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Good afternoon and happy holidays to all. The magnolia tree is blooming outside my window in Brighton, which is a sure sign that spring has finally sprung.
But to business. First of all, thank you for the responses to last week’s call for information on services. Lots of interesting answers. I’ll come back to this topic after Easter, but if you were going to send an email, but you were too busy, don’t be shy. Use one of those holidays to send me a note. Confidentiality assured.
Otherwise, it’s another busy week in Brexitland. He coach chaos at Dover it was interesting for two reasons. The first is because a full complement of French border police turned up this time (unlike in July, when Dover blamed the police aux frontières for failing to show up for the chaos). So even fully staffed, the additional post-Brexit passport controls mean the bureaucratic capacity of the port is less than the capacity of the ferries. This has led to effective caps about bus numbers at peak times, even if they are not called that.
The second is the denials by Conservative (Suella Braverman) and Labor (Lisa Nandy) politicians that Brexit had much to do with it. Obviously, he did. Checks take longer now.
Politicians shouldn’t take people for fools, but the fact that neither side can have a fact-based conversation about the Brexit issues is a huge impediment to tackling the broader trade and business investment challenges created. for leaving the EU. (John Springford at the Center for European Reform was very good on this topic this week; It’s worth reading.)
Secondly, there was also an announcement that the UK will finally implement proper border controls on imports from the EU to the UK. There is a query and the devil will be in the implementation of this.
In short, the government will have to strike a balance between the risk of supply chain disruption in the UK as a result of smaller EU companies leaving trade with the UK (such as UK made in 2021 when the Trade and Cooperation Agreement entered into force and the EU fully imposed its border controls). . .
. . . while at the same time imposing a strong enough border to create some leverage with Brussels over customs facilitations in future ATT negotiations, as EU countries will be more interested in customs easements when their own exporters face border frictions.
Today, however, I want to return to the free ports, which have just passed their second anniversary and continue to be a cornerstone of the government’s political agenda, both for leveling up and for what passes for industrial policy.
Like this excellent Institute of Fiscal Studies report by Stuart Adam and David Phillips, UK free ports differ from previous iterations of these schemes both in the UK and the rest of the world because each port is deliberately designed to foster a particular industry group. In theory, this is also a group that would not have arisen without the tax breaks and other incentives offered in the free port zones.
So, for example, Humber Freeport is intended to be a processing center for rare earths (producing inputs for the production of electric vehicles and wind turbines); Teesside Freeport will be a new manufacturing facility for offshore wind turbines; and Plymouth and South Devon Freeport are considering testing autonomous maritime vehicles.
Post-Brexit governments have made big claims to free ports. Going back to the 2019 election, Boris Johnson touted them as a key part of the Brexit ‘momentum’, while Rishi Sunak has always been a fan of free ports, writing a paper on the subject for the Thatcherite Center for Policy Studies on the subject called The Opportunity of Free Ports.
So what exactly is the opportunity? And will the UK be able to understand it? The IFS paper cited above tries to see if this new generation of UK free ports will be able to avoid the problems that have plagued previous generations.
Namely, that the tax incentives available in free ports (lower trade rates, tax deductions on plant and machinery, reduced national insurance contributions for hiring new employees) tend to crowd out economic activity.
This displacement can be from another place (a factory closes in one place and reopens within the area); or a substitution of activity that would otherwise have happened (the factory would have been established anyway, without the incentives); or, in a tight labor market, employing workers in “new” jobs within a free port zone who would have been working elsewhere anyway.
The UK scheme places a burden on free port consortia and local government to prevent these displacement activities, and the government has committed to monitor them in the future.
Not that that uncertainty prevents the prime minister and the free port consortia from making big claims about the benefits their ports will bring.
For example, Sunak took to Twitter following the announcement of two new Welsh Freeports last month in anglesey and the “Celtic Freeport” in Port Talbot and Milford Haven saying they could create “20,000 jobs.”
