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The freeport con

The government is championing free economic zones, but experts are sceptical.

By Sebastian Shehadi

Addressing the nation in 1931, the leader of the Liberal Party and former prime minister, David Lloyd George, said: “No human system is perfect, but the system of freeports with all its faults has built up for us the greatest international trade in the world.” Lloyd George was making an impassioned speech in defence of free trade, set against an eerily familiar backdrop of rising right-wing populism and protectionism across Europe.

Today, the Conservative government is championing freeports, too. They are a key part of Boris Johnson’s much-trumpeted “levelling up” agenda. Like Lloyd George, the government claims to be fighting for free trade, and today’s campaign is driven by proponents of Brexit. Chief among these has been the Chancellor Rishi Sunak. His 2016 report, The Freeports Opportunity: How Brexit Could Boost Trade, Manufacturing and the North, criticised EU law for holding back the potential of British ports.

The UK government’s vague use of the term “freeport” refers to special economic zones, also known as “free zones”. These are designated areas within a country (inland or coastal) that benefit from special business perks, such as reduced tariffs, taxes and regulation.

The exact composition of the proposed freeports remains unclear. However, the latest government consultation – undertaken in October – says their mission is to “turbo-charge post-Brexit trade [and] create jobs, drive investment and regenerate communities”.

There are several thousand free zones around the world, the vast majority of which are in emerging markets. The Conservative government has praised the successes of freeports Singapore and Hong Kong.

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“Freeports make sense for those locations, but not for the UK,” says Peter Holmes from the UK Trade Policy Observatory. Unlike Hong Kong, the UK is not a port city located in a country where tariff rates are high. Free zones have been deployed with greatest success in less developed countries where, outside them, companies are hindered by a combination of heavy custom duties, red tape, poor infrastructure or legal instability. “Traditional free zones solve problems in the developing world that basically don’t exist in Britain,” explains Meredith Crowley, an international trade economist at the University of Cambridge.

Read more: Will the UK’s freeports project survive Covid-19?

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One of the main objectives of the UK’s freeports, as per the latest report from the government, is to simplify customs procedures and duty suspensions on goods. “But the UK already has very low tariffs and streamlined regulations, so there’s almost nothing to be gained by giving tariff exemptions,” says Holmes.

This traditional use of free zones – focused on tariff reductions – is aimed at manufacturing and logistics companies, a limited pool of economic activity. In his 2016 report, Sunak praised free zones of this kind in the United States, citing the tens of thousands of jobs they have ostensibly created.

“However, the UK doesn’t have high tariffs on intermediate goods, the kind of materials you use to process stuff into a finished car, for example. The US does, and therefore benefits more from these free zones,” explains Alex Stojanovic, a researcher at the Institute for Government.

The US context is very different. “The comparison is complete nonsense,” says Holmes. “If we apply the American model to the UK, the only real sector that would benefit is dog food, literally.” Crowley is equally scathing: “The American zones are basically a tax relief program for larger US firms who know about, or can afford, the legal costs of becoming part of a free zone.

“It’s not that many jobs were being created by the existence of the free zones. Companies just realised they could move their factory – and thousands of workers – into a zone, on paper. Then, the US just draws a line around them,” she adds.

There is also the fact that the vast majority of business activity in US free zones goes towards production and warehousing, according to Sunak’s 2016 report. “The UK regions outside of London need free zones that attract value-added companies, not more low-skilled assembly-type jobs. R&D centres and professional services don’t import parts and components, so they don’t care about tariff removals,” says Holmes.

Although tariff reductions are part of the UK’s freeport strategy, the government is also taking a broader approach akin to the enterprise zones of the 1980s and the George Osborne era. In essence, these are free zones that focus on decreasing tax, not tariffs. “Enterprise zones of the past didn’t really create many jobs, but displaced companies who just shifted their economic activity to new locations to get tax benefits,” says Stojanovic.

The only unequivocally successful enterprise zone has been the Royal Docks, which created Canary Wharf. However, the only reason it was able to generate high-skilled jobs was due to its location in London, a high-skill catchment area that benefits from numerous public transport links.

Read more: “The UK is an unequal nation”: Local leaders on the “levelling up” agenda

Freeport tax incentives will not move jobs from London to Sunderland, but from regional capitals like Newcastle to Sunderland, contends Holmes. Research from the Centre of Cities shows the importance of supporting these regional capitals, and the risks posed by spreading government investments – such as free zones – to areas of the UK that lack a sufficient base line of skills and infrastructure.

Can freeports help deprived parts of the UK attract high skilled jobs? “Depressed regions of the economy need more than a few tariff and tax cuts. There’s a much deeper problem: a lack of skills and infrastructure,” says Crowley. “Freeports are not needed to boost infrastructure, housing and education spending, or experiment with regulation such as much-needed improvements to planning permissions,” she adds. To “streamline” planning processes is one of the freeports’ key missions.

Reducing regulation just in free zones could also have negative environmental consequences. “There’s a risk of freeports becoming Wild West zones, not least as offshore havens for corrupt elites to stash artworks and launder money,” says Holmes. In this regard, Transparency International has raised serious concerns, while the EU has long been suspicious of freeports.

Despite these risks, and the hazy evidence supporting their regenerative impact, many locations have shown extreme enthusiasm in receiving freeport status. The bidding process will formally begin at the end of the year.

Stojanovic thinks that some bidder-locales are not even sure of the benefits. “But they don’t want to lose out on competitors and they take every opportunity to get extra funding from the national government.” Extra funding for local authorities is indeed sparse.

Covid-19 has made the “levelling up” of the UK’s unequal economies more urgent than ever. But Johnson’s “freeports”, whether the term is an homage to Lloyd George or not, will do little to bolster the regions in the economic crisis. 

This article originally apeared in the Spotlight report on regional development. Click here for the full edition.

Sebastian Shehadi is a senior editor at Investment Monitor.