Companies in freeports will not get to enjoy the full benefits of the tax-efficient zones if they export to certain countries including Canada, Norway, Switzerland and Singapore, the government has admitted.
Prime Minister Boris Johnson and Chancellor Rishi Sunak have declared that eight new English freeports — announced in the Budget — will be a “transformational” benefit from Brexit.
But officials disclosed on Sunday that recent post-Brexit trade agreements with 23 different countries included clauses that specifically prohibit manufacturers in freeport-type zones from benefiting from the deals.
Emily Thornberry, shadow trade secretary, said the clauses could easily have been removed during the trade discussions. “On the surface of it, this looks like a catastrophic blunder by a minister stuck in her silo,” she said.
“As a result, I fear that manufacturers in towns, cities and regions across our country who have succeeded in bidding for freeport status risk missing out on access to key markets.”
Typically, freeports are set up to allow companies to receive components and ingredients from abroad without paying any duties — including tariffs, VAT or excise duties — through a process known as “duty drawback”.
But businesses in freeports that enjoy those advantages will be obliged to pay tariffs when exporting finished products to any of the 23 countries in question, unlike companies elsewhere in the country.
The trade department said there had not been any “error” but admitted that the so-called “duty exemption prohibitions” would apply in respect of those countries.
“It is not uncommon for free trade agreements to have these provisions,” the Department for International Trade said. “Where these provisions apply, businesses can choose to either benefit from the duty drawback, or the preferential rates under the free trade agreement — provided they meet the rules of origin test under that agreement — depending on what suits them best.”
Sam Lowe, senior research fellow at the Centre For European Reform, said the clauses went against the political “narrative” that the new freeports would be economically transformative.
“I’ve always thought they were largely pointless anyway,” he said. “It is absolutely the case that if you produce certain products in freeports you will not be able to take advantage of many of the free trade agreements.”
Britain’s exports of goods to the 23 countries concerned were worth £35.56bn in 2019, almost 10 per cent of the UK’s total global goods exports that year, according to research by the Labour party.
Thornberry said trade secretary Liz Truss should have been aware of the clauses when she struck recent agreements with countries including Canada, Singapore and Mexico.
“It would have taken an hour of discussion and the stroke of a pen to explain the UK’s freeports policy to negotiators from these countries and remove the prohibition clauses from those agreements, and I cannot understand why Liz Truss failed to do that,” she said.
“I’ve written to Liz Truss asking her to clarify the situation, and if it needs fixing, I’ve urged her to go back to the negotiating table immediately with these 23 countries and get these clauses removed before Britain’s freeports come into operation later this year.”
The freeports to be outlined in the spring Budget are at Teesside, London Gateway, Liverpool City Region, Humber, Felixstowe, Southampton, Plymouth and East Midlands Airport.
The issue does not apply to the UK’s trade deal with the EU, which is by far its largest market for exports.