Freeports

Michael Tomlinson Excerpts

Thursday 11th October 2018 Westminster Hall

[Mr Simon Clarke (Middlesbrough South and East Cleveland) (Con)]

I beg to move,

This this House has considered the establishment of freeports in the UK.

It is a pleasure to serve under your chairmanship, Mr Hanson. I thank the Backbench Business Committee, chaired by the hon. Member for Gateshead (Ian Mearns), for granting this timely debate, and the many supporters who helped to secure it, in particular the right hon. Member for Birkenhead (Frank Field). He is a great champion of both Brexit and the north of England, and is held in the highest regard on both sides of the House. He has asked me to pass on his apologies today; he is unfortunately detained on Merseyside.

What is the issue that unites us, and what is a freeport? At its simplest, a freeport is an area that is physically within a country but legally outside it for customs purposes. Consequently, goods that enter a freeport do not incur import duty. Instead, import duty is paid only if and when goods pass from the freeport into the domestic economy. That offers a number of advantages, as, for example, goods can be imported, processed and then re-exported without incurring any duty. That incentivises international businesses to use the freeport as part of their supply chain, thereby stimulating domestic manufacturing and creating jobs in the process. The deferral of duty also enables goods to be stored or processed in the freeport before entering the domestic economy. That allows businesses to better control their cash flow and, again, encourages domestic manufacturing, as import tariffs on processed goods are often less than those on the individual component parts.

In addition to the benefits accrued through duty-free status, freeports often offer their users a number of additional advantages, including tax reliefs and a simplified regulatory environment. It is important to stress that there is no one model of freeport. All freeports are different in the mix of advantages that they offer and the physical form that they take—I think we will hear from colleagues today about issues ranging from seaports to airports. The debate, therefore, is about not only whether the UK should establish freeports, but what form they should take. I will begin, however, by briefly describing the case for freeports in general.

Freeports are not a new idea; indeed, approximately 3,500 freeports are now operating in more than 135 countries. The UK is unusual in that we have no operational freeports. If we are to compete seriously in the global trading system once we leave the EU, that has to change, as my hon. Friend the Member for Richmond (Yorks) (Rishi Sunak) pointed out in his excellent paper for the Centre for Policy Studies.

Wherever freeports have been implemented properly around the world they have had that effect. Just look at how quickly and impressively the Jebel Ali free zone in the United Arab Emirates has transformed Dubai. In the space of a few decades, that free zone has brought unimaginable wealth to that country. The free zone alone now hosts 7,000 global companies, employs 145,000 people and accounts for around 40% of the UAE’s total direct foreign investment.

Jebel Ali is the most unique and dramatic example, but freeports have demonstrated their worth in highly developed and mature economies as well. The growth in freeports in the US, for example, has outperformed the US economy as a whole. One report predicts that if freeports in the UK were as successful as those in the US, we would create an additional 86,000 jobs. There is every indication that freeports in the UK would be just as successful as those around the world—perhaps even more so, given our excellent links with the United States, Europe and the Commonwealth.

A report commissioned from Mace Group by my fellow Conservative, Tees Valley Mayor Ben Houchen, looked at what a programme of supercharged freeports in the north of England might mean for our economy. It found that such a programme, once established, would boost UK trade by nearly £12 billion a year, create 150,000 extra jobs across the north, including 17,500 in Tees and Hartlepool, and provide a boost to northern powerhouse GDP of £9 billion a year—equivalent to £1,500 a year for every household in the north.

Although the jobs created by freeports would extend to the service sector as well, the vast majority would be in manufacturing. That in itself would be another huge advantage for the UK economy. Although manufacturing as a share of our economy has declined from 32% of gross value added in 1970 to 10% today, it still accounts for 13% of business investment, 50% of UK exports and 70% of business research and development. It also creates high-paying jobs, with the average worker in manufacturing earning £3,400 more than those in the rest of the economy.

