Could free ports boost trade and manufacturing in the north after Brexit?

On 16 June 2017 our Newcastle office hosted a round table meeting of political and business leaders to discuss the practical implications of the report 'The Free Ports Opportunity: how Brexit could boost trade, manufacturing and the North.'[1]

A free port or free zone (FTZ) would be an area inside the UK geographically, but legally outside of the UK customs territory. Goods can be imported, manufactured or re-exported inside the FTZ without incurring domestic customs duties or taxes. These are only paid (often at reduced rates) on goods entering the domestic economy. As well as benefits to customs taxes and duties, FTZs often also support economic activity through financial incentives like Research and Development (R&D) tax credits, regulatory flexibility, and tax reductions.

Before the 23 June 2016 referendum key business groups in the North-East had considered the scope for FTZs as a means of improving regional economic performance and competitiveness. However, those discussions concluded that the UK's membership of the EU Single Market and Customs Union meant that, while FTZs might be technically possible, the need to comply with EU rules made any practical benefits marginal at best. Arguably, the UK vote in favour of Brexit has changed the calculus.

Hard Brexit: soft landing?

FTZs offer significant advantages in terms of tariff rates and reduced risk of bureaucratic delays affecting imports and exports, particularly for businesses that rely on "just in time" inventory management and production processes. They have the potential, following a "hard" Brexit, to mitigate any adverse economic impacts and, in the longer term, to create and enhance opportunities for trade and sectoral economic development. However, those advantages depend on the precise nature and extent of the UK's exit from the EU and on the terms of any subsequent UK-EU trade agreement. It was common ground that FTZs are likely to be viable – and necessary – only in the event of a "hard" Brexit.

For the purposes of our discussion a "hard" Brexit is one in which the UK leaves:

• The European Union
• The EU Single Market
• The European Economic Area
• The EU Customs Union.

If there were to be a "hard" Brexit then the viability of free ports and free trade zones would depend on the terms of any UK-EU trade agreement. If a UK-EU deal involved any element of zero or low-tariff and "frictionless" trade then the price would probably be restrictions on free ports or free trade zones in the UK. This element might be complicated by the DUP's demand for a "frictionless" border between Northern Ireland and the Republic of Ireland.

If FTZs were considered viable and necessary then there would have to be primary legislation. Those with experience of Parliamentary procedures and business management considered that FTZ legislation could not in practice be tacked on to the government's proposed "Great Repeal Bill". Consequently, the government's subsequent decision (17 June 2017) to opt for a 2 year session, cancelling next year's Queen's Speech, reduces the likelihood of Parliamentary time being found for the necessary legislation. Even if a short enabling Act were passed, setting a broad framework, detailed regulations would be required to bring it into operation. That would require a substantial allocation of departmental time, which may prove scarce in view of the extremely wide range of issues that must be addressed before the expiry, in March 2019, of the two year period triggered by the UK's notice under Article 50 of the Lisbon Treaty.

Defined area or virtual FTZ?

Looking beyond those obstacles, we discussed the potential types of free zone that might be adopted. Globally, the most common (and easy to regulate) form is a geographically defined zone within which tariff arrangements, tax breaks and other incentives apply either generally or to specific activities.  An alternative approach now made possible by technology is the "virtual" zone, linking elements of a supply chain or manufacturing process wherever located within the UK. The key enabling technologies are:

• Internet-of-Things (IoT) sensors allowing the position and state of raw materials, commodities and components to be monitored as they enter, progress through and leave the FTZ
• Blockchain and distributed ledge technology to promote trust by providing a verified and immutable record
• objectID, allowing HMRC to monitor the system.

At a technical level, either form of FTZ is possible. Indeed, the models are not mutually exclusive and it would be entirely possible to legislate in a way that allows or facilitates both. In practice, the choice of applicable model is a question of policy. Relevant considerations include:

• Whether virtual FTZs might diminish the regional benefits of geographically-defined zones. There may be a tension between arguments in favour of FTZs that rely on their potential to rebalance the UK economy and arguments that highlight potential sectoral benefits
• Whether FTZ status should be afforded to all UK ports, or whether that status ought to be gained through a competitive bidding process (for example, drawing on experience relating to Enterprise. Arguably, selective awards would in the short term risk exacerbating any negative effects of Brexit in areas not awarded free port/free zone status. However, in the longer term competition might yield significant benefits, such as regional clusters of expertise and creativity or economies of scale helping to rebalance the national economy.

Framework legislation could enable both geographical and virtual zones, allowing policy decisions to be made on the precise form(s) to be adopted in practice.

Next steps?

The consensus view was that there is merit from a North-East regional perspective in pressing the case for FTZs, both geographical and virtual as a credible response and perhaps as a practical necessity in the event of a "hard" Brexit. Ideally, enabling legislation would be enacted during the period before expiry of the UK's Article 50 notice in March 2019. During our discussion, concerns were raised about the potential risk that progressing legislation that would be required only in the event of a "hard" Brexit might undermine or preclude any shift in the UK's negotiating position should it wish to move towards a "softer" outcome. The consensus view was that taking steps to prepare for various potential outcomes would be perfectly explicable as a prudent and pragmatic way to provide a fallback position to protect the UK economy. Subsequent public statements made by the Chancellor of the Exchequer and the contents of the Queen's Speech on 21 June in any event remained consistent with a form of Brexit that would involve leaving the EU Single Market and the Customs Union.

If the outcome of negotiations were to be "no deal" then it would be extremely important to have at least the framework legislation in place, if not more detailed regulations, to avoid or minimise any period during which the UK would be trading solely on World Trade Organisation terms.

Rishi Sunak MP is seeking to arrange a meeting/event in Parliament, hopefully in September 2017, to promote the concept of FTZs. In the meantime any position papers, research or submissions discussing the merits and challenges of FTZs could usefully be addressed to Greg Clark MP, Secretary of State for Business, Energy and Industrial Strategy.