Will the UK’s freeports plan be among the casualties of a no-deal Brexit?

The UK’s lengthy divorce from the EU may finally be in its final act. On July 23^rd, EU chief negotiator Michel Barnier blasted Boris Johnson’s government for “not showing a willingness to break the deadlock” and advised that a deal on the UK and the EU’s future relationship now seems “unlikely”. Since London has pledged not to seek an extension of the Brexit transition period, it’s increasingly probable that Boris Johnson’s boasts that the UK will still “prosper mightily” in case of a no-deal split may be put to the test in January 2021.

Johnson’s apparent willingness to revert to WTO rules was initially dismissed as tough talk to secure concessions from the EU27, given the general consensus that failing to clinch a deal will come with significant economic costs. With the British economy already suffering its sharpest contraction in 41 years amidst the coronavirus pandemic, reports that leaving on WTO terms could shave up to 8.1% off the UK’s GDP over the next decade are alarming.

Walking away from the negotiating table isn’t just bad for British business in general—it might strike the final nail in the coffin for one of the lynchpins of Chancellor Rishi Sunak’s plan to revitalise the British economy, the creation of a network of freeports. Sunak has long trumpeted the benefits of these special trade zones, claiming that they could create 86,000 new jobs and reinvigorate disadvantaged regions of the UK. Critics, meanwhile, have pointed to problematic experiences abroad to suggest that the plan could turn Britain into “the world capital of money laundering”. Given the steadily increasing likelihood that come January 1^st, tariffs will disrupt trade between the UK and its largest trading partner, will the UK finally consider freeports’ risks greater than their rewards?

Past evidence from the UK and from abroad raises concerns

While Sunak has argued that Brexit will give the UK the “economic freedom” needed to establish the special zones where duties are temporarily suspended, his plan wouldn’t be the UK’s first rodeo where freeports are concerned. Indeed, the UK possessed seven such facilities between 1984 and 2012. As some pundits have pointed out, there’s a reason why the UK freeports’ licenses were not renewed—unless the model for the zones is significantly updated, they risk becoming “a huge investment for not a huge amount of return”.

Other countries have indeed experimented with different freeport models. Swiss “freeport king” Yves Bouvier built expensive facilities in Luxembourg and Singapore, more akin to high-tech bunkers than to industrial zones, in which billions of pounds’ worth of Picassos and Lamborghinis are stored to avoid hefty tax bills. The flaws with this new style of facility, however, are far more serious than the negligible economic benefits the UK observed at its former freeports.

Not only are Yves Bouvier’s freeports in both Luxembourg and Singapore in financial trouble, but they’ve come under fire from the EU. As part of a year-long investigation, a group of MEPs from the European Parliament’s Tax3 committee, focused on financial crime, visited the Luxembourg facility—and came away with the impression that it was a “black hole” ripe for money laundering and tax evasion.

The Tax3 committee identified a number of reasons why the freeport was a drain on the EU’s security and good reputation. The “extremely perfunctory” oversight that policymakers observed when they visited Le Freeport Luxembourg was one, as MEP Ana Gomes observed that “we did not see any attempt to establish who were the real owners of the goods” in the freeport. German MEP Wolf Klinz, meanwhile, highlighted the “dubious and highly problematic reputational profiles of Le Freeport’s private shareholders”, referring to Bouvier, Jean-Marc Peretti and Oliver Thomas.

Economic concerns compound reputational risks

In the wake of the Tax3 committee’s damning report, the European Parliament recommended that the Luxembourg facility, and the EU’s other freeports, be urgently phased out. MEP Ana Gomes wrote to the British Parliament suggesting that, if the UK does decide to reopen freeports in Britain, it should institute a so-called “Bouvier Rule” to screen freeport investors and prohibit the storage of artworks above a certain value.

Crafting a freeport model which would add more value than the UK’s previous freeports did while avoiding the reputational risks associated with the facilities in Luxembourg and Singapore already promised to be a daunting task for Johnson’s government. The spectre of a no-deal Brexit has made it ten times harder.

Even industry officials who are sanguine overall about freeports’ potential to boost UK manufacturing and exporting question whether the facilities’ advantages will be a drop in the bucket compared with the disastrous effects of delays in the customs queue at Dover, piles of paperwork and ruinous tariffs. Indeed, a group of British ports admitted that any tariffs between the EU and the UK would diminish the utility of the freeport plan. Under WTO rules, some tariffs could be unsustainably high—carmaker Nissan, for example, has already warned that its plant in Sunderland would not survive a tariff of 10%, something that a freeport would be unlikely to change.

The lacklustre economic boost which the UK’s former freeports ushered in, along with reports of overseas facilities’ links to financial crime, could have been reason enough to disqualify them from serving as a cornerstone of Britain’s economic recovery plan. With their economic potential further constrained by the substantial tariffs accompanying WTO rules, freeports may lose some of their lustre for even their staunchest supporters.