Increasing the size of our manufacturing sector is also central to boosting the stagnant levels of productivity that the Government have rightly identified as a key structural challenge for the UK economy. As the Government’s industrial strategy White Paper points out:

“The productivity of the sector has increased four times faster than the rest of the economy”.

By boosting the share of manufacturing in the UK economy, freeports would have positive effects on productivity, wage levels, the current account deficit, investment, and research and development.

Although I would love to see freeports dotted around the entire UK coastline, like giant magnets pulling in container ships from all around the world, I also want to fly the flag particularly for Teesport, and I am delighted to see my friend the hon. Member for Redcar (Anna Turley) here to make that case. Situated immediately adjacent to the site of the former Sahaviriya Steel Industries steelworks—now the centre of the largest regeneration project anywhere in the UK—Teesport is undergoing huge investment to prepare it to rival the major ports in Europe. It handles more than 5,000 vessels each year and around 40 million tonnes of cargo, on an estate covering almost 800 acres. Teesport has all the qualities that will allow it to prosper as an international hub for trade and supply chain processing: deep water access that allows volumes to be maximised, the availability of extensive brownfield land surrounding the port, excellent transport links to the rest of the country, a ready supply of skilled workers, and a local economy that has so much unrealised potential.

For all the reasons that I have set out, I strongly believe that freeports could transform the economic growth and prosperity of the north-east, as well as the wider UK economy. However, as I have mentioned, freeports come in many forms, and it matters a great deal for the success of a freeport that it consists of the right features. Members may be aware that the UK has experimented with freeports once before. My researcher dredged out a wonderful report from the 1980s by the Adam Smith Institute, setting out the experiment that was launched in 1984, giving six ports around the UK freeport status: Belfast, Birmingham, Cardiff, Liverpool, Prestwick airport and Southampton. All those freeports, however, failed to achieve the success that we have witnessed in others around the world, because they did not offer anything like the advantages that could be acquired in many other freeports outside Europe. That was partly due to an uncharacteristic lack of ambition by the Thatcher Government, but mostly due to the regulatory constraints placed on them by the EU.

It is therefore crucial that, if and when we reintroduce freeports to the UK, we allow them the oxygen that they need to breathe and come to life. That is where I take issue with the Government’s current position. In his reply to a written question from me earlier this week, the Financial Secretary to the Treasury emphasised that the Customs and Excise Management Act 1979, which I am sure we all know well, already provides a legal basis for the designation of free zones, and will continue to do so following our departure from the EU.

I am a great admirer of the Minister, and I know that he is deeply committed to boosting our economy. I am also genuinely grateful for the supportive conversations that I have had with other Treasury Ministers about how we could aim to deliver a new generation of freeports. However, if we are not prepared to go further than we did in the 1980s, the results will be the same. During that first freeport experiment, Dr Eamonn Butler and Dr Madsen Pirie, by surveying the characteristics of freeports around the world, produced a list of the advantages that freeports need to succeed, and I will mention a few of them now.

At the macro level, freeports must be able to offer lower levels of taxation and less burdensome regulations than exist outside. Those conditions are crucial for attracting new business, creating jobs, and encouraging start-ups. Freeports also need to be able to curb bureaucratic administration by having both automatic concessions and collective processing. Automatic concessions would mean that freeport users do not have to undertake the costly and lengthy process of applying for individual concessions, such as for inward processing relief. Collective processing would also reduce paperwork, as the freeport operators would deal directly with customs documentation on behalf of all, or a number of, their tenants.

Successful freeports must also offer their users security. The heightened security around freeports is often perceived as a necessary burden, required to prevent smuggling. However, the existence of a highly secure customs perimeter affords freeport users huge cost savings in the form of lower insurance premiums. High-value stock is also more secure, and the insurance need cover only the duty-free, rather than duty-paid, value of the stock.

The final advantage that all freeports must be able to offer businesses is improved cash flow. To an extent, it will arise naturally because of the ability to defer duty payments until the goods actually leave the freeport, but additional measures can be taken. Ideally, VAT should be scrapped on transactions within the freeport so that businesses are not required to wait for needless VAT refunds.

