Free ports
The Government wants to use free ports to revive ailing regions and boost trade after Brexit. Will the plan work?
How do free ports work?
They are free-trade zones, where normal import duties and tax rules don’t apply. Free ports operate within a country’s land area, but outside its customs territory – a duty-free “bubble”, which is usually situated at a shipping port, an airport or a rail hub. Imports can enter this bubble without being subjected to the tariffs and import duties which are often incurred when goods move across borders. They can also leave the country from that free port, again avoiding the taxes usually imposed. However, if the goods move out of the free port into another part of the country, they are then subjected to the full import process – including the payment of tariffs.
What is the point of them?
They started off with a fairly simple aim: to allow the import of goods tax-free, until they were re-exported. In 19th century Britain, bonded warehouses at, for instance, London’s West India Docks were used for this purpose. Over time, though, free ports developed into fully fledged “special economic zones”, offering a wide range of tax and regulatory benefits to attract businesses that import, process and then re-export goods. Finished goods often carry lower tariffs than component parts, so it makes sense for, say, a vehicle manufacturer to import the parts, manufacture the car in a free zone, and export the finished product. These freedoms can help stimulate economic activity. Hence the 2019 manifesto pledge to create up to ten free ports, which reportedly will be fully operational by 2022.
How long have free ports existed?
Ports offering special privileges to attract merchants and manufacturers have existed since classical times. The “Cinque Ports” in southeast England were given tax exemptions in the 12th century. One of the most famous examples is the Shannon Free Zone, established in 1959 to boost activity around the Irish town’s struggling airport (see box). The UK itself operated seven free ports (including Southampton, Liverpool, Tilbury and Sheerness ports, and Prestwick Airport) from 1984 to 2012, when the legislation that established them expired. Around the world, there are an estimated 5,300 free trade zones in about 135 countries, most of them in the Far East and Middle East. Dubai’s Jebel Ali Free Zone hosts 7,000 global firms. And there are about 80 free ports in the EU, mostly in countries that joined the bloc after 2004.
How might they benefit Britain?
The Government is proposing to offer free ports a series of extra incentives: discounts on stamp duty and business rates, research and development tax breaks and loosened regulation – relaxing local planning laws, for instance. The idea is that this will draw in investment from around the world. Ministers say the plans could help “transform” towns and cities, bringing thousands of high-value jobs to regions that have been hit by the decline in manufacturing – building “innovative business clusters” and “levelling up” left-behind areas. The construction group Mace estimates the creation of seven free zones in the North of England could create 150,000 jobs and add £9bn to the UK economy.
How is this related to Brexit?
If Brexit negotiations result in a free trade deal and zero tariffs between Britain and the EU, then tariff relief will not be such a draw. However, at present that looks unlikely, in which case free ports will have a significant advantage. In addition, free ports and free zones in the EU have to comply with the bloc’s rules: for instance, state aid rules aimed at ensuring fair competition between EU countries. It has been argued that these greatly limit their operation and, when combined with tariff reductions, led to Britain’s free ports being discontinued. Supporters say Britain stands to benefit greatly from free ports after Brexit because the UK will no longer be bound by EU competition rules.
Where might they be created?
The Government consultation process is now complete, and according to the British Ports Association, more than 30 ports are interested in being selected to be one of the ten free ports. They include large ports, such as Dover and Belfast, and small ones, such as Mostyn in Wales. Leading contenders include the Port of Tyne in South Shields, and Teesport, just east of Middlesbrough. Teesport is, on the face of it, a particularly promising case. It is a large deep-sea port – the UK’s third biggest, while the closure of Teesside Steelworks means that it has a great amount of brownfield land ripe for redevelopment, along with relatively cheap labour, and an industrial “cluster” that already includes steel, petrochemical and engineering works. Teesport believes that at least 32,000 new jobs could be created over the next 25 years.
How successful are free ports likely to be?
Free zones have been a valuable tool for developing countries with high tariff rates and inefficient bureaucracies, but how they can stimulate economies which have long been open and industrialised is less clear. “The question is what you can do in a free port that you can’t do elsewhere,” says Dr Anna Jerzewska, a customs and trade adviser. Businesses in the UK can already use streamlined customs procedures, and, even under WTO rules, tariffs are mostly low. Another concern is that free ports may be used as havens for criminal activity: the EU clamped down after finding that they had aided money laundering, tax evasion and organised crime. But the major disadvantage is that new free ports may not create genuinely new jobs, but just encourage companies to shift jobs from other parts of the country to take advantage of tax breaks. This is not a great worry for the Tory MP Martin Vickers, chair of the parliamentary free ports group, who said that the Government’s “levelling up agenda” would inevitably, to some extent, involve displacing jobs from the Southeast.