In the wake of the Brexit referendum in mid-2016, a young member of parliament at his first experience at the House of Commons authored a report on freeports that ended on a quite enthusiastic note.
“[Freeports] have the potential to lay the foundations of a golden age of prosperity for a Britain connected by its trading and manufacturing businesses to every corner of the world,” the report reads.
That MP has quickly risen through the ranks of the Conservative Party and now serves as the government’s chancellor of the exchequer.
Since entering 11 Downing Street in February 2020, Rishi Sunak has made freeports (more widely known as special economic zones) a main priority of the Treasury's agenda, taking a personal lead in the policy development process by reigning in control from the Department of International Trade, which carried out early consultations.
However, Mr Sunak has covered little ground so far, with the Covid-19 pandemic demanding most of his attention in the past few months. In the meantime, academic analysis has suggested a very limited economic dividend from the customs benefits typical of freeports in a country like the UK, unless they become testbed for new, innovative regulation able to unlock value across a range of selected industries.
The pandemic has forced policy-makers, including in the UK, to think outside the box to find ways to reignite growth. Within that perspective, British freeports are gaining new momentum and things may be close to a turning point as the November budget approaches, when the whole programme, or at least its initial blueprint, should finally be formalised.
“Our new freeports will create national hubs for trade, innovation and commerce, regenerating communities across the UK and supporting jobs,” Mr Sunak said in a note on October 7.
“They will attract investment from around the world as we embrace new opportunities following our departure from the EU, and will be a key driver for economic recovery as we build back better post-coronavirus.”
Following a round of consultations with different stakeholders, the Treasury confirmed that a freeport bidding process in England will open by the end of the year. Sea, air and rail ports will be invited to bid, with the government aiming for the first of the new sites to be open for business in 2021, an official note published by the ministry on October 7 confirmed.
New generation zones
The Treasury also outlined three main sets of benefits coming from: streamlined planning processes to aid brownfield redevelopment; a package of tax relief to help drive jobs; and simplified customs procedures and duty suspensions on goods.
“The regulatory element is the most important piece, far more important than customs and tariffs benefits,” Shanker Singham, the CEO of consultancy Competere and chairman of GENN (Global Economic Neural Networks), tells fDi. “What you might find difficult to do in terms of improving the planning regime in the UK at a national level, you could potentially do in the freeports, experimenting with all kinds of ideas that make planning much faster. That’s just one regulatory change. The question is: what are the issues that prevent foreign investment into the UK? It’s not just about tax. Assuming the UK is a relatively stable country with a normal tax regime, tax breaks and benefits don’t move the needle that much in terms of attracting FDI to the freeport. But from a regulatory standpoint, the government can certainly look at other areas where the country has competitive issues — sectors like retail banking, energy, transportation, those are areas affected by systemic problems.”
While the sky is the limit for the UK government to experiment with regulation within freeports, its room of manoeuvre with regards to customs benefits appears more limited.
Analysis by researchers Peter Holmes and Julia Magntorn Garrett at the University of Sussex published in August found “no evidence of significant opportunities to exploit tariff inversion [a situation where tariffs on intermediate goods are higher than those on final goods, thus making production within the a duty-free zone more advantageous]” 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 already duty-free and none have a tariff exceeding 4%.
A freeport model emphasising regulation over customs benefits would also align the UK with best practices around the globe.
“Modern freeport regimes, in the context of multilaterally falling tariffs schedules, are not primarily concerned with the tariff question at all,” says Jean-Paul Gauthier, CEO of consultancy Locus Economica. “What modern freeports do is offer a combination of ‘hard’ bespoke infrastructure, as well as ‘soft’ [policy] offerings, centred on the ease of doing business and the quality of site governance, that together generate impressive investment and operating cost advantages, and reduce business transaction frictions.”
Such advantages include a one-stop-shop for compliance, enhanced e-government facilities, a host of value-added and onsite services (including a work–live–play environment for staff), exhibit and conference facilities, onsite presence of knowledge and research and development institutions, testing and metrology laboratories, regionally competitive corporate income tax rates, suspension of VAT and excise in the context of intra-zone sales.
“One is not talking about 50 acres with two warehouses inside a harbour area; one is rather speaking of hundreds and thousands of revitalised acres adjacent to – potentially distressed – ports and airports, and an economically proven recipe for economic growth in the local host economy.”
With the freeport programme aligning with the government’s overarching ambitions to make the UK a key global trade nexus in its post-Brexit life, level-up the country by spreading wealth and investment away from London, and find new sources of growth following the Covid-19 pandemic, the case for UK freeports is mounting. And now that Mr Sunak is at 11 Downing Street, all the pieces seem in place to put freeports at the heart of that “golden age of prosperity” he envisioned back in 2016.
This article first appeared in the October/November print edition of fDi Intelligence. View a digital edition of the magazine here.