I asked Number 10 how Sunak had arrived at that number and they told me that it was an intermediate figure between the evaluations that the offers themselves had made. Therefore, the government relies on the estimates of the winners of the free port tender, who clearly have an interest in not underselling.
I then asked the freeport bidders how they arrived at the numbers, and both declined to give any specifics, citing commercial confidentiality.
Anglesey said its number of “up to 13,000” jobs was based on the Center for Business and Economic Research (CEBR) model and relied on “trade impacts” by mapping the increase in free port on historical Holyhead data. . But the statement he provided was not specific enough to be subject to expert analysis.
However, Anglesey’s focus on commercial profit was a bit strange, as, as the FT has done reported before — these traditional benefits of a free port (through the so-called ‘tariff inversion’) are really minimal.
Celtic Freeport also declined to provide enough detail to truly assess its estimates, except that it follows Treasury “Green Book” guidance and relates to the downstream impact on net-zero industries and offshore wind opportunity assessment.
It is unclear what Celtic’s claim to support “16,000 new green jobs” is based on and whether those “new” jobs can be attributed to the freeport.
That is, if a welder or engineer comes to work in Celtic Freeport as a result of a subsidy to encourage offshore wind, how do you know they wouldn’t have been working elsewhere in the UK? Is it really a “new” job? Or would they have been working anyway and without benefit? Honestly, even with the best efforts, it can be hard to tell.
The broader point is that there is not much transparency. Sunak himself has a way of faking the numbers. His CPS report claimed that free ports could create 86,000 jobs, but that figure was derived simply by taking the number of jobs in US free ports and then adjusting, pro-rated, for the US labor force. United Kingdom.
As the IFS dryly notes, Sunak’s figures were based on “significant methodological flaws”, not least because US freeports (where the tariff reversal is real) are a very different proposition to UK freeports. .
The IFS also notes that when the House of Commons International Trade Committee asked the government in the summer of 2021 to publish its own assessments of the costs and benefits of free ports, it refused to do so. I asked Downing Street if it has since. He hasn’t.
Given that this is such a landmark government policy, and it will receive up to £75m in annual tax breaks and £25m each in seed funding, it does not seem unreasonable to expect the government to provide the basis for its calculations of how this will be money well spent.
At the moment it is too early to tell. The independent fiscal watchdog, the Office for Budgetary Responsibility, has said that based on past performance, the benefits of free ports will be too small to measure, with most activity going to be displacement.
The IFS is a bit more optimistic in its article, particularly on the localized advantages of free ports, but notes that activity within free ports will always be difficult to measure, as we never live in the counterfactual of how much of that activity would have occurred. anyway.
That’s a roundabout way of saying we’ll never really know. Which, I suspect, is exactly what the government wants.
Brexit in numbers
A survey of decision makers in 750 UK-based companies that trade internationally, conducted by Deloitte’s Opinium for 2023 Survey of Attitudes towards Trade, found that 74 per cent of participants whose companies traded in Europe saw a negative impact on EU trade as a result of Brexit. About a third said trade with the rest of the world had made up for those losses. But net-net, is negative.
This sounds strongly with an Institute of Directors political document released this week that was based on a survey of 580 IoD members conducted in September 2022.
It found that: “Brexit has affected the ability to export both by creating barriers to trade and by increasing competition from EU-based companies. Some companies are trying to refocus on new markets, but it’s not easy and it feels second best.”
Both documents point to two basic truths about Brexit. One, it’s not going away (trade barriers are structural and permanent) and two, it amounts (as a roomful of CEOs I spoke to this week said privately) to low-grade but persistent erosion of the UK. . competitiveness. But the frog is being boiled, not spattered.
This, I fear, is why, unless we get some political honesty, which I doubt (see above), facing the costs of Brexit will continue to be very difficult.
And finally, a tip for your post-Easter lunch journals. My colleague Stephen Bush and I will be taking part in an exclusive webinar for FT subscribers on: Is a Labor victory over the Conservatives inevitable? (April 19, 1pm-2pm BST — sign up here)
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