposed by State Aid rules is not top the ‘freeport’ element but to the ‘enerprize zone’ element – that is tax exemptions.  Let the UK Trade Policy Observatory explain.

The operations of free zones – as well as enterprise zones – must be compliant with EU state aid rules. This is because tax exemptions and financial incentives offered to businesses choosing to locate in these zones can, in principle, be considered as a state subsidy that distorts competition – and would be in breach of the Treaty on the Functioning of the European Union (TFEU).

The General Block Exemption Regulation (GBER) defines categories of aid that are compatible with the EU internal market, and these depend on the size of the company. As such, medium-sized enterprises are entitled to aid of 10% of the total investment (in addition to any regional aid they have already received), while small companies are entitled to 20% more.

The requirement for compliance with the EU state aid rules constrains the options for free zone and enterprise zone operations, but exemptions may be granted under Article 107(3)(a) and (c) TFEU, whereby the use of state aid is considered beneficial to the economic and social development of underdeveloped regions of the EU (for example, aid for regional development, promoting innovation, improving environmental standards, assistance to small and medium-sized enterprises). Specifically, Article 107(3)(a) and (c) TFEU states that the following may be considered to be compatible with the internal market:

  • aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment, and of the regions referred to in Article 349, in view of their structural, economic and social situation;
  • aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest.

This ‘economic development exemption’ clause may explain why many free zones and enterprise zones in operation in the EU are located in the ‘new’ EU Member States in Central and Eastern Europe,[25] whose level of GDP per capita often lags behind that of the ‘old’ EU.[26] Poland has been particularly active in this field. Most countries in Central and Eastern Europe began setting up special economic zones in the mid-1990s as a way of attracting foreign direct investment (as they were making a transition from centrally-planned to market economies), offering incentive schemes such as tax holidays, reduced corporate income tax rates or customs duty exemptions / deferrals. In the run-up to the EU accession, however, these countries were required to revise their incentive schemes to make them compatible with EU state aid rules.

Most of the locations suggested such as Teeside would easily qualify, after all they already operate enterprize zones.  Bristol clearly would not however it is full;y possible to operate a freeport outside the EU customs Union under the 1979 Act.

The matter has become highly charged because of the assertion that European rules prevent Freeports and being outside the Eu and therefore an advantage  for example Boris

The source of this nappears to be the CPS report on Freeports by Rishi Sunak MP

This does not mention or quote the above regulation creating tariff exemptions.  It appears solely to refer to the case of tarrif inversion.

Tariff Inversion. The complexity of modern tariff regimes means that
finished goods often command a lower tariff rate than their component
parts. This incentivises importing finished goods rather than importing
high tariff components and using domestic manufacturing to create the
actual product. A Free Zone allows a company to import components
tariff free, manufacture the final product in the free Zone, and then pay a
lower duty rate on the finished product when it enters the host economy.

Is this possible, yes of course as the report admits

This kind of tariff inversion is theoretically possible in the EU through the
provisions of Union Customs Code (UCC), which came into force in May 2016.
This allows EU companies to apply to process goods under what are known as ‘special Procedures for Inward Processing’. Once granted, this status allows a firm to pay duties only on the finished product – effectively offering one of the key benefits of a Free Zone on a company-by-company basis. While this mayseem straightforward, the hurdles to achieving special status are considerable.

Here the report descends into pure bullshit

In order to use the Inward Processing Procedures, the UCC requires a UK
company to first obtain authorisation from HMRC. This wouldn’t be a problem were it not for the fact that, in making its decision, HMRC is legally required to establish that “the essential interests of Union producers would not be adversely affected” before granting authorisation

However this applies to any firm into the union inside a freeport or not and it doesnt seem to be a problem

According to a 2012 study[1], the benefits of inward processing are visible on examination of the sales abroad of products that emerge from the processing and assembling in the EU of imports. For example, out of €160 billion worth of EU motor vehicles exports in 2011, almost 43% (€69 billion) were exports of motor vehicles that were produced under the inward-processing regime i.e. they were essentially cars assembled in Europe from parts and components imported from the rest of the world. This example shows how important can the inward processing procedure be for businesses in the EU.

The essential interests of union producers would not be harmed because the same freedom from tariffs applies to them all.

EU freeports are unusul in that operate within the customs union however the same tariff freedoms, duty exemption, duty deferral and tariff exemption apply.  As the EU definition clearly states

Free zones

Member States may designate parts of the customs territory of the Union as ‘free zones’; these free zones must be communicated to the European Commission.

Free zones’ are enclosed areas within the customs territory of the Union where non-Union goods can be introduced free of import duty, other charges (i.e. taxes) and commercial policy measures.

Such goods may, following the period in the free zones, be released for free circulation (subject to payment of import duty and other charges), or be placed under another special procedure (e.g. inward processing, temporary admission or end-use procedures – under the conditions laid down for these procedures) or re-exported.

Union goods may also be entered into or stored, moved, used, processed or consumed in free zones. Such goods may afterwards be exported or brought into other parts of the customs territory of the Union.

So lets be clear Boris is right only if you define Free Zones as lying outside a customs union.  But this is irrelevant as the EU has designed Freezones to offer exactly the same tarriff free benefits.  The only EU state aid law restrictions is on tax exemptions, Boris seems to have been strongly influenced here by donations from the port of Bristol.

Freeports casan make planning and economic development sense in the right circumstances, globally there are many great successes and huge failures (especially in Africa and India) the economist sums it up

Zones need to be connected to global markets. Improving infrastructure for this purpose has a bigger impact on the success of zones than tax breaks do. This often requires public spending to upgrade roads, railways and ports to handle the extra freight. Lack of such investment has been the downfall of many an SEZ in Africa. Lots of the continent’s new zones will fail for lack of a reliable power supply or because they are too far from a port.

If there was a national plan which prioritised routes for logistics  (which might be created from the extra capcity from HS2 and NP rail) and set down areas for freeports and inland ports it might make sense.  I have presented on this to the National infrastructure commission having worked on SEZs around the world.  I even suggested restoration of the Great Western railway as its backbone (its original intention of linking freight to europe) linking to the new port in Liverpool via the Whitehead tunnel.

There is far less case for non tarrif tax exemptions such as enterprise zones which just shift economioc activity around and have created few jobs.

 

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