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Any Port In A Storm? The Future For Freeports

Any Port In A Storm? The Future For Freeports
Sam Lowe

Sam Lowe

7 min read

Freeports are mentioned throughout the Government’s levelling up white paper as an innovation that will bring “jobs, investment and prosperity” to the nation. But as Sam Lowe of Flint Global writes, there’s a lack of clarity over exactly how that will happen.

Freeports, or free zones, make the most sense in countries with poor economic governance, unwieldy regulatory regimes, and high external tariffs. In such circumstances, a free port, which sits outside of a country’s customs territory and is subject to different taxes, rules, and legal requirements, can serve as relative haven for business, luring in investment and foreign capital that would have otherwise looked elsewhere. 

Fortunately, none of the above applies to the UK, a modern G7 economy, with low average import tariffs, strong rule of law, and a business-friendly regulatory environment. 

Despite the UK being a non-obvious candidate for freeport proliferation, the hunt for tangible post-Brexit benefits ­led to the 2019 Conservative Party manifesto promising up to ten freeports across the country. This promise was made good when Rishi Sunak, the chancellor and long-time freeport advocate, used his March 2021 budget statement to announce the locations of 8 freeports across England. A further two so-called ‘greenports’ (freeports with supplementary green objectives) are set to be announced in Scotland. 

But what are the benefits of being a freeport? From a customs perspective, freeports sit outside of a country’s normal tariff and taxation regime. This allows companies to import goods into a freeport without paying the import tariff and VAT that would otherwise apply. The tariff and VAT becomes payable if the good is moved out of the freeport and into normal circulation within the host country, but nothing is due if the good is instead exported out of the freeport to somewhere else. 

The ability to avoid paying a tariff or VAT opens up a number of opportunities. These include being able to set up an export-focused manufacturing hub within the freeport which makes products using foreign inputs that would have otherwise been subject to high import duties. This is effectively what happens when iPhones are assembled in special economic zones in China, and then shipped all over the world. 

Manufacturers might also set up within a freeport to benefit from something called tariff-inversion. This is when the final product is subject to a lower tariff than its inputs, meaning that firms can benefit from importing the high tariff inputs into the freeport, processing them, and then selling the final product, which would attract a lower tariff when moved out of the freeport, to a country’s consumers. The UK Trade Policy Observatory identified canned pet food as a product that could benefit from tariff inversion in the UK context. 

Other freeport opportunities include the ability to create a regional distribution hub where inventory can be stored and exported onward to multiple different countries. In a UK context, this would allow, for example, t-shirts sourced from India to be stored and shipped to consumers across Europe, avoiding the risk of double taxation: the t-shirts would not face a tariff when entering the freeport; only when moved to their destination in either the UK, EU or elsewhere. 

A more questionable ‘benefit’ of freeports is the ability to keep certain goods – such as artwork – off the radar of the tax authorities, although that will never appear in a government brochure. 

While it is possible to find examples of potential benefits to UK manufacturers from the classic freeport model, they are few and far between. This is a good thing and reflects well on the UK. Opportunities for tariff inversion are hard to identify because the UK import tariffs are generally very low for both inputs and finished goods. And where opportunities do exist, there is often no need for to relocate to a freeport to take advantage of them. 

UK customs rules already allow, for example, firms to make use of so-called duty drawback processes to reclaim tariffs paid on inputs incorporated into exported products; or to store inventory outside of the UK’s formal customs territory in so-called bonded warehouses. The benefits of using these existing customs procedures over a freeport is that they are not tied to a specific geography – they can be used or set up anywhere, without the need to physically relocate to specific parts of the country. 

And despite freeports being publicly framed as a post-Brexit opportunity, they are not new to the UK. They had just become redundant – for many of the reasons listed above – with the last one closing in 2012. 

In an implicit acknowledgement that the traditional benefits of freeports are not a large enough draw, the government has included additional incentives for firms operating out of the newly created freeports. These include stamp duty tax relief on land purchased within a freeport prior to 30 September 2026; enhanced capital allowances; time-limited employment tax incentives including employer national insurance contribution relief; business rates relief; possible government investment; and streamlined planning rules. 

There is currently little reason to assume that UK freeports will pull foreign investment into the UK that would not have happened anyway

This points to where the real benefits of modern freeports might lie. Just because freeports of the past are no longer relevant, it does not mean that modern freeports cannot be designed differently, with enhanced benefits. In a UK context, for example, freeports could be used as a regulatory/customs sandbox to test new border and customs models, prior to wider application. Indeed, in its call for companies to express interest in piloting a new “ecosystem of trust” border management system, the government explicitly welcomed applications from freeport operators and firms operating out of freeports. But there is no good reason many of these trials and pilots couldn’t be conducted at normal ports too. 

Given what we know, there is currently little reason to assume that UK freeports will pull foreign investment into the UK that would not have happened anyway. But perhaps that was never the point. Just because the macroeconomic argument in favour of UK freeports is weak, does not mean it does not make sense for individual ports and communities to bid to become one, particularly if the status attracts further government attention and investment. A cynic might also note that freeports provide a useful excuse for a government to throw money at electorally significant constituencies, with obvious benefits for those living in the constituency. 

In the context of the government’s levelling up agenda, freeports could also lead to a disbursement of economic activity throughout the UK. Although it is just as likely that freeports draw investment from equally deprived areas, or indeed other parts of the same town, as they do from more prosperous regions such as London. And it is notable just how little freeports featured in the government’s levelling up white paper.

UK freeport policy has also suffered from a lack of intra-government coherence, with a number of the UK’s rolled-over trade deals including provisions that exclude goods produced in free ports (although DIT is working to remedy this, most recently with Switzerland). 

It is also not always clear who is responsible for their successful implementation. The Department for International Trade has washed its hands of the policies, the Treasury is institutionally sceptical (despite freeports being a pet project of the Chancellor) and – going off the levelling up white paper ­– the Department for Levelling Up, Housing and Communities has other priorities. 

For now, beyond their role as useful post-Brexit soundbite, freeports are a policy without a clear purpose and vision. And until government can credibly answer the question of what exactly it is they want freeports to achieve, and how its policies will do that, the UK freeports of the future run the risk of going the same way as those of the past. 

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