Will Poole soon become a ‘freeport’? Yes, if Drew Mellor, Conservative leader of Bournemouth Christchurch Poole (BCP) Council, gets his way. As the Brexit transition period approached in December 2020, Drew Mellor announced plans for a joint bid to government from Bournemouth Airport and the Port of Poole. The bid also includes the Dorset’s local enterprise partnership (LEP) and the local council is providing £50,000 to support its preparation. But what is a ‘freeport’? And who will benefit – or lose – if Poole becomes one of the ten new freeports in the UK?
We need to go back to this time last year – February 2020 – to see what the government thinks. That’s when it released its ‘Freeports Consultation – boosting trade, jobs and investment across the UK’. The ministerial foreword, signed by Sunak (Chancellor), himself an author of a 2016 paper promoting freeports (see below), Truss (International Trade), Jenrick (Housing, Communities and Local Government) and Shapps (Transport), tells us:
“We have just turned the page on a great new chapter for this country. Freeports will let us sail onto our next, great, prosperous destination…Out of the EU and into the world.”
Conservative Cllr Philip Broadhead, BCP cabinet member for regeneration, the economy and strategic planning is convinced. Speaking after the meeting at which the council decided to go ahead with a bid in January 2021, he claimed that:
“There are a lot of benefits to being a free port… It opens up a lot of options and a lot of paths for the economy.
There are also benefits to the local authority, such as business rates retention and as a massive platform to build on.”
Labour Cllr Lewis Allison took a different view:
“This proposal will do nothing to benefit working people in BCP. The claim made by government and Councillor Mellor about the positive economic benefit of these zones are fictional. The damage caused to council income, wages and job security for local workers, and to existing small and medium businesses in BCP will be catastrophic.”
So what actually is a freeport? And do their mooted economic benefits really stack up?
Freeports – also known as free zones and free trade zones – are areas where a country’s normal customs and tax rules do not apply. Goods can be imported into a defined area – such as around a port or airport – without the importers paying tariffs or having to fill out extensive customs declarations. These goods can then be manufactured into other products by businesses based in the area, adding value, before being re-exported. If the products are transferred into the domestic market, however, they will face all normal customs and tax measures. Freeports are similar to enterprise zones, in that they both have special regulatory status, although the main purpose of freeports is to promote re-export.
In the main, those promoting freeports argue that by reducing regulatory costs, a freeport area will become more attractive to importers, which in turn will lead to an expansion in locally based businesses engaged in reprocessing and re-export. This, in its turn, will lead to further job creation. Supporters argue that designating freeports in areas of relative economic deprivation will allow these places to ‘catch up’ with the rest of the country by attracting innovative companies and promoting higher skilled and higher paid jobs.
Critics of freeports, however, are concerned that national and local tax revenues will fall as businesses start to relocate from normally regulated areas. Some have concerns over the potential for increased smuggling. Furthermore, critics suggest that the evidence for new net job creation is limited and that much employment ‘gain’ will in fact be due to relocated jobs from elsewhere in the country (with consequences for those areas the people and businesses have left).
The evidence base
Most recently, freeports have been promoted in The Centre for Policy Studies’ ‘The Freeports Opportunity – How Brexit could boost trade, manufacturing and the North’ (2016), written by the current Chancellor Rishi Sunak, and in the Mace Report ‘Supercharged Freeports – the ultimate boost for Britain’s economy’ (2018).
In his report, Sunak emphasised the rebalancing of the economy to the benefit of deprived areas that could occur with the introduction – or re-introduction – of freeports:
“Free port jobs would be created in areas outside London where economic need is higher. Of the UK’s 30 largest ports, 17 are in the bottom quartile of Local Authorities when ranked by the ONS Index of Multiple Deprivation and three quarters are in ‘below average’ Local Authorities.”
Poole is not one of the 30 ‘largest ports’ named, although they may be keen to expand. This would be achieved by combining forces with Bournemouth Airport and establishing a ‘freight corridor’ between the two sites.
