This paper is an update from an article published in Droit Maritime Français, n° 831 in January 2021, with the permission of the editor.

 

Introduction

The UK Government’s plan to create a dozen free ports in the UK, with public support, is being finalised. Far from being an accessory, this plan constitutes the very basis of the economic offensive that this Government intends to carry out at the doors of the Union. It is about attracting, by means of competitive advantages, companies and investments not only in the logistics or transport sector, but the most diverse investors and industries, including the GAFAs, to these port locations. Creating a differential with the rules applicable in the EU is essential to this plan and the end of the application of European rules on state aid, since  January 1st, 2021, would allow it to be followed up. This makes it all the more understandable that discussions on the regulatory “level playing field” have been stalled for a long time. The UK had made no secret of its intention to regain its sovereignty in this area, even backing away from the commitments made in the Exit Treaty, while expecting a free trade agreement along the lines of CETA. The European Commission is aware of the risk that the regulatory gap between the UK and the EU poses to future trade between the Parties. In particular, the limits of the applicability of EU rules on state aid granted by a state that will no longer be a member of the EU have been well recognised in Brussels. In a recently published White Paper,[1]the Commission announces the contours of a future response by the Union and its Member States to public support granted abroad to companies operating in the EU. This development confirms a turning point initiated with the EU regulation on the control of foreign direct investment[2]and is not directly linked to Brexit. It remains to be seen if and when this new approach will materialise. It is all a question of effectiveness, particularly in the context of UK-EU relations in the sector of interest to us, which is vital in a globalised economy. In this article, after clarifying the content of freeports and the issues at stake, we will examine how the framework adopted in the 24 December 2020 agreement would allow for the regulation of the state aid in question, before examining the possible consequences of the European Commission’s White Paper on foreign state subsidies.

 

 At the heart of the Global Britain vision is the confirmation of the plan to create 10 freeports in the UK

Regularly announced by the Chancellor of the Exchequer[3], the project to create free ports underwent a new phase in the autumn of 2020 and has now been confirmed in greater detail. After a reminder of its genesis, we shall endeavour to identify the avenues now being pursued by the British Government.

 

 1.1. What does the UK Government mean by “freeports”?

Even before his appointment as Chancellor of the Exchequer, Mr. Rishi Sunak had a project for the creation of free ports, which can be considered as emblematic of the vision of “Global Britain” carried by the Brexiters. If this project has evolved with time and discussions with the business community, it should not come as a surprise to observers. [4]

The contours of the concept still needed to be defined. Indeed, the concept of free port has had various variations and successes. Classically, free ports are logistical interfaces located outside the customs territory of a State, where the storage or processing of goods received from abroad is carried out before the goods are forwarded abroad.[5]The advantage of this concept is that various logistical and processing operations can be carried out duty-free. Such free ports exist all over the world, particularly in Asia but also in Europe. The largest container ports in the world have this character. Some have primarily a hub function, with containers being immediately transferred to another vessel, but these free ports often house processing facilities for products that can then be forwarded to the hinterland or re-shipped after processing.

The European regulations applicable to this type of free port have been relatively undeveloped, although they were introduced early on. The directive adopted in March 1969 [6]in the context of the creation of the Common Market bears witness to a customs harmonisation approach centred on goods with a view to facilitating their free movement. This feature is also reflected in the European regulation of July 1988 on free zones and free warehouses. [7]

In addition to these free ports in the classical sense of the term, enterprise zones have emerged in many states. The common regulatory feature of these areas is a reduction or exemption from various taxes or social charges normally borne by the companies concerned. Often created by states in urban areas with economic backwardness or abnormally high unemployment, these enterprise zones are usually justified by social or economic policy arguments and have a temporary status. The issue of customs duties is not concerned. France[8]and later Italy[9], were pioneers in this field with tax and social urban free zones.

The EU addressed the French and Italian enterprise zones and their imitators in other European cities through the EU state aid rules and considered them compatible with the current Article 107.3 TFEU. Overall, the aim was to revitalise the local economy with little or no impact on trade between Member States.

However, if they are created in or in the immediate vicinity of a seaport, these enterprise zones will be able to benefit from a combination of advantages: the presence of logistical tools and services, exemption from customs duties, exemption from taxes or social charges will make it possible to attract investors and companies carrying out an international activity, with the social dimension being more or less a priority, to the benefit of industrial synergies and economic attractiveness.

It is all of these considerations that seem to inspire the British Government’s project for the 10 free ports in question, within the framework of an offensive industrial revitalisation strategy of international scope.