In summary, we should not aim to establish the type of insipid freeport that one finds across the European continent. Instead, we should aspire to construct supercharged freeports like those found in China, the US and the middle east.

[Michael Tomlinson (Mid Dorset and North Poole) (Con)]

My hon. Friend makes a powerful and compelling case. He mentioned that freeports come in all shapes and sizes. Does he agree that the UK’s regional airports present an opportunity to expand freeports or free zones? It is good to see the Minister in his place; does my hon. Friend, like me, look forward to a positive answer from him to the call for freeports, not only in the north-east but in our regional airports?

[Mr Clarke]

I agree completely that the opportunities are not restricted to Teesport or even to seaports. Airports could be a logical centre for such innovation; I know of freeport zones in Tennessee that are centred around local airports and that keep spreading prosperity to areas that are not naturally at the centre of current economic success. That is the point: freeports can really diversify the benefits of a liberalised economy into areas that have struggled to attract the levels of inward investment that other cities or areas have enjoyed. Regional airports should absolutely be part of the strategy. I think the Government would broadly agree that if the idea is taken forward, it will not be in any way restricted to seaports.

Why are freeports back on the agenda now after a three-decade hibernation? The answer, of course, is Brexit. Leaving the European Union is the perfect opportunity to establish supercharged freeports, for three reasons. First, we will be free from EU regulatory restraint and will therefore have the freedom to create something meaningful, rather than just glorified bonded warehouses. Secondly, as we pivot from Europe to the rest of the world, we will need to be even more competitive to attract new business. I cannot emphasise enough that if we accept a looser economic relationship with Europe, we will have to establish better ways of enhancing our trade relationships with the rest of the world or the exercise will lose all economic meaning. Thirdly, in the event that we end up with no preferential trading relationship with the EU, freeports will help us to maintain frictionless trade, especially for just-in-time supply chains.

That brings me to my final point, which is about our future relationship with the EU. The type of freeport that we can introduce post Brexit is inextricably linked to the type of relationship that we forge with our European partners. At the heart of the question lies state aid, on which the EU has much more stringent rules than the World Trade Organisation. The most fundamental difference is that under WTO rules, only “financial contributions” count as subsidies, whereas the European Commission defines state aid as

“an advantage in any form whatsoever”.

Although setting up a freeport is possible within the EU, the state aid restrictions make it impossible to set up the type of successful freeports that we want and need, with power to attract meaningful levels of foreign investment and incentivise the onshoring of jobs. Crucially, members of the European economic area are automatically bound by all EU state aid rules, while Canada, in its new comprehensive trade agreement with the EU, applies none of them. If we are serious about establishing freeports in the UK, our future relationship with the EU will therefore need to look a lot more like Canada plus than like EEA minus.

From the proposals in the Chequers White Paper, it looks as if the freeport opportunity will die without a shot fired. The White Paper pledges that

“the UK would make an upfront commitment to maintain a common rulebook with the EU on state aid”.

That makes really depressing reading. By committing to apply the entire EU state aid rulebook, we are tying our hands and sapping our ability to attract foreign investment, boost international trade and ultimately create thousands of jobs in the UK, mostly in manufacturing.

To avoid any misunderstanding by the Government, I want it to be crystal clear that, for me, that is not good enough. The whole Chequers approach is characterised by the desire to split the difference between being a member of the EU and being an independent country, but it ends up delivering the benefits of neither. Along with the wider democratic deficit involved in our voting to leave the EU, but then accepting being a rule taker, that is why I must end my speech by emphasising that I am deadly serious that I cannot and will not support the Chequers proposals if they form the basis of an agreement with the EU in a few weeks’ time.

Freeports are one demonstration of why we would fare far better in a looser trading relationship with the EU based on a super-Canada deal. The remaining negotiating time should be spent in practical engagement on the Irish border, to which very clear solutions have been suggested and which I believe is much more about a political than a practical obstacle. It is very simple: time—both for freeports and for a proper Brexit—is running out.