Brexit: Labour claims trade deal blunder will freeze freeport firms out of export markets

Labour has accused trade secretary Liz Truss of a “catastrophic blunder” which could mean that UK companies which sign up to the government’s flagship freeport programme will be shut out of export markets worth £35bn a year.

Rollover free trade deals signed with 23 countries including Canada, Switzerland, Norway and Singapore feature clauses specifically excluding manufacturers benefiting from freeport tax breaks, said shadow trade secretary Emily Thornberry.

She said this meant companies taking advantage of new freeport zones at East Midlands Airport, Felixstowe & Harwich, Humber, Liverpool City Region, Plymouth & South Devon, Solent, Thames and Teesside will have to pay tariffs at potentially punitive rates on exports to these countries, which together make up almost 10 per cent of the UK’s global export market.

But a government spokesperson denied there had been an error, insisting that companies will be able to choose between benefiting from either the “duty drawback” arrangements available to them in freeport zones or the preferential tariff rates negotiated in the free trade deals.

Boris Johnson has promoted freeports as a key benefit from Brexit, even though the UK was able to operate them as a member of the European Union and did so from the 1980s to 2012, when the Conservative-led government decided not to renew licences.

Manufacturers based in the zones will be allowed to import raw materials and components duty-free before converting them into finished products for export around the world. 

The prime minister and chancellor Rishi Sunak believe they will provide a boost to local economies, though some experts believe they will simply relocate economic activity from one area of the country to another and offer companies an opportunity to minimise tax.

The rollover trade deals signed by Ms Truss aim to reduce the economic damage from Brexit by allowing UK companies to continue to enjoy the tariff-free trade available to them while Britain was an EU member.

But trade ministers failed to remove “duty exemption prohibitions” contained in 23 of the agreements. These prohibitions state that any business which has not paid duty on its imports cannot benefit from reduced tariffs on its exports, potentially affecting all manufacturing firms taking advantage of the freeports initiative.

Ms Thornberry pointed out that a warning about the impact of the clauses was included in the small print of a Treasury prospectus issued in November last year inviting bids for freeport status.

But Ms Truss went ahead to sign a further 10 deals including duty exemption prohibitions even after the Treasury warning was issued. Only one deal, with Turkey, included a restriction on the scope of prohibitions which mean they will not apply to the vast majority of UK exports.

Ms Thornberry said: “When I asked Liz Truss recently what she was doing to promote the nation’s new freeports, I was told in response that it was a ‘domestic policy’ and not something her department was focused on, and now I fear that we are seeing the cost of that inattention.

“Last November, when the Treasury invited applications for its new freeports scheme, the small print warned potential bidders of the prohibition clauses contained in several continuity trade agreements the Department of Trade had signed in the previous two years.

“But despite that warning, Liz Truss went on to sign trade agreements with 10 more countries containing the same clauses, including key markets like Canada, Singapore and Mexico.

“It would have taken an hour of discussion and the stroke of a pen to explain the UK’s freeports policy to negotiators from these countries and remove the prohibition clauses from those agreements, and I cannot understand why Liz Truss failed to do that.

“On the surface of it, this looks like a catastrophic blunder by a minister stuck in her silo, and as a result, I fear that manufacturers in towns, cities and regions across our country who have succeeded in bidding for freeport status risk missing out on access to key markets.

“I’ve written to Liz Truss asking her to clarify the situation, and if it needs fixing, I’ve urged her to go back to the negotiating table immediately with these 23 countries and get these clauses removed before Britain’s freeports come into operation later this year.”

A government spokesperson said:“There is no error and it is not uncommon for free trade agreements to have these provisions. Businesses will not be shut out of markets we have negotiated free trade deals with. They will benefit from both our free trade programme, and also from freeports, which provide tax breaks, simpler planning restrictions and cheaper imports.

“Where these provisions apply, businesses can choose to either benefit from the duty drawback, or the preferential rates under the free trade agreement - provided they meet the rules of origin test under that agreement -  depending on what suits them best.”

Export partners affected by the prohibition clauses and the value of UK goods exports in 2019, are: Switzerland (£11bn), Canada (£5.7bn), Singapore (£5.5bn), Norway (£4bn), Israel (£1.5bn), Mexico (£1.5bn), Egypt ((£1.4bn), North Macedonia (£1.3bn), Chile (£726m), Morocco (£672m), Ukraine (£552m), Lebanon (£325m), Iceland (£321m), Jordan (£298m), Tunisia (£192m), Serbia (£169m), Georgia (£84m), Faroe Islands (£28m), Moldova (£26m), Liechtenstein (£22m), Albania (£19m), Kosovo (£10m) and Palestine (£2m).