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The European Union fears the UK’s new freeport regime could drive investment away from the bloc in the latest clash between the two over London’s post-Brexit policies.
European Union officials want to ensure the policy, championed by British Prime Minister Rishi Sunak as a backbench MP, is consistent with a post-Brexit trade deal and will raise his concerns at a meeting this week, people briefed on the matter said.
The UK has designated eight areas as freeports, allowing them to benefit from tax breaks and easier customs controls. London hopes to become a manufacturing hub, importing components tariff-free.
The post-Brexit Trade and Cooperation Agreement (TCA) allows for tariff and quota free trade between the UK and the EU. The UK refused to harmonize its rules with Brussels but agreed to prevent “distortions of trade or investment” by ensuring a “level playing field for open and fair competition”.
The two sides set up a number of joint committees to monitor a level playing field and address other concerns about the smooth running of the accord. The European Commission will raise its concerns over Freeports at a Trade Partnership Committee meeting on Thursday in Brussels.
Potential problems with the policy were highlighted last month in a briefing paper by the UK Trade Policy Observatory (UKTPO) at the University of Sussex. It warned that “tax incentives offered by UK Freeports may be perceived by an importing partner as an unfair export subsidy”.
The UK’s independent spending watchdog, the Office for Budget Responsibility, said last October that Freeports was likely to cost the Treasury £50 million to fund tax breaks and would have some positive impact on the economy.
UKTPO peer Peter Holmes said given such an independent assessment of Freeport’s value, it was “highly unlikely” they would prove distortive to trade, but the commission needed to show it was alert to the risk.
“I would be surprised if these subsidies had any significant impact on exports, but the Commission will need to show that it is vigilant, not least so it can say that they are carried out simultaneously when dealing with other subsidizing trading partners. , such as China,” he added.
Under the TCA UK goods can enter the EU tariff-free if a sufficient percentage of their content — around half — is “made in the UK”.
The agreement does not restrict the input of goods that benefit from so-called “duty clawback” schemes like Freeports, which qualify for zero-tariff access to the EU — but it does include a clause that allows for a review after 2023.
Sam Lowe, a partner at Flint Global, a consultancy specializing in trade, said it was “difficult” to see how freeports between the EU and the UK would become an issue.
“The EU has expressly exempted goods benefiting from ‘duty drawback’ in other trade deals, so the Commission knew what it was getting into – and it has a mechanism in the TCA to address this if it becomes a problem,” he said. . .
Brussels has previously complained about the UK’s energy policy to a special committee. Last year it accused London of subsidizing offshore wind farm developers who bought turbines partly made in the UK.
In March, it launched a case on the matter at the World Trade Organization, but the case was dropped in July after the UK clarified its policies.
The commission declined to comment. The UK Department of Business did not return a request for comment.
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