1.2. Clarification in October 2020

 

In October 2020, the UK Government published the results of the industry consultations launched in February 2020 on its project, the responses it is making to them and reaffirmed its determination to launch the tender process for the ten free ports in question. [10]

In the letter formalising the UK Government’s response to the consultations, the Chancellor of the Exchequer firstly confirms the overall scope of the UK’s ambition and its link to leaving the EU:

« In seizing the opportunities of leaving the European Union, we want the new Global Britain to be a hub for international trade and investment, partnering with our friends around the world as an independent trading nation. Revitalising our port regions through an ambitious Freeport policy is a key component of realising this vision and unlocking the deep potential of all nations and regions of the UK. » [11]

On reading the commitments made by the British Government to the Parties invited to apply for the creation of one of the 10 free ports, it is clear that the project combines the advantages of free ports in terms of customs and those of enterprise zones with the full range of regulatory tools, plus public investment.

The aim is to create spaces in or near ports (and not just enterprise zones without a link to a port area). However, the plan includes multi-sited areas, including inland areas, directly linked to a port where a specific customs regime would apply.

However, this does not mean that the companies that might be located there should have a logistics or transport activity. There is no definition in the document issued by the Government of the activities that could be carried out there.

In total, the project combines the advantages of a port site with an enterprise zone regime. The plan provides for a temporary tax exemption or relief scheme for geographical areas of a maximum size of between 300 and 600 hectares per site, it being specified that the geographical sites benefiting from tax relief do not necessarily have to coincide with the duty-free port area. It will therefore be possible to attract industries or services outside the duty-free area as well as outside the port area itself.

In addition to the tax reductions, the Government will propose a specific scheme for real estate investments in the areas concerned, authorising the deduction of 2% of the investments from the annual results for fifty years. Similarly, part of the social charges linked to the employment of staff in the free ports will be covered by the State for a period still to be determined.

The Government is also committed to providing seed money to finance infrastructure investments in the ports and their environment.

1.3.Potential sites: the state of play at the end of March 2021

There are currently eight sites that would be selected as a result of the UK Government’s bidding process.[12]

• East Midlands Airport
• Freeport East – Felixstowewith Harwich
• Humber – including Hull, Grimsby, Immingham and Goole
• Liverpool City Region
• Plymouth and South Devon
• Solent – including Southampton
• Thames – combining the ports of London Gateway and Tilbury
• Teesside

The UK authorities have committed to establishing at least one such free port in Scotland, Northern Ireland and Wales, in consultation with the relevant local authority authorities. The current list is expected to evolve as a result of the selection process and ongoing consultations.

For Northern Ireland, however, there is a particular difficulty: as the territory is part of the Single Market for an interim period, EU state aid legislation continues to apply[13]and could hamper projects.

Despite some of the rhetoric from Brexiters and members of the UK Government about a future Global Britain, there is a case for the EU to take the as yet incomplete UK Freeport project seriously. 15 of the 17 container ship loops linking Asia to Northern Europe pass through a UK port.[14]The UK’s historical and commercial links with major Asian ports, especially Singapore where price fixing between shipping lines is tolerated, should give pause for thought. The UK has also just signed its first free trade agreement since Brexit with Japan.

As a counterpoint to this vast plan, it will be remembered that European competition law will no longer apply in the UK and that a reorientation of English competition law in a direction more favourable to industrial interests is on the agenda. This was the issue at stake in the difficult discussions between the EU and the UK on the regulatory level playing field, which is particularly sensitive. What competition rules, and in particular what rules on state aid, will be applicable in British free ports located at the gateway to the European market?

 

Squaring the circle: negotiations on the “level playing field”

 

The stated aim of the UK Government is to create an attractiveness differential for UK free ports by means of state aid, while concluding free trade agreements with third countries and the EU. The intervention in extremis, on 24 December 2020, of the EU-UK Trade and Cooperation Agreement defines a framework but opens the way to divergences in the future. However, commitments were made at the time of the exit signing, but these have been called into question.

2.1. Reduced commitments

In the first exit agreement between the UK and the EU,[15]which was ultimately rejected by the Westminster Parliament, the UK side committed itself to maintaining regulatory alignment with the EU on competition rules, including state aid, and even to accepting monitoring by the European Commission. [16]

The second withdrawal agreement,[17]which was finally ratified, marks a clear step backwards in this respect: only Northern Ireland will be concerned by regulatory alignment. The rest of the United Kingdom will be subject to English competition law alone. Admittedly, the adoption of the Withdrawal Act by the Westminster Parliament has enabled the incorporation into English law of most of the provisions of European competition law. But what one law has done, a new law can undo, at any time, by a new intervention of the British Parliament, since no regulatory alignment has been subscribed in this matter.

