Wednesday 10 November 2021

We need the freedom to be honest, not to join in corruption


In 1984, the then Conservative Government set up six freeports across the UK on an experimental basis. The experiment was not exactly a huge success, and in 2012 the then Conservative Government scrapped them. The current Conservative Government now wants to try again, including overruling any objections from devolved administrations, and taking powers away from those administrations in order to implement their plans.

Contrary to what Brexiteers seem to suggest, scrapping freeports was nothing to do with the EU or the single market – EU rules allow freeports to exist, and indeed there are currently 72 such zones spread across 20 of the remaining member states. They were scrapped in the UK because they just didn’t live up to their promise. It certainly is true that in 2019 the European Parliament called for freeports in the EU to be closed down as a result of tax evasion and money laundering; there is no reason to suppose that freeports set up in the UK will be any more immune to such problems. It’s also true that EU rules on tax breaks and aid to industries in freeport zones were a constraint on what individual governments can do, and that in theory, therefore, outside the EU the UK is able to offer more incentives. That may turn out to be more a theoretical statement than an implementable one, however; there is (and can be) no guarantee that EU countries (and the same is likely to apply to other countries) will accept imports from zones considered to be effectively outside the UK customs area on the same terms as those from the UK itself under the Trade and Co-operation Agreement. And why would they? Why would anyone want to allow companies being unfairly subsidised and given tax breaks which they themselves can’t match to undercut their own businesses?

The government’s own Office for Budget Responsibility told us in no uncertain terms a fortnight ago that “…the main effect of the freeports will be to alter the location rather than the volume of economic activity” – in simple terms, they will move jobs from one place to another rather than create new jobs. And in the process, they will reduce the tax income to the Exchequer, at the same time as demanding extra infrastructure investment. The main beneficiaries from the initiative (according to the thinktank UK in a Changing Europe) will be the businesses and super-rich individuals who take advantage of the tax breaks they offer. And there is good reason to expect that they will provide new opportunities for secrecy, money-laundering, tax evasion, reduced regulatory control, and fraud. Put that way, it’s easy to see the attraction for the current government; freeports will directly aid the Tories’ cronies and funders. It’s also easy to see why the Welsh Secretary would be so keen to seize on another opportunity to roll back devolution.

It’s a lot harder to see why the Welsh Government would want to get involved, and the reticence being shown by Drakeford is wholly understandable. He does face two problems, though: if he refuses, he’ll be overruled and lose any vestige of control, and if freeports set up across the border attract companies to relocate from Wales, Wales will lose jobs and economic activity, for which he will then be blamed. But agreeing to host a freeport in Wales because England is doing so on our doorstep in Liverpool is more like the logic of an arms race than a sound economic plan. The better response to dishonesty and corruption on a grand scale is not to emulate it, but to escape its clutches. And that means more independence, not less.


Jonathan said...

I used to work in shipping, and have tried to think about what might work for Wales. I absolutely agree as to the defects of Freeports but I do wonder what the best response actually would be. Wales does not have a shipping industry. We have to decide whether we want one - yes or no? Wales would need a shipping culture - have we got one? Having knocked around Atlantic Arc circles I'd have to say - we don't. We had real-estate people in Welsh Ports who would like a lively harbour. But its not enough. You might get a corporate level shipping line interested, but probably not. They are happy with Portsmouth for ferries. For containers, Milford Haven has no chance. Nor does Port Talbot, which would be good, but is spoken for. But containers are moving through Liverpool more now. Ah yes, Liverpool. I've been there a lot recently and they have the right attitude. Whatever the stereotypes, I speak as I find. They like a party, they work hard. And they do love a deal. As you know, I favour Liverpool as an independent City State like Hamburg or Bremen. Because they have this attitude, and they understand of sea trade. What we in Wales need to get over is that you need to play with fire somewhat, and take some of the risks you correctly identify wrt Free Ports. Historically, ports and entrepots have always been marginal places, legal grey areas, on the coast and not inland like most modern capital cities. Consider places like Carthage (and numerous places in the Med in Antiquity), Hanseatic Ports, Singapore, Hong Long, Nassau Bahamas etc etc. Problem is cultural ie none of these would appeal to a neis-neis Welsh Mam with children like Mark Drakeford. He so obviously dislikes nightclubs and pubs. I just can't see him allowing a proper seaport, with inevitable commercial "grey areas", let alone Red Lights!. The art of the Statesman is to licence such places, encourage the trade, set a sensible level of tax, and deal with inevitable pirates, cut-throats and VAT-dodgers when it gets out of hand. Has worked for every civilisation down the ages.

John Dixon said...

Whilst they're called 'freeports', the concept isn't necessarily linked to shipping - airports are also options.

Whilst I agree with much of what you say, I rather suspect that " licence such places, encourage the trade, set a sensible level of tax, and deal with inevitable pirates, cut-throats and VAT-dodgers when it gets out of hand." would, in practice, render them irrelevant. Without the 'advantages' which are negated by a proper regime, what is left? (The success of the concept in the US seems to be due, to a significant extent, to a curious phenomenon known as tariff inversion, where the tariffs on the raw materials are higher than the tariffs on the finished goods - a situation which does not pertain for the UK.) And, even if there is still some marginal advantage to be gained from properly regulated grey areas (if that isn't an oxymoron), that still doesn't address the issue - which the OBR identified - that the main impact is relocating economic activity rather than expanding it.