Freeports: what are they and will they work?

The government is planning to establish freeports at eight new locations – East Midlands Airport, Felixstowe & Harwich, Humber, Liverpool City Region, Plymouth, Solent, Thames and Teesside. The idea of freeports has been a theme in Tory circles for many years now. Back in 2016, the Centre for Policy Studies, a think tank, published The Free Ports Opportunity – written by none other than Rishi Sunak himself, then just a freshly elected backbench MP. Many, however, remain unconvinced by the case being made for them.

So, what are freeports and what might the government be hoping to achieve with their introduction?

In their simplest form, freeports are areas exempt from usual tariffs, a bit like an airport duty-free zone. Goods can enter without being taxed and are only taxed on exit if they enter the host country. Tariff exemptions are often combined with other measures designed to attract businesses. In the UK’s case the Treasury has stated it is planning further tax relief and measures to speed up the planning process for freeports.

Freeport enthusiasts argue these measures will not only help kickstart growth, but also rebalance the economy geographically. Sunak’s report suggested that they could create up to 86,000 jobs – mainly in manufacturing. A report published by Mace was even more enthusiastic, claiming that the introduction of “Supercharged Freeports” could add £9 billion to the UK economy annually and create 150,000 jobs in the North.

Some proponents also like to think of freeports as a Brexit dividend, and that they were not possible while the UK was in the EU.

The problem, critics say, is that these claims just don’t hold up to scrutiny. According to Professor Catherine Barnard, Professor of European Union and Employment Law: “Current evidence suggests that what we see in freeports is not so much job creation as job relocation. For those areas that have got freeports it’s clearly good news, but on a macro level you’re just shuffling business around. Felixstowe might do well out of this, but potentially at the cost of Great Yarmouth.”

As for a Brexit dividend, “The idea we couldn’t establish freeports under the EU is simply nonsense – there are dozens of freeports in the EU.” Indeed, the UK itself had seven freeports until David Cameron’s government let them fade from existence in 2012. Barnard also added: “The UK’s new state aid regime also very closely mirrors the EU’s so we won’t be able to just shovel money into these places.”

Certainly, some of the advantages of freeports cited by their proponents seem somewhat dubious – most notably tariff inversion.

Widely taken advantage of by US freeports, tariff inversion involves getting around the fact that tariffs on intermediate goods such as car engines and pharmaceutical chemicals are often higher than the tariffs on the finished goods, i.e. cars and medicines. This creates an incentive to import the finished goods – rather than import the components and manufacture them domestically. Getting rid of the tariffs incentivises local manufacture. Notably, Sunak’s 2016 report not only proposed US freeports as a paradigm but also based its 86,000 new jobs estimate on UK freeports being equally successful.

Yet experts point out there is very little scope for tariff inversion in the UK. A report by the UK Trade Policy Observatory found that the only category of goods which might benefit from tariff inversion in the UK was products used in the manufacture of dairy, starch and animal feeds which account for approximately one per cent of the UK’s total imports in 2019.

Free port advocates appear more enthused by other reforms of the sort seen in generic special economic zones. According to Eamonn Ives, a Senior Researcher at the Centre of Policy Studies: “What I really hope is that the government takes advantage of these areas to experiment with tax reform – cuts to commercial property tax, business rates, full expensing. Reforms to planning would also be great.”

Long-term, Ives hopes these measures could be rolled out across the country after being trialled in freeports. The Treasury seems to have something similar in mind, talking of “regulatory sandboxes” which could “facilitate the trialling and testing of new technology and processes”.

A final factor to consider is that the government might be trying to make a virtue of simply shuffling things around. Regional inequality is a major issue in the UK and the government has promised to address it. Doing so might help the Conservatives hold on to the seats in the North and the Midlands poached from Labour in the 2019 election. It’s been pointed out that two freeports – Teesside and the East Midlands Airport – are located in areas where the Conservatives hold a clutch of new seats and two Tory metro mayors are facing elections in May.

Still, this would fall short of what free port advocates hope for. “If freeports simply cause economic activity to shift from one part of the country to another, one could question their efficacy as a way of getting growth going again – especially if they draw economic activity away from already struggling regions,” says Ives.

From a regional inequality perspective, the programme could also benefit from better targeting. Some genuinely deprived areas like Teesside and Liverpool stand to benefit but others like Blackpool have been left off the list in favour of the relatively affluent Solent.

Shifting growth regionally might also end up being in tension with the idea of using these areas as regulatory sandboxes; if the changes made to attract businesses to these areas are eventually rolled out across the country the comparative advantage disappears.

Whether freeports are a success or a failure will depend a great deal on what the government actually wants to achieve.