It was furthermore doubtful thatthe provisions of Article 77 of the Joint Political Declaration accompanying the Exit Agreement, [18]according to which: “The Parties should in particular maintain a robust and comprehensive framework for competition and state aid control that prevents undue distortion of trade and competition » would be of any help.

The UK Government has used the EU’s free trade agreements with a number of third countries, which do not include regulatory alignment in the area of competition law, to confirm its newfound freedom. In its own statement on the future relationship,[19]there is no mention at all of coordination with EU law. It reads:

“In line with applicable precedents, such as the CETA, the agreement should commit the parties to maintaining effective competition rules, covering merger control, the cartels and abuse of dominant position. It does not require regulatory alignment. Both sides should have the regulatory freedom to respond to new and emerging challenges in these areas. » [20] The provisions of the EU-UK agreement reached on 24 December 2020 only provide that each Party shall take appropriate measures to apply its law in its own territory. It remains to be seen to what extent the freedom that the British Government is availing itself of in this area could be limited by the action of the European Commission in the future. Indeed, the doctrine of qualified effects[21] would authorise the Commission to sanction anti-competitive practices which, although originating outside the territory of the Member States, are likely to produce sufficiently appreciable effects on the territory of the Union.

 

The special case of state aid

The setback was even clearer with regard to state aid. It will have been noted that this issue was not mentioned in the above passage. It is dealt with separately, in the previous paragraph of the UK Government’s statement, in the clearest possible terms: “The United Kingdom will have its ownsubsidy regime. » [22]

The way was thus paved, as far as free ports and their set of subsidies, exemptions or reductions in taxes or social security contributions were concerned. Indeed, unlike the other competition rules that apply to companies of any nationality, including non-European ones, the TFEU rules on state aid apply to EU Member States. They do not, however, apply to non-EU countries. As ofJanuary 1st, 2021, the UK as a state is therefore no longer subject to these rules. It is therefore unlikely that the Commission’s action will force the UK government to limit its interventionist policy in law, particularly in the free ports it plans to create.

The provisions adopted in the agreements between the EU and Japan, or in the CETA Treaty, which provide for an exclusively inter-state and a posteriori mode of dispute settlement, do not guarantee the required effectiveness in this area. [23]

The EU-UK agreement of 24 December 2020, the result of a political compromise, creates an intermediate framework between the law applicable within the EU and WTO rules.

It provides for a transparency obligation that requires Parties (in this case the EU or the UK) to publish state aid within six months of its granting. In the event that a Party fears a negative effect on trade or investment, it may request explanations and then refer the matter to a bipartite committee specialising in the regulatory “level playing field”, which would attempt to reach an agreement. This is classic interstate, a posteriori.

The UK will have to create an independent authority to control the granting of the rules, under existing UK law.[24]The UK Courts will be able to rule, under English law, on the legality of decisions to grant state aid or decisions of the independent authority. Within this judicial framework, interested parties (this time, competing companies) will be able to be heard provided that they have a right of access to the Tribunal under English law. It should be noted that there is no obligation to give prior notification of the granting of a public aid project, still less an obligation to suspend the granting of an authorisation, contrary to the rule applicable in European law.

Finally, the agreement reached in extremis is conceived as a classic instrument of public international law, valid exclusively between its signatories and not implying any legal constraint on the British Courts and even less any direct effect for the benefit of the companies concerned.

3. The Commission’s White Paper: late awareness, uncertain practical consequences

In the meantime, on 17 June 2020, the Commission published a White Paper on a level playing field for foreign subsidies.[25]Timely though not directly related to the Brexitand the no-deal hypothesis, this document attests to Europeans’ awareness of the asymmetry of economic openness and the relative rules applicable to state aid between the EU and its partners.[26]The Commission’s starting point is precisely that EU state aid rules can put European companies at a disadvantage by prohibiting aid granted by Member States, while some foreign companies can benefit from aid from third countries. Competition in the internal market is therefore distorted and the White Paper proposes some preferred ways of remedying this, the effectiveness of which should however be examined.

3.1. How should aid granted by foreign states be treated?

Generally speaking, the White Paper confirms a shift in the strategy of the EU and the Member States, as announced by the European regulation on the control of foreign direct investment.[27]While the opening up of the European market is not called into question, the emphasis is placed on the need to monitor the equality of conditions of competition with a view to re-establishing, where and when necessary, mutually beneficial trade relations. Therefore, with the increased interdependence of economies through the globalisation of trade in goods and services, the awareness that foreign subsidies can distort competition within the EU.

