Governments tend to be keen to encourage free trade and often plan new zones to this end. We currently have 24 such enterprise zones in England, which enjoy light-touch regulation and subsidies designed to stimulate business. And earlier this month, the government announced the location of eight new zones with similar features, known as freeports, to be set up in England.
Some 30 areas had vied to be selected, each attempting to demonstrate how a freeport would bring economic opportunity to the region. The eight locations chosen—East Midlands Airport, Felixstowe and Harwich, Humber region, Liverpool City Region, Plymouth, Solent, Thames and Teesside—were also judged by how badly they had been hit by Covid.
Freeports, which can span up to 45km across, are usually located around airports or shipping ports. Although they are physically within a country’s territory, they are outside its customs border, and goods that come into freeports are not subject to the usual tariffs upon arrival. Once they leave the freeport, if they are moved to elsewhere in the UK, the charges are paid then—but if the goods are immediately sent abroad, the charges are not levied. Freeports, unlike freezones, are specifically intended to encourage the importing, processing and re-exporting of goods.
The UK has had freeports before: seven operated in Britain at various periods between 1984 and 2012, when the relevant legislation expired. But since the UK voted to leave the EU, the idea of creating freeports has been raised by the government and advertised as a benefit of Brexit. Although we did have freeports before Brexit, critics say EU laws hampered their ability to galvanise trade. Chancellor Rishi Sunak wrote in 2016 that after Brexit, freeports could “increase manufacturing output, create employment regionally where it is most needed, and promote trade,” as well as signalling Britain’s openness to the world. While it remained in the EU, Britain’s ability to set its own customs duties and financially support manufacturing activities in freeports was constrained, Sunak argued. But once we left, he predicted that freeports in deprived areas could create up to 86,000 jobs, mostly in manufacturing, which would increase productivity, wage levels, and employment. Was he right?
“The modern idea of a free zone as a completely liberalised area within a country isn’t really possible within the EU,” agrees Victoria Hewson, research associate at the Institute of Economic Affairs. “The EU has a very specific set of rules and regulations, and you can’t really deviate from that.” She points out that EU state aid rules can restrict attempts to grant tax relief to specific areas of a country—although the WTO subsidies agreement and our free trade agreement with the EU still prevent any freeport becoming “a wild west—a completely lawless area.”
It’s worth noting, however, that freeports can indeed become hotspots for money laundering and tax evasion: the Geneva freeport reportedly contains a vast art collection, counting more than 1,000 works by Picasso, whose ownership remains opaque.
In his March Budget, Sunak said that the different rules applied to freeports will “make it easier and cheaper to do business.” Companies operating within the freeports will be offered temporary tax breaks, including reduced national insurance for new staff and reduced tax on existing property when they buy new buildings.
But the benefits of freeports tend to be concentrated in their immediate geographical areas. “Anyone who invests [in a freeport] or sets up a business there will likely get tax advantages and will get some form of reduction in red tape, which is usually to do with planning,” says Catherine Barnard, a law professor at Cambridge University. “And the businesses there will generally get better-quality infrastructure: both in terms of roads, and also the quality of the infrastructure within the freeport. But the evidence of them helping the UK as a whole is not strong.”
Worryingly, US research shows that freeports tend to be “economically attractive actors, like large vacuum cleaners which suck in business from the surrounding area,” Barnard adds. The risk is that they can harm the wider region if jobs are not being created but simply moved into the free zone.
David Henig, UK director of the European Centre for International Political Economy, describes freeports and free zones as simply “areas of government focus.” “I remember with the London Olympics, it was about bringing business to East London,” he says. “The government spent lots of money in an area of East London that wouldn't have [received it] otherwise—that's what Ken Livingstone used to say. For the places involved, they get a lot of perks.”
One beneficial effect of freeports mentioned by the Department for International Trade is so-called “tariff inversion.” In some cases, components brought into a freeport would have high tariffs on them, were they to leave the zone. But when the components are combined to make a new product inside the freeport, that product can be subject to cheaper tariffs when moved outside. (This benefit can be seen in the US, for example, with cars, where individual parts face higher tariffs than the whole product). But this argument does not work in the UK, Barnard says, as most of our tariffs on component parts (excluding agriculture) are relatively low. Indeed, a University of Sussex review from July 2020 found “no evidence of significant opportunities to exploit tariff inversion”—with one main exception, dog food.
There are an estimated 3,500 freeports across the world. They are particularly useful in developing countries, where they can help to bypass difficult trading rules. But Henig says such advantages do not apply in the UK. “We don't have high tariffs, we're not really a heavily corrupt country, we've got plenty of places where you're going to have manufacturing. There is no obvious specific benefit.”
Hewson acknowledges that the traditional streamlining role of freeports is limited in this country. The real reason for modern-day freeports, she says, is that they provide an opportunity to trial changes to regulatory reforms. “You could look at working-time regulations; you might liberalise employment and workers’ legislation within the freeport,” she suggests. “Planning is a huge one—I was really pleased that the chancellor confirmed that there will be planning liberalisation associated with the new wave of freeports.”
In nations which have restrictive trade practices and regulations, a successful zone free of those limitations can serve as an example to the rest of the country, Hewson says. “There’s no reason why that needs to only be applicable in developing countries. If planning liberalisation gives a real boost to the economy on Teesside, then that’s a really good way of signalling to the wider electorate what planning reform can do. [A freeport] is almost like a petri dish to demonstrate how particular reforms can be beneficial to the country.”
But even if they serve as useful experiments, creating eight new freeports will require great expense and effort for little obvious direct economic gain. Economic zones have had some success in regenerating parts of London, Barnard says. “But then the question is, how much public money has been pumped into these areas? There was some evidence that for every job which was created in the economic zone, it cost the taxpayer £17,000. That's an awful lot of money per job.”
It’s not hard, however, to see why freeports suit the government’s political agenda. “They would like to show that there is a Brexit dividend, and this would be a very concrete way of demonstrating that,” Barnard says. Even if freeports only move business around the country, diverting economic activity from affluent areas to worse-off places could be seen as fulfilling Johnson’s “levelling up” aspirations—although there may be no net gain.
Henig suggests one reason why the government is keen to create freeports: “An American friend of mine (impeccably free market) said, ‘Well, it’s obvious why they’re doing freeports. Free is in the title!’ I think they’re just playing around with the word—it sounds good.”
Governments have set up special trade zones to experiment with regulations before. “There’s unlikely to be a significant benefit that’s not costing extra government subsidy,” Henig says. “Maybe somehow you find the magic formula. But it’s very unlikely.”
