Freeports may not sound like the most exciting policy initiative, but Cabinet members like Rishi Sunak see them as the key to boosting nationwide economic growth. If they work as well as Trade Zones in the US, freeports could help to secure skilled jobs and foreign direct investment (FDI) for the UK’s most underdeveloped regions.
The concept is simple: a business could import a material, manufacture it into a product at the freeport, and then pay the tariff (a tax on imports) when the finished product entered the domestic market. Although this was possible before Brexit, leaving the EU’s state aid regime will allow the UK to provide firms with strong incentives to locate at these sites.
What are the advantages of freeports?
Not having to pay tariffs or having payment postponed will help businesses with their cash flow, as well as reducing the administrative burden of customs declarations.
Firms based in a freeport will be eligible for reductions to their business rates, national insurance contributions, and capital allowances. This level of incentivisation should encourage firms to relocate or set up in these zones, which will boost employment and wealth creation.
The government also proposes that a freeport could be spread over multiple locations, not just a single area, with each entitled to the same incentives. This is crucial as it will allow economic activity to radiate outside of a specific area and benefit the region as a whole.
Encouragingly, proposals for freeport status have come from some of the UK’s most deprived regions, like the North East and the Humber. For example, Doncaster Sheffield Airport have announced that a successful bid would allow them to start work on a 3.5 million sq. ft manufacturing and logistics centre. Closer to home, a bid is expected for a combined freeport in the North West, which will include Liverpool’s Peel Ports, Manchester’s Ship Canal, and Heysham on Morecambe Bay.
Despite this, the government is misguided if it thinks it can ‘level up’ the country with freeports alone.
One of their central claims is that businesses will be attracted by a new tariff inversion policy. To put it simply, tariffs on intermediate goods, a part for a car engine for example, tend to be higher than those on finished products (the car). The government has outlined that firms will only have to pay tariffs on finished products entering the UK market - a supposedly significant saving. Yet in terms of the UK’s major imports, the gap between the tariff on intermediate and final products is actually negligible. This policy is therefore unlikely to attract any interest from international firms.
There is also the question of economic displacement. A recent House of Commons briefing warned that freeports don’t necessarily create new jobs, they may simply relocate a source of employment from one area to another. This means that figures around the added economic value of this initiative need to be treated with caution.
Lastly, the government hasn’t provided any estimates on how much the tax reliefs outlined above will cost. Research into the Enterprise Zones of the 1980s, a concept very similar to freeports, found that the cost per job created was approximately £30,000 in today’s prices. That money would be better spent on a universal cut in the business rates faced by small and medium-sized enterprises.
However, the deadline for freeport applications passed on the 5th of February and the necessary infrastructure will be in place by the end of the year.
So if freeports are inevitable, how can the UK get them right?
First of all, the government needs to ensure that contracts pertaining to the operation and construction of freeports are tendered to local businesses. The jobs created by a freeport in South Wales should be based in South Wales, not administered by firms in London and the South East. Secondly, the current provision for capital allowances, where taxes are cut for businesses investing in equipment, places an unnecessary burden on the Exchequer. The rate cuts and tariff relief mentioned above would provide sufficient incentivisation, so further exemptions are somewhat excessive. There are also concerns that freeports may encourage tax evasion and other illegal activity, so port operators should be given the resources to mitigate this threat.
Most importantly, the government needs to stick to its ‘lead objective’ of prioritising bids from disadvantaged areas. Accepting proposals for developments like the London Gateway will only serve to further concentrate growth in the South. Yet it’s not just wealthy regions that could have business and investment pulled out from under them. A freeport policy could shift economic activity away from a recently regenerated city like Southampton, and this would be self-defeating. The Treasury must therefore conduct thorough impact assessments into the potential for economic displacement, even if this means delaying agreed developments.
The government clearly needs to approach freeports with their eyes wide open, instead of seeing them as a quick fix for ‘levelling-up’ the country. Light-touch regulation and incentivisation will encourage enterprise, but freeports should be part of a wider suite of measures for addressing regional inequality. An astute industrial policy will only have an impact when combined with commitments to upskill workers, improve transport, and reverse health inequalities. The UK needs to approach Brexit as a process, not a one-off event, and freeports should be implemented with the appropriate due diligence.