Freeports

Simon Clarke 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.

--- Later in debate ---

[Judith Cummins (Bradford South) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Hanson. I congratulate the hon. Member for Middlesbrough South and East Cleveland (Mr Clarke) and my right hon. Friend the Member for Birkenhead (Frank Field) on securing this important and timely debate.

We have heard how our ports play a vital role in facilitating our global trade, and about their importance to coastal communities and regional economies. However, 95% of our goods trade passes through our ports, which is significantly higher than the EU and international averages. Our businesses depend on our ports to get their goods to overseas markets. Our ports handle an estimated 500 million tonnes of freight each year, making our port industry the second largest in the EU, with more than 100,000 people in towns and cities around our coast employed directly, and many thousands more in supporting and related businesses. In 2015, the maritime sector accounted for approximately £4.7 billion in tax revenues—some 0.7% of the total tax take that year, with the port and shipping industries being the largest contributors.

I welcome the renewed focus on the maritime sector in the wake of Brexit. Although it is right that we consider the role that ports play, we must also consider that role in the context of Brexit. The Department for Transport estimates that in 2017, 55% of international tonnage passing through UK major ports was to or from the EU. It is still our largest trading partner, accounting for 44% of our exports and 53% of our imports.

The Government’s chaotic handling of Brexit could cause tariffs to be imposed on exported goods, along with increased paperwork, inspections, audits and so forth. It could cause bottlenecks at ports here and on the continent. Security or customs delays could cause substantial tailbacks leading up to our ports as freight lorries are forced to pool while waiting for ports in France or the Netherlands to clear any backlogs that build up there.

The impact on ports such as Dover, where 99% of through trade is to or from the EU, will be substantial. Other ports, such as those that are members of the UK Major Ports Group, have suggested that they are investing substantially in infrastructure and capacity expansion, to be prepared for any eventuality. Sadly, it seems that the Government have yet to adequately prepare for the same. Towards the end of last year, at a hearing of the Public Accounts Committee, Her Majesty’s Revenue and Customs told Members of Parliament that the new customs declaration system would not be fully up and running in time for Brexit and that the system had not been designed with any increased customs processing in mind.

That is precisely why Labour has repeatedly called for a new customs agreement with the EU, to ensure that our businesses can continue to export tariff-free and without friction at the border. Today’s debate should perhaps have focused on that and the Government’s complete failure to ensure that our ports are supported in the event of any change to our current trade relationship with the EU. Nevertheless, we are here to debate the reintroduction of freeports. I say reintroduction because, as many Members have alluded to and will remember, the UK has already experimented with freeports at the ports of Liverpool, Southampton, Tilbury, Sheerness and Prestwick airport. Those freeports, established while we were a member of the European Union, were freeports in the true sense of the term: a defined area outside our customs territory, where goods could enter without attracting taxes or tariffs.

If the Government are considering whether to re-establish such a model, will the Minister tell us why, under the coalition Government, it was decided in 2012 that the freeports would not continue? Are we really talking about not a freeport per se, but a free trade or free enterprise zone, where goods can be manufactured and services rendered without being subject to the ordinary tax and/or legal regimes of this country?

Ministers, including the Under-Secretary of State for Housing, Communities and Local Government, the hon. Member for Richmond (Yorks) (Rishi Sunak), have suggested that the Government should consider adopting the American model of free trade zones, in which businesses would be given tax incentives to relocate. Although there may be evidence to demonstrate that such a model creates employment and attracts investment, very rarely is any assessment made of the extent to which those jobs and that investment are displaced, resulting in job losses and business closures elsewhere.

There is evidence around the world to suggest that such free trade zones are exploited by investors and businesses that seek to take advantage of general tax holidays and lax employment laws, while failing to produce the economic benefits promised.

[Mr Simon Clarke]

I thank the hon. Lady for highlighting the importance of EU trade, with which I completely agree. On displacing business from elsewhere, which is really important, I know from conversations with Ministers that that is at the heart of the Treasury’s concern to ensure that we do not just end up shifting jobs from one part of our country to another. This is about winning business from outside the UK for the UK that otherwise would not be here. I do not believe, for example, that if we had a string of freeports around our country they would take jobs away from other port areas in the UK. It would be about winning new businesses and jobs.

[Judith Cummins]

I will come on to the importance of defining what is a freeport. A 2011 review of special economic zones by the World Bank suggested that many such models had become white elephants, with the cost of revenue lost to the Exchequer outweighing the benefits. At the same time, The Economist reported that they create distortions in economies and that many fail, leaving a long trail of failed zones that either never got going, were poorly run or in which investors gladly took tax breaks without producing substantial employment or export earnings.

Reports have repeatedly surfaced from free enterprise or free trade zones around the world that demonstrate lax enforcement of labour laws. Polish workers have been sacked for an illegal strike against poor working conditions at a business located in a special economic zone. There are similar examples in China, Cambodia and elsewhere. The European Parliament’s director general for external policies found that often in such zones

“the governance of labour rights may differ from the rest of the country and fall below international legal standards”.

If the Government are considering such a model, will they tell us how they intend to ensure that workers’ rights are protected and enforced? Will the Minister tell us what discussions he has had with trade unions?

Serious concerns have been raised about how a combination of tax incentives and relaxed monitoring and supervision, even by competent regulators, has resulted in a reduction in finance and trade controls and enforcement, creating opportunities for money laundering and the financing of terrorism. The intergovernmental Financial Action Task Force raised precisely those concerns in the inaugural review of free trade zones in 2015. It noted that

“the same characteristics that make FTZs attractive to legitimate business also attract abuse by illicit actors”.

