Licensing criminality?

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The Conservative UK Government and the Labour Welsh Government both want to claim their share of the credit for the granting of freeport status to two areas in Wales, and in the case of the one in Holyhead, the Plaid-run Ynys Môn council is staking its own claim for a share of the praise as well. It’s understandable that politicians want to claim credit for delivering benefits to their constituents, and clearly Wales needs a bit of ‘levelling up’, but I wonder if the enthusiasm all round is quite as justified as any of them seem to believe. Unanimity amongst politicians is either a very good sign or a great big red warning light; rarely anything in between. In this case, it brings to mind the old saying that ‘whilst success has many fathers, failure is a bastard’. Whether those claiming to have been part of the fathering process now will still be doing so in a few years time remains to be seen.

There is nothing new about the idea of freeports; there are around 80 in the EU and the UK had seven as well before the (Conservative-led as it happens) government abolished them in 2012. It’s not true (as Sunak declared) that this is some sort of Brexit dividend; that the UK could not have set up freeports whilst it was a member. It’s not entirely untrue either – the EU is taking an increasing interest in the operation of freeports, and setting tighter rules about what benefits they can offer, which might have constrained the detailed rules around the new ones. The EU is concerned about the potential for tax evasion, corruption and crime, all of which seem to have been a feature of freeports in the past, along, of course, with money-laundering. In theory, there is a customs border around every freeport, ensuring that goods brought legitimately into the freeport without paying customs duties are not then taken illegitimately into the wider economy. In practice, enforcement of that border is patchy at best – creating one of the many opportunities for criminal activity.

Even assuming that the new Welsh freeports manage to avoid all of those concerns, and run as they are intended to with everyone following the rules, the extent to which they provide real long-term economic advantage to the country as a whole is open to question. The UK Government’s own Office for Budget Responsibility has said (referred to here) that the proposed freeports in England are likely to reduce government revenue by around £50 million a year because of the tax breaks granted. If the extra economic activity is sufficiently large – and occurs in the places that need it most – that might be a price worth paying; it’s certainly not a reason in itself for not having freeports. But the OBR also points out that historical evidence suggests the "main effect" of freeports will be to move economic activity from one place to another. And it was largely that factor which led the Cameron government to scrap them.

It’s understandably difficult for any politician to do other than welcome a boost for the area which he or she represents, and taking a wider view can be hard. But is economic growth in Ynys Môn or Pembrokeshire, much-needed as it may be, really a boon to Wales it if merely shifts economic activity and jobs from Flintshire and Carmarthenshire, and reduces the income of national and local governments in the process? It’s a question which doesn’t even seem to be being asked in the rush to jump on the bandwagon.

Tories demand UK becomes landlocked

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The issue with the Northern Ireland Protocol is, and has been from the outset, that two areas with different regulatory and customs regimes need to have a border between them to control smuggling and tax and customs evasion. It’s a simple enough concept, although one which the Brexiteers are still struggling to understand, largely because many of them actually favour tax evasion and smuggling. Buccaneering, aka piracy, is what they’ve openly admitted that they want.

But the issue doesn’t just apply to the question of Northern Ireland – it also applies to so-called freeports. Logically, there has to be a customs border between any freeport and its immediate hinterland because two different customs regimes apply; without controls over what passes across that border, goods imported tariff-free into a freeport can simply end up in the rest of the UK, potentially undercutting legitimately imported goods. The proposal from a group of Tories that the whole coastline of the UK should become a freeport thus effectively amounts to a demand that the rest of the UK should become an entirely landlocked customs area. The fact that they are proposing, effectively, not to police the border doesn’t mean it isn’t there, just that crimes such as tax evasion, money laundering, and smuggling become easier to commit. If one of the problems with the border between the Republic and the North is its length and the number of crossing points, just imagine the consequences of a border which maps the entire UK coastline, but a few miles inland.

There is certainly evidence that establishing a freeport promotes the development of industry and jobs within its area, but there is no hard evidence to suggest that that economic activity is extra, rather than merely relocated. From the perspective of a capitalist, who wouldn’t prefer to operate in an area where they pay less tax and are subject to fewer regulatory restraints? Whether it actually benefits the economy as a whole, as opposed to only those who can easily relocate their businesses, is another question entirely. The evidence and experience is not good, which is why the government of the day – a Tory government – closed down the UK’s freeports in 2012. There is no obvious evidence that the current crop of Tories have learned anything from the problems of the past, and every reason to believe that it’s a get-rich-quick scheme for those prepared to play fast and loose with the rules.

There is another parallel with the Northern Ireland Protocol here, though. Those who believe that it is possible to set up separate customs regimes within a territory without policing the borders can’t understand why the EU doesn’t see things in the same light. The EU believes that borders between customs areas should be controlled; the UK government considers such controls unnecessary. That’s how they want to implement their promise that the UK outside the EU would pursue a policy of global piracy, although they preferred the rather vaguer term ‘buccaneering’. Same thing, though. One man’s criminal is another man’s ‘entrepreneur’; it’s hard to see how that gap between perspectives can ever be bridged.

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

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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.