In this area, however, the EU has so far lacked an appropriate legal framework. The White Paper therefore intends to propose measures targeting financial support granted by third country authorities to companies in the EU, either directly or through their parent companies established outside the EU.

Due to the inapplicability of EU state aid rules, only WTO instruments are available, on the basis of which the EU can bring a case against a WTO member state in case of violation of the SCM Agreement,[28]in particular when that state grants subsidies prohibited by the Agreement, or subsidies that harm its interests. However, this system has many limitations: not only does it only apply to trade in goods and not to services, but it does not involve any prior notification of state aid with the immediate illegality of granting it without authorisation. [29]

Hoping to complement the WTO framework, the White Paper therefore presents a set of measures to address three typical situations: on the one hand, distortions generated by foreign subsidies provided to an economic operator in the EU market (Module 1) and, on the other hand, distortions generated by foreign subsidies in the context of the acquisition of target enterprises in the EU (Module 2) and public procurement (Module 3).

In the event that distortions of competition linked to foreign subsidies are proven, the White Paper suggests remedial measures. If it is not possible to impose with certainty the reimbursement of the aid received from the third country that granted it, it is envisaged that a Member State authority or the Commission could require corrective measures of a structural nature or remedial payments to the EU or Member States, through behavioural measures.

The case envisaged in Module 1 of the White Paper is the one that will attract our attention, given the problem posed by British free ports, namely the granting of advantages in the form of subsidies or reductions in taxes or charges for companies carrying out their activities in this framework.

In the words of the White Paper, there are two options to be considered: first, the foreign subsidy would be targeted if it confers a benefit on a company established in the EU. This would be the case if one of the entities of a company operating in a UK free port was established in the EU, assuming that the UK government funding benefited the EU-based entity.

The second option, which is aimed at non-EU companies, is envisaged in cautious terms by the Commission:

“Consideration should be given to the possibility of applying Module 1 not only to companies established in the EU, but also to certain companies that receive foreign subsidies and carry out some kind of activity in the EU, such as when a company established outside the EU seeks to acquire an EU target. »

The Commission’s pusillanimity is sobering. Its aim seems clear and legitimate: to circumvent the inapplicability of EU state aid rules in order to restore a level playing field. Failing to write clearly that the new rules will apply to companies not established in the EU but operating in the EU when they have received state aid from a third country, the Commission uses the conditional and takes refuge in a limiting example: the acquisition of a company in the EU. It is clear that the Commission has identified the problem, but at this stage it seems to have doubts about being able to apply its new instrument.

 

3.2. UK free ports: the need for an adapted European response

This is where the specificity of British free ports comes in. These areas are not located in the EU, but they are actually on its doorstep.

In addition to the customs advantages of a free port, these zones will receive considerable public support both for the investment required to build them and for the social and fiscal conditions under which the companies that set up there will operate. They are designed by the UK Government to become the UK’s global interface with the EU, the hub for serving the EU with products processed from imports, particularly from Asia. But also to attract to the UK companies based in the EU, which would be likely to relocate to the UK. This applies primarily to companies operating in logistics in continental ports. But that is not the end of the plan: the establishment of technology companies in the Dublin Docklands, including the GAFAs, should give food for thought. The Brexiters‘ plan is there and it builds on the time-honoured tradition of Britain trading with the rest of the world by sea.

The issue of the regulatory Level Playing Field and dispute settlement is particularly sensitive in the case of British free ports. The immediate proximity of these tax-free areas calls for special attention, especially as it is doubtful that the White Paper currently under discussion will outline a possible future application of European rules. In any case, it is certain that the UK will strongly oppose it in the name of its claimed and recovered sovereignty.

 

Conclusion

The EU has become aware of the issue of state subsidies granted by third countries to investors and companies active in its internal market. Of course, it is primarily Chinese state-owned enterprises that are targeted. But the Brexit creates the conditions for a very specific threat: while its liberal tradition was opposed to public support for companies, the United Kingdom is about to embark on an unprecedented offensive towards the European Internal Market, via the creation of freeports accompanied by a massive plan of state aid, after having negotiated a free trade agreement with the EU.

