The UK government’s plan to designate 10 freeports has sparked debate after a research by the University of Sussex’s UK Trade Policy Observatory (UKTPO) found this was “unlikely to generate any significant benefits” for the UK economy.
British freeports would provide value to manufacturers by waiving tariffs on inputs, imposing them only on the final goods exported to the domestic market from the freeport. They offer businesses potential savings over producing outside the zone as tariffs on intermediate goods tend to be higher than those on final goods, a situation known as tariff inversion.
In other words, they would make it convenient for companies to import production inputs duty-free into the free port and pay duties on the final products when they enter the UK market, a situation that has long been exploited by foreign trade zones in the US.
However, analysis by researchers Peter Holmes and Julia Magntorn Garrett found “no evidence of significant opportunities to exploit tariff inversion”, as the weighted average tariff on production inputs was only 1.6%. This is significantly lower than the weighted average 8.8% tariff on final goods, they found.
Furthermore, they found that out of the 20 most imported inputs in the UK, which account for around 40% of its imports of intermediate goods by value, 12 are duty-free and none has a tariff exceeding 4%.
Even in the few sectors in which tariff inversion does apply, the economic benefits were found to be small, either because these sectors comprise only a minor part of the UK economy or because the difference between tariffs on inputs and final goods is low.
Besides the UKTPO’s criticism of the UK freeports plan, other experts on freeports stressed the need to consider factors besides duty savings. Tony Restall, who was involved in setting up several freeports in the United Arab Emirates, told fDi that “anyone looking to establish a manufacturing industry in any tax-free area will look at two things: cost of labour and cost of power” – both areas in which the UK is not competitive.
Mr Restall said the government lacks a clear strategy, pointing out that, rather than articulating the details of the programme beforehand, the government asked prospective freeports to tell it what they want from the programme.
However, he believes UK freeports would bring significant benefits beyond tariff inversion, and advocates establishing more so they can capture most of the country’s industry.
But to ensure these benefits are achieved, strategy is needed to develop a business proposition beyond that of duty savings, he said. “It is important to look at freeports as a business and operate [them] as a commercial enterprise” as they require revenue flows and strong leadership, he added.