Will the UK's freeport gamble pay off?

If Brexit has dominated the public debate in the UK for three years, prime minister Boris Johnson is spending effort and political capital to outline his vision for the country once the divorce with the EU has been finalised – one way or another.

Freeports – typically special economic zones established around ports, airports or other logistics centres – stand at the heart of Mr Johnson’s narrative of breaking loose from the EU to reassert the UK's role as a champion of free trade.

A clear consensus over the business case for freeports in the UK has yet to emerge, however. If the Treasury believes they would bring new investment and jobs, others think their added value to the country’s overall business proposition is limited – a first such attempt in the 1980s had little effect.

Additionally, freeports may even get in the way of a future trade deal with the EU. As they wait for Brexit to happen and prepare themselves for the policies that will follow, ports across the UK are scrambling to put forward their bid for freeport status.

‘Turbocharge’ boost

“We are exploring freeports as an innovative way to drive growth and support thousands of high-skilled jobs across the UK,” Rishi Sunak, chief secretary to the UK Treasury, said as the government established a panel to advise the government on the establishment of 10 freeports in August 2019.

Mr Sunak authored a report published in 2016 by the Centre for Policy Studies arguing that the development of freeports in the UK, based on the model of the US free-trade zone programme, would generate 86,000 jobs in areas currently lagging behind London in economic development. It also argued that freeports would widen the UK’s manufacturing base – industrial activity accounts for 10% of the country’s GDP, one of the lowest levels among OECD countries.

A more recent report by consultancy Mace, which ran a model over seven possible freeports combined with enterprise zones (urban areas that already offer tax breaks and government support) in the north of England, estimates their employment dividend could reach up to 150,000 new jobs by 2041, creating what Mr Sunak referred to as a “turbocharge” for the British economy.

Supply chain link

“There is an element of uncertainty after Brexit regarding supply chains, therefore I see a case for having some exceptions [to our customs regime] for particular industries closely integrated with European supply chains, such as the automotive industry. With freeport arrangements, things such as tariff barriers wouldn’t matter any more,” says Eamonn Butler, director at the Adam Smith Institute and a member of the advisory panel.

“At the same time, we do have a number of places along the coast that have lost their industries, or their fishing ports have been in decline because of the [EU’s] Common Fisheries Policy and perhaps they need some help to recover. If we can establish freeports with low taxes and regulation and by doing so successfully bring in FDI, then that would be an indicator that we should have more of them.”

Freeports or free zones typically offer companies a special environment where they can import and export goods free of charge, benefit from a special tax regime and deal with reduced bureaucracy. Free zones have mushroomed across the globe to number 5400 at the end of 2018, up from 79 in 1979, according to Unctad figures. Their level of success varies depending on their specific features, and the UK’s recipe for freeport success is by no means a foregone conclusion.

Few benefits?

“I see little business case for free zones in the country,” says Neil Davidson, senior analyst at port consultancy Drewry. “The extra benefits from a freeport status are narrow – and often already available in the form of, for example, duty deferment schemes. Factors that attract businesses go beyond the freeport status and entail things such as cost of labour and land, corporate taxes, existing trade volumes and infrastructure. These would define the success or failure of a zone.”

In addition, a freezone programme could get in the way of future post-Brexit negotiations of a trade agreement between the UK and the EU.

“If we still are in any serious relationship with the EU, the task of designing freeports becomes especially acute, because of the entrenched state aid rules and the reluctance of the EU to allow what they see as a move away from a level playing field, so the EU will push the issue also when it comes to negotiating a trade deal,” says Graham Mather, chairman of the World Free Zone Convention and former member of the European Parliament.

“We have to combine elements of a freeports regime like in the 1980s, with elements of an enterprise zone, and elements of a pilot regime as they are currently doing in Shanghai, where they are testing things that will run in the whole economy eventually," he adds. "In this way there is chance to persuade Brussels and address some of these concerns of a level playing field by saying that these are pilot areas and any distortion will be removed in a few years.”

Mr Mather adds that there is room for freeports to create advantages in the form of streamlined customs procedures, local tax breaks typical of enterprise zones, and a corporate tax rate closer to Ireland’s 12.5% – “if that will be our ambition” –  as long as everyone else outside the zone catches up in a few years to limit competition distortions.

History repeating?

The UK government under the late prime minister Margaret Thatcher tested the freeport model on six ports in the 1980s, but the trial was soon abandoned after internal opposition by the Customs and Excise agency and externally by the EU (then the European Economic Community). The pilot freeports also performed poorly.

Following Brexit, the UK government will have to draw on that experience – and that of free zones around the world – to find the right formula for a British freeport programme to succeed, and erase the uncertainties of the past few years.