Free ports: the government’s latest bright idea just distracts from more serious Brexit challenges

The word “free” has a special place in the hearts of those wanting to leave the EU deal or none. A UK free of EU regulations has long been a core part of the rationale for Brexit. UK Free Trade Agreements have increasingly joined the narrative as a reason to reject the proposed Withdrawal Agreement. Completing a trinity of UK freedom outside the EU we now have the possibility of up to 10 free ports, as announced last week by the new Secretary of State at the Department for International Trade, Liz Truss.

The idea of freedom from EU regulations has long been dogged by the failure of most Brexiteers to name any specific regulations they want to repeal on departure. Free Trade Agreements don’t actually yield huge economic gains, and would better be described as preferential trade agreements, providing improvements on World Trade Organisation terms as long as you know what to ask for to benefit your economy. Free ports similarly turn out on further investigation to be a slightly less than overwhelming answer to the question of what the UK should do after Brexit, in particular how to make up economically for increased tariffs and other barriers to EU trade.

Essentially free ports are zones of the country, designated by the government, where goods may arrive, be reconfigured, and subsequently exported without any import tariffs being applied by the host nation. They are usually sited at ports or airports, and typically in addition to a tariff-free status a variety of regulations and taxes are relaxed, to increase the attractiveness of establishing processing facilities there. Another popular activity within such areas is storage, which has led to concerns that items such as fine art are often held in free ports as a tax avoidance measure.

The EU has concerns about free ports, but there are a number in existence across member states. The UK similarly had free ports until 2012, including at Prestwick Airport and the Port of Tilbury. They were not seen to add significant value to the economy. One of the main reasons for this is that free ports don’t affect the tariffs applied by other countries, so in the event of a no-deal Brexit, goods coming from a UK free port would still be subject to EU tariffs. They are also subject to UK tariffs if brought further into the country.

Where tariffs are high free ports can be very advantageous. Back in 1948 when the General Agreement on Tariffs and Trade, the forerunner to the WTO, was created, the average tariff applied by participants was around 25 per cent. But now it is around 5 per cent. Generally tariffs are also higher for agricultural produce than other goods, while free ports focus on the latter. The UK is unlikely to suddenly become a high-tariff country, meaning that there is little benefit to be had here.

In its announcement DIT focused instead on the possibility of free ports reducing unnecessary regulation. No specific examples were given and considering that this will be UK regulation, one has to wonder whether it wouldn’t be more effective to find what is unnecessary for the whole country and just remove that. The lack of detail however suggests no real thought has been given to this aspect. There have been suggestions that these zones should be given tax advantages, which would certainly help to attract business, though probably only from other parts of the country. Indeed one can understand local leaders such as the Tees Valley Mayor Ben Houchen wanting to attract free ports to their area. But this would probably take jobs from inland areas less likely to be designated, and probably wouldn’t be seen as fair across the country. Equally there are EU and WTO rules about providing state aid, though the latter conditions less stringent. More importantly, in terms of international trade, preferential access for any goods produced in free ports within a Free Trade Agreement will have to be negotiated. One could imagine, for example, the EU wanting to be more stringent about allowing tariff-free access for goods from free ports than for those which paid UK tariffs, not least because of the concern that otherwise they could just be used as transit points for cheap goods from China. Individual trade deals are also likely to involve state aid clauses which may restrict free port activity.

When looking at the global experience of free ports the UK government cited their apparent success in the US, where 420,000 jobs have been created. However these have come in 250 separate areas, meaning on average less than 2,000 each. Significant—but hardly an economic game changer for the whole country, especially when you scale down. There is also some suggestion that such jobs have mostly been relocated from elsewhere in the country, with little “additionality.”

So the evidence and analysis supporting the creation of free ports in the UK is sketchy at best. At worst the policy seems to be a complete distraction from the more serious effort of considering what the UK economy will look like after a no-deal Brexit, and how trade deals can make a difference to this. To take the most obvious example, the future of the UK as bulk car exporter is clearly endangered by a no-deal Brexit, and that is our largest single goods export. It is extremely unlikely that free ports will make any difference to this.

Similarly, access to sell UK services in the EU is likely to be reduced. Again it is unlikely that free ports will make a difference here, and UK companies are unlikely to get any significant new access from a US trade deal. There are potential opportunities from a Chinese trade deal, but that is currently rather low down the priority list.

Despite the popularity on the Brexiteer side for solutions involving the word “free,” free ports are a gimmick. They answer no fundamental questions, provide uncertain benefits, and may even increase resentment in the rest of the country. Unless any further rationale is provided they seem to be a solution in search of a problem.