What Are UK Freeports, And Would You Want One Next Door?

Freeports are coming. The creation of these freight hubs is (for now) the flagship economic policy of the Boris Johnson government, and they have been promoted as potentially transformational for UK cities.

But what are they, will they work and what effect do they have on neighbouring areas?

The answers may not be reassuring.

Freeports are the flagship of the government's new post-Brexit trade policy. They seem to be very close cousins to the enterprise zones and urban development corporations of the 1980s with tax incentives and light-touch planning.

Up to 10 will be created at ports and airports, the government announced earlier this month.

“These zones reduce costs and bureaucracy, encouraging manufacturing businesses to set up or re-shore,” the government policy announcement said. "The most successful Freeports globally attract businesses and create jobs for local people through liberalised planning laws."

Large-scale logistics and warehouse development seems to be on the cards.

The government has yet to detail what this process will involve and what policies will be in place in freeports, but it seems clear it envisages them as areas where normal UK regulatory regimes do not operate. The government’s announcement in August said freeports “could be free of unnecessary checks and paperwork,” and include customs and tax benefits.

This could draw corporate investment into the areas around freeports.

“Freedoms transformed London’s Docklands in the 1980s, and Freeports will do the same for towns and cities across the UK. They will onshore enterprise and manufacturing as the gateway to our future prosperity, creating thousands of jobs,” the government statement said.

Despite having no representation on the panel advising the government on freeport policy, property industry has given the plan a fair wind. Some observers, among them Mace, are enthusiastic.

“Our polling shows that they would give a possible economic bonus of £1,500 per person in areas they are created,” Mace Chief Operating Officer for Consultancy Jason Millett said.

“They already exist in many countries right around the world, and it’s great that the UK now has plans to catch up. I look forward to hearing more about the government’s proposals and locations selected over the next few months and hope that they decided to supercharge them by combining them with enterprise zones, which is the recommendation our report put forward.”

Others in the property sector raise concerns about the tight supply of land around existing ports and airports, land that is under the control of a handful of port and airport operators which limit free-market opportunities. Even so, they have high hopes for areas like Teesport.

“We need to do something for areas like Teeside," Knight Frank Head of Industrial Property Charles Binks said. "If they are planned right and transshipment from east coast ports is affected, then it could be significant.”

But would you want a freeport next door? Here are three reasons to be cautious.

Displacement Effect

It is fairly well understood that if governments create a boundary, and pay for incentives to be on one side of the boundary rather than the other, some people and businesses will cross it. Some argue this displaces economic activity with little net economic benefit, but at the cost of expensive incentives.

Essentially, the benefits help one area at the expense of another, with incentive costs on top.

The enterprise zones of the 1980s were scrapped largely because of this displacement effect, and the new enterprise zones of the 2010s were designed to avoid it.

A House of Commons Library briefing sums up the debate and shows that the 1980s enterprise zones created relatively few jobs (just 126,000 from 23 zones over four years) and that not more than 58,000 (46%) were new. The rest were displaced. The cost per job created was £17K (£968M divided by 58,000 jobs; £36K at today’s prices).

The big winners from enterprise zones were not the unemployed, but the property sector.

“Capital allowances and business rate allowances were the major mechanisms for attracting firms and went to many landowners and developers for constructing commercial property,” the Centre for Cities concluded following the independent analysis of 1995.

Freeports would repeat the failings of 1980s enterprise zones, according to analysis by the UK Trade Policy Observatory at the University of Sussex.

“While some form of free zones could help with shaping export-oriented and place-based regional development programmes, UK policymakers will need to devise measures that counteract the possible risk that economic activity will simply be diverted from elsewhere,” University of Sussex Research Fellow in Economics Illona Serwicka said. "They will also need to offer a wider set of incentives for trade and jobs while keeping within the [World Trade Organization] and any ‘level playing field’ obligations that arise from new agreements."

If you own land or premises outside of a freeport, there may be little to celebrate.

A Misunderstanding

“Freeports ensure Britain’s port cities and airports are ready to take full advantage of post-Brexit opportunities, including increased trade with the USA and fast-growing Asian markets as we sign our first free trade deals with global partners,” the government statement said.

“There are already thousands of very successful free trading zones around the world, with the United States having pioneered the creation of over 250 free trade zones, employing 420,000 people, many in high-skilled manufacturing jobs. If the UK model is implemented as successfully, it could have a significant economic impact.”

The government points to the U.S. freeport model operating in Miami's port, which handles over 7 million tons of cargo a year.

However, according to specialists, the government may be misunderstanding the U.S. example.

Analysis of free zones operating within the U.S. by the UK Trade Policy Observatory at the University of Sussex suggests limited evidence on their ability to create genuinely new jobs rather than just encourage companies to shift jobs from other parts of the country.

“It is a big misconception that they create net new jobs or promote exports,” University of Sussex Reader in Economics Peter Holmes said. “In the U.S. example it is all about imports, not exports, and for the peculiar reason that the tariff on some intermediate parts of some finished products is higher than the tariff on the finished product, which is unusual. It’s not something we have here. So freeports are a bespoke solution to a very unusual problem which we don’t in fact have.”

“Free zones alone can’t do very much to promote overall regeneration," Holmes continued. "They will need to be incorporated into a far more comprehensive plan alongside other regional incentives to revitalise areas hollowed out by de-industrialisation and in need of services jobs as well as manufacturing.”

Bad Neighbours

Customs and excise duties can increase incidents of smuggling. Mess around with them, create wrinkles and exceptions and complicated borders, and you create opportunities for smuggling.

This is the European Union's fear about customs zones, as explained in a July report on terrorism finance, money laundering and cross-border activities. 

“Free-trade zones may pose a risk as regards counterfeiting, as they allow counterfeiters to land consignments, adapt or otherwise tamper with loads or associated paperwork, and then re-export products without customs intervention, and thus to disguise the nature and original supplier of the goods,” the report said. “The misuse of free-trade zones may be related with infringing intellectual property rights, and engaging in VAT fraud, corruption and money laundering. In most EU free ports or customs warehouses (with the exception of the Luxembourg Freeport), precise information on the beneficial owners is not available.”

Others see the deregulation implicit in freeports as opening the door to wider abuses. If freeports are extra-territorial, then why restrict the bonfire of regulation to planning rules? Why not get rid of employment rules, too, or normal immigration requirements? This fear is reflected in the criticism from Sussex University's Holmes.

"My grim fear is that freeports become a place where you deregulate everything, a place which is not UK territory, so we end up with places that are not so much mini-Singapores as they are labour camps," Holmes said.

At this stage, with so little known about how the freeport plan will work, or what post-Brexit trade policy will look like, such fears are likely premature. But if you had a freeport for a neighbour, it might give you pause for thought.