The Financial Action Task Force also noted that FTZs have been used in the transport and production of weapons of mass destruction.

--- Later in debate ---

[Mr Simon Clarke]

I thank everyone who spoke in the debate. I particularly thank the Minister for sending out a really encouraging signal that there is serious engagement from the Government. The gauntlet is thrown down to us and the ports sector to make the proposition viable.

The hon. Member for Redcar (Anna Turley) set out a compelling case, which is close to my own heart, for why Teesport is such a great candidate to be a freeport if the initiative gets off the ground. Leaving aside what Harold Macmillan would term a little local difficulty about our positions on Brexit, I welcome the consensus that we have achieved. There is no suggestion that a freeport should, for example, weaken workers’ rights. It would be insanity as well as bad practice for us to do anything that took us down that route. This matter is about economic potential, not deregulation in that sense.

My hon. Friend the Member for Cleethorpes (Martin Vickers) is such a doughty champion. I am so pleased that he set up the all-party group. Obviously, his area, like mine, could benefit enormously from making a go of freeports. He pointed out that the initiative is perfectly designed for northern communities that have been left behind. It is absolutely about embracing the opportunities of Brexit, as he rightly said.

My hon. Friend the Member for Hornchurch and Upminster (Julia Lopez) spoke. It is rare that I get the chance to praise London and the opportunities that it offers. It is true that London is a complex and diverse city. The idea that it is all Bentleys and million-pound homes in Sloane Square is not true. It is important that places like Havering get to benefit from initiatives such as the logistics hub. The hon. Member for Redcar and I are working on promoting such a bid for Teesside—nothing passes without Teesside getting a mention. Logistics hubs are a great idea and Havering seems to me to have many of the characteristics that would make it a successful location.

[Mr Peter Bone in the Chair]

My hon. Friend the Member for North East Derbyshire (Lee Rowley) has emerged as the foremost champion of social and economic liberalism within my intake of Conservative MPs. He rightly identifies that we need to be nimble, dynamic and fearless as we leave the European Union. If we are to do that, I think freeports are a great opportunity. I wish him luck working out how to get the sea a little bit closer to North East Derbyshire.

The hon. Member for Dunfermline and West Fife (Douglas Chapman) eloquently set out his party’s position on Brexit. He is absolutely right about the importance of EU trade. I draw him back to my point that current EU state aid rules restrict us from creating freeports in a way that would allow them to succeed. He made his own powerful case for Rosyth to form part of a freeport, were such a policy to be initiated. He is certainly right to pay tribute to the work of the UK ports sector in helping us to prepare for today’s debate.

The hon. Member for Bradford South (Judith Cummins) rightly highlighted the importance of EU trade. We struck genuine cross-party consensus that this must not be an opportunity to deregulate things that are important to all of us, including hard-won advances in workers’ rights. It did seem slightly ironic that she took the Government to task over the lack of clarity on Brexit. I lose track of the exact position of the Opposition on this point, but it is fair to say that it is difficult for all parties, and we need to bear that in mind.

More broadly, I hope that Labour can find a way to make this policy a part of its platform, as it has enormous potential for many Labour constituencies. The fact that the hon. Member for Redcar is here and the fact that the right hon. Member for Birkenhead (Frank Field), a friend whom I admire greatly, is the co-sponsor of the debate, shows that this idea goes to the heart of regenerating places that have had a really raw deal over the last 30 years and have really struggled with the challenges of deindustrialisation. They could potentially benefit enormously from making this policy work. I certainly do not think we need to worry about her colourful suggestion about the transport of weapons of mass destruction. I promise now that Teesport will not become a centre for that—it is the only thing that I will rule out for Teesside.

I turn to the points made by the Exchequer Secretary to the Treasury, my hon. Friend the Member for Newark (Robert Jenrick). It was a huge pleasure to welcome him to Skelton a few weeks ago; we had a really good visit. I know he is one of the most thoughtful and effective champions of enterprise in Government and someone who I think will go right to the very top of Government—he certainly deserves to. It is great to hear about his close engagement with the ports sector and he is right that the onus now passes to the sector to come up with workable, serious proposals. We have expanded upon the intellectual framework for why this could work and it is now about getting the granularity of detail that the Government require to make it happen.

Whatever the framework within which we choose to leave the European Union, it must allow the broadest possible powers for future enterprise. That takes me back to my point about Chequers. I really do want to see supply side benefits realised. There is a particular opportunity at a time when the Government have embraced a place-based industrial strategy to make the case for areas like the Humber and South Tees, where there are enormous brownfield sites. I appreciate there are ports that are constrained, such as Dover and Liverpool, but there are others where the potential is unlimited—as much land as is needed can be given. This is something that is exciting and it resonates.

It would be wrong of me to close without paying tribute to the work of Ben Houchen and the whole regeneration initiative, which is making a huge impact cross-party. It is getting people’s hopes up in places like South Tees. Sometimes it is not just about changing the economic reality but about changing the intellectual and emotional response to where we are now. We have had one narrative for a long time and hopefully we are starting to get into a much more enterprising and forward-looking mood in our area. This is an exciting and hugely challenging time. There will be great opportunities and pitfalls in the months and years ahead. That is what comes when one takes back control of policy. Today has crystallised the next steps that we are going to have to take in order to make freeports a serious, workable prospect for our future.

Question put and agreed to.

Resolved,

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