The EU representatives do have an ace in the hole: the British plan is largely dependent on access to the Internal Market for services and products supplied from freeports. Japan’s Foreign Minister was not mistaken. The ink was not yet dry on the new Japan-UK free trade agreement when he said: « It is of paramount importance that the supply chain between the UK and the EU is maintained even after the UK’s withdrawal. »[30]

Faced with this particular but very important regulatory challenge, the EU must protect its market and its companies with an appropriate mechanism. It should be noted in passing that the eleventh hour trade and cooperation agreement has not yet been submitted to the European Parliament for ratification. Nor has the White Paper on foreign subsidies yet been the subject of a formal proposal for the adoption of a European regulation. What guarantees, in this context, could be obtained from the British Government as to the effective implementation of a state aid control mechanism in the United Kingdom, while the free port plan is emblematic in the eyes of the Brexiters? There should be no illusions in this regard. Strong tensions between Europeans and British are therefore to be expected, given the possible consequences on the activity of the continental ports of the Channel and the North Sea.

 

Philippe Corruble 

 

 

[1]White Paper on a level playing field for foreign subsidies, COM (2020), 17 June 2020

[2]EU Regulation 2019/452 establishing a framework for screening direct investment in the Union, OJEU, L 79 I, p. 1

[3]See for example Rishi Sunak, Statement in the House of Commons 10 February 2020. Mr. Sunak, prior to joining the Government, was the author of a report recommending the creation of free ports.

[4]Adam Branson, ” How the UK is preparing for a fre-port boom “, Construction News, 9 April 2020

[5]A. Lavissière, L. Fedi, and A. Cheaitou. 2014. “A modern concept of Free Ports in the 21st century : a definition towards a supply chain added value.” Supply Chain Forum : an International Journal 15 (3): 22-28.

[6] Council Directive 69/75/EEC of 4 March 1969 on the harmonisation of the laws, regulations and administrative provisions relating to free zones.

[7]Council Regulation (EEC) No 2504/88 of 25 July 1988 on free zones and free warehouses Official Journal L 225 , 15/08/1988 P. 0008 – 0013

[8]The Urban Free Zones scheme was adopted by Law No. 96-987 of 14 November 1996 on the implementation of the Urban Revival Pact. This derogatory tax and social security exemption scheme was first approved by the Commission on 23 April 1996 (State aid N 159/96) for a period running from 1 January 1997 to 31 December 2001.

[9]See Commission Decision No 3446/2009 of 28 October 2009 on the Italian regime

[10]HM Government, Freeport Consultation, Response to the consultation CP 302, October 2020

[11]ibid, Ministerial Foreword p.5

[12]Thierry Martin, La Tribune, March 23rd 2021

[13]Article 10 of the IE/NI Protocol provides that “the provisions of Union law listed in Annex 5 to this Protocol shall apply to the United Kingdom, including with regard to measures supporting the production of and trade in agricultural products in Northern Ireland, in respect of measures which affect that trade between Northern Ireland and the Union which is subject to this Protocol“.

[14]A. Braakman, Hub and Spoke cartels in the container liner shipping industry (2017) 23 JIML, p. 51

[15]Draft Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community, as agreed at negotiators’ level on 14 November 2018

[16]See Herbert SmithBrussels, 28 January 2020, The View from Brussels: Some critical issues for the future trade relationship Legal Briefings, Eric White and Lode Van Den Hende

[17]Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community (2019/C 384 I/01)

[18]Political Declaration setting the framework for future relations between the European Union and the United Kingdom, General Secretariat of the Council, XT 21095/18, 22 November 2018

[19]The Future Relationship with the EUThe UK’sApproach to Negotiations. Presented to Parliament by the Prime Minister by Command of Her Majesty, February 2020CP211

[20]Emphasis added by the author of this article.

[21]See CJEU Grand Chamber judgment on 6 September 2017, Case C-413/14 P Intel v Commission and AG Wahl’s conclusions in that case.

[22]Art. 63 of the UK Government’s declaration, supra note 18.

[23]For example, the provisions of the EU-Japan agreement require states to declare aid (already) paid only every two years.

[24]At the time of writing, 30 March 2021, this authority has still not been designated.

[25]Precedence, see note 2.

[26]See press release from Thierry Breton, Phil Hogan and M. Vestager, European Commissioners for Internal Market, Trade and Competition respectively, Commission adopts White Paper on foreign subsidies in the Single Market, Brussels, 17 June 2020 IP/20/1070

[27]cited above. See note 3

[28]Agreement on Subsidies and Countervailing Measures

[29]This is in contrast to the European state aid regime applicable in the EU, which also allows a company to bring an action before the courts of the Member States to claim compensation for its losses.

[30]See Dr Minako Morita-Jager, « UK-Japan Trade Deal will provide political cover – but only limited trade boost » Politics.co.uk, October 27th 2020