In calling for ‘supercharged freeports’ – essentially, a combination of freeports and free zones across the north of the UK – the Mace Report also emphasises economic rebalancing as a major benefit.
According to both reports, rebalancing will not only be geographical but sectoral, as manufacturing would most likely gain, rather than services.
The government’s freeport consultation also promotes ‘tariff inversion’ as a benefit:
“If the duty on a finished product is lower than that on the component parts, a company could benefit by importing components duty free, manufacture the final product in the Freeport, and then pay the duty at the rate of the finished product when it enters the UK’s domestic market.”
Both reports suggest that being in the EU made such a focus difficult or unviable. But in fact, the UK had a number of freeports up to 2012 – including Southampton and Liverpool – when the legislation allowing for them was not renewed. There are currently 24 free zones in England and about 80 free zones across the EU. In the latter (EU) case, state aid rules still apply and one of the arguments for Brexit was to allow the UK government to decide state subsidy priorities without reference to EU regulation. However, the trade deal agreed with the EU may restrict how far the UK can actually go in subsidising home industries to undercut EU business, before facing retaliatory measures.
The UK Trade Policy Observatory (UKTPO) is a partnership between the University of Sussex and Chatham House, an independent policy institute for discussion on global affairs. The authors of ‘What is the extra mileage in the reintroduction of ‘free zones’ in the UK?’ (February 2019), argue that:
“free zones should not be seen through the prism of post-Brexit opportunities as a tool that – unfettered by the EU state aid rules – can deliver a major boost to economic growth potential after Brexit.”
Three major reasons are given:
1. Where tariffs are low, benefits of free zones are also low, given that suppliers do not have duty-free access to final markets;
2. Widespread use of free zones might attract significant investment, but insofar as these areas are in fact areas of ‘hidden state subsidies’, increasing their numbers will almost certainly contravene either World Trade Organisation rules or any trade agreement signed with the EU;
3. The evidence for ‘net’ job creation is limited and many free zones may simply attract businesses and employees away from other parts of the country (arguably, this may be seen by some as a ‘benefit’, if it helps more deprived areas).
In a UKTPO July 2020 paper on ‘tariff inversion’, ‘Tariff inversion in UK Freeports offers little opportunity for duty savings’, the authors conclude:
“Introducing freeports in the UK is unlikely to generate any significant benefits to businesses in terms of duty savings. Tariffs on intermediates tend to be low in the UK, typically lower than tariffs on final goods, which rules out duty savings in most cases. In addition, in those sectors for which we have been able to identify any inversion, the benefits are small and would not have any material impact on the UK economy.”
The World Bank 2017 report ‘Special Economic Zones – an operational review of their impacts’ comes to a similar conclusion, its key findings being that:
“in the aggregate, most zones’ performance has resembled their national average… growth is difficult to sustain over time…the provision of corporate tax breaks… and most non-fiscal benefits…has been of marginal benefit”.
In writing this article, I make no claim to special expertise in trade policy matters but, following research, I have attempted to set out the pros and cons of freeports to enable the reader to draw their own conclusions.
If we accept that discussions on economic matters are often based on quantitative data which are then used to promote policy outcomes which are much more subjective in terms of their benefits, then it may be possible to find something for everyone in the freeports debate. For example, should the measure of success be ‘net’ jobs creation in the country as a whole, or are gains in deprived areas the yardstick?
It may be argued that whatever the possible economic benefit of freeports, hyperbole is unhelpful wherever it comes from and whatever it promotes. Still, if it acts to encourage people to ask questions, especially about topics often otherwise ignored for their supposed ‘dryness’, perhaps even hyperbole has its place, provided it is recognised as such.
And what about Poole’s chances of becoming a freeport? We may not have long to wait before we know the answer to that question, as at least ten freeports are to be created. The first sites are expected in 2021, with an announcement possibly as soon as budget day this week.
Editor’s comment: Readers may want to watch this video. It will be interesting to see which businesses want to use these facilities. Freeports are, for libertarians like Johnson and the ERG, about permitting the free movement of capital beyond the control of the state and without the imposition of any taxes.