Will Covid-19 sink Britain’s freeport ambitions?

    Tuesday, 19 May 2020
    This is an opinion article by an external contributor. The views belong to the writer.
    London is planning on creating 10 customs-free points of entry by 2021.

    For months, the coronavirus pandemic has held Europe in its cold grip, but with the EU and the UK beginning to ease restrictions in order to revive economic activity, there’s long-awaited light at the end of the tunnel.

    But while Brussels soldiers on largely as before the crisis, London’s outlook has significantly changed compared to last year. PM Boris Johnson and his government have laid out a variety of policies to make the post-Brexit UK a “stunning success” able to “unleash” its full potential, a lot of which hinged on the idea of turning the country into a low-tax paradise through the use of freeports.

    London is planning to create 10 of these special, customs-free points of entry by 2021, predicting “They will attract new businesses, spreading jobs, investment and opportunity to towns and cities up and down the country”. Also considered will be tax advantages in order to increase investments in infrastructure and construction. However, with the country facing the worst recession in recent memory, the crescendo of voices questioning the wisdom and efficacy of freeports is getting louder – to the extent that Downing Street may well be forced to bin the idea altogether.

    False hopes and false assumptions

    Proponents insist that freeports – in their function as a special economic zone and “regulatory sandboxes” – are game changers for the revival of economically depressed regions of the country. Many economists, however, agree that freeports have close to zero measurable economic effect. It’s not difficult to see how this assessment is undoubtedly gut-wrenching for London at a time like this.

    The reason lies in a fallacious assumption: freeports will be created in areas already unable to attract investments, and it’s hard to imagine that tax breaks and regulatory tricks will suddenly convince companies to set up shop there. In the words of Susanne Frick, a fellow in Local Economic Development at the London School of Economics, “why are those firms not located in these areas anyway – and are freeports actually addressing these bottlenecks?”

    This is unfortunately very unlikely. Freeports can hardly make up for years of government neglect that placed London at the centre of its economic efforts. As such, freeports are what the government is offering these poorer regions in lieu of solid infrastructure spending.

    The real benefactor is not the general population

    Of course, the issue about freeports is not only structural; it is inherent to their purpose. Shadow chancellor John McDonnel called on this fundamental flaw when he slammed Johnson’s plan as “a ‘levelling-up’ for the super-rich, who will use free ports to hoard assets and avoid taxes” while the population at large will suffer from an eroded tax base and “feel the effects of under-funded public services.”

    For proof points, look no further than continental Europe, where the EU has had its own battles with freeports. While several EU member states set up freeports of their own, the EU has since taken a firm stand against them, to a large extent as a result of the scandals surrounding Swiss art dealer and “freeport king” Yves Bouvier, who has made headlines not only for promoting the freeport concept but also for defrauding Russian billionaire Dmitry Rybolovlev out of $1 billion in transaction fees.

    A “fertile ground for money laundering and tax evasion”

    As Yves Bouvier’s fraudulent activities were uncovered, scrutiny of freeports increased. Alarmed by the opacity of these facilities, the European Parliament’s Special Committee on financial crimes, tax evasion and tax avoidance (Tax3) concluded freeports resemble offshore financial centres allowing “transactions to be made without attracting the attention of regulators or direct tax authorities.”

    For this reason, Brussels finally began clamping down on them after assessing them to be a security risk, and in doing so is exposing them for the bastions of the rich – and their entrenched interests – that they are. After investigating Yves Bouvier’s Luxembourg freeport, Luxembourgish journalist and chief editor of Le Quotidien Fabien Grasser testified to have received threats from shareholder and management, and subsequently lost his position with the leading Luxemburgish newspaper. A local NGO dedicated to fighting offshore finance, the Collectif Taxe Justice Lëtzebuerg has denounced Grasser’s firing, calling it “a bad omen for press freedom in Luxembourg, particularly on the sensitive topic of tax justice”.

    The better alternatives

    The EU’s rather messy affair with freeports, therefore, should suffice as a warning against their use that London would be advised to heed. Between insufficient evidence for positive economic effects and the great risk of tacitly sanctifying a global elite’s illicit finance activities, the UK’s leadership should recognize the fact that freeports are a luxury the country cannot afford.

    Indeed, if Johnson truly has the best for the country and people at heart, a more effective approach to attracting investments and getting the economy’s wheels turning should be prioritized. At the moment, the British Treasury’s most pressing goal by far is to prevent large-scale bankruptcies and unemployment, along with saving “as much of the intellectual, physical and human knowledge capital that exists in the UK right now.”

    Under the current circumstances, going the tried and tested road of providing fiscal and financial incentives to firms aiming to become active in the UK is the best way forward, as this approach tends to be more inclusive of a region’s labour and skills. At a time when millions of Britons are looking at financial uncertainty for an indefinite length of time, cutting out extra privileges for the already privileged is a highly misguided move purely based on a flight of fancy. For a population craving normality, Johnson will pay for his choice at the ballot box in any case.