18 February 2022

To make the most of Brexit, we should embrace radical freeports

By Phil Radford

In an op-ed last week, Jacob Rees-Mogg issued a rallying cry to Sun readers to help him scrap irritating Brussels bureaucracy.

‘Through thousands of small changes’, Rees-Mogg wrote, ‘we can enact real economic change — which means The Sun’s readers will feel a real Brexit bonus in their pockets and in their lives  every day.’

But the new Brexit Opportunities Minister could go much further than simply taking a red pen to burdensome EU rules. The biggest Brexit opportunities are to be found in taking a radical approach to freeports, using new freedoms to set local tax rates, scrap regulations and incentivise investment to boost some of our poorest regions. We should be buccaneering in our approach to establishing radical freeports across the UK with a focus on sectors that can bring in big global investment.   

To make the most of Britain’s independence policy makers will need to face up to some awkward truths. ‘Global Britain’ is not emerging into a global trading environment that is naturally conducive to free trade. In some industries – especially the car industry – subsidies distort competition to a huge extent. 

The subsidy problem is endemic across many of UK’s most important trading sectors. Even before we left the Customs Union, we had become net importers from the EU in every one of UK’s biggest manufacturing sectors, with the sole exception of aerospace. And since the onset of the pandemic, EU member states have spent literally hundreds of billions of extra Euros supporting their industries.

Where subsidies aren’t a problem, tax discrimination often is. The UK’s pharma industry, for example, had a boom time in the first decade of the 20th century. Then output collapsed as global pharma decamped to lower tax jurisdictions, including Ireland. Our pharma exports to the EU are still below their 2010 value. 

So how can the UK compete? If we can’t turn around some fairly unwelcome trends, investment will continue to slide overseas and UK manufacturing will be hollowed out.

Public finances won’t sustain a counter-subsidy policy forever. Besides, unlike our European competitors, British business seem to take to subsidies like the proverbial bottle. Meanwhile, the EU trade agreement forecloses the option of countering subsidies with tariffs. And neither response is politically attractive. Modern-day Brexiteers resemble Victorian liberals – doctrinally opposed to subsidy and protection in equal measure. 

Asian countries show what’s possible with freeports. There, different models of freeport abound. For example, Thailand’s Eastern Economic Zone offers reductions in corporation tax. That’s helped attract huge investment from Japan’s industrial companies. China deliberately trials different models of freeports to see what works best. It’s currently in the process of turning the whole of Hainan Island into one huge freeport.

What’s more, bigger and freer freeports could help Mr Rees-Mogg out of one of his dilemmas. They could be used to pioneer the sorts of radical deregulation that Brexiteers want, but the Government is too cautious to deliver. It may prove easier to regulate from scratch – bottom-up, within the confines of a freeport – than to de-regulate top-down outside of it. Scotland doesn’t sound keen, but why not trial derogations from labour law to see if that can kickstart careers and apprenticeships in Newcastle, Hull and Liverpool?

Radical freeports could also provide a way out of tricky challenges. If there has to be a customs border proper between UK and Northern Ireland, why not excise a huge stretch of ex-industrial Belfast from that separate customs territory – including the Harland and Wolff site – and turn it into the kind of radical, enterprise zone that attracts the world’s best marine-engineering businesses. Prosperity welds people together; it could also weld Ulster to the UK.

There are three big examples, where radical freeports could help regenerate UK industry straight away: shipbuilding, pharmaceuticals, and offshore wind turbines. 

Boris Johnson wants a renaissance in British shipbuilding. But there is no commercial shipbuilding industry left, and we have not exported a warship larger than a patrol vessel for 30 years. Our slipways are silent – with very few exceptions. And our yards are uncompetitive by any global standard. We should copy the auto industry, swallow some pride, and lure the world’s best shipbuilders to our shores.

Japanese and Korean engineering is pre-eminent in the shipbuilding sector, so the solution is obvious. Turn our ailing shipyards and their adjacent areas into radical freeports and invite successful Japanese and Korean shipbuilders to take them over. Then let their expertise benefit the British economy. The car industry was revamped by an injection of foreign expertise in manufacturing. Shipbuilding should follow in its wake.

Pharmaceuticals is another candidate. Here, UK needs to compete on tax, following Ireland’s example. The Irish government offers big tax breaks for pharmaceutical manufacturing and Irish pharma exports are now worth twice the value of the UK’s pharma exports. Brexit presents a big opportunity to shift the investment calculus for global pharma and their oh-so-supple supply chains. Anew, super low-tax pharma freeport in Northern Ireland could have special tax reliefs and reduced corporation tax rates. This would allow the province to compete aggressively and scoop up pharmaceutical skills and expertise from over the border.

Then there’s offshore wind. Over the next ten years, the UK will install more offshore wind-generating capacity than any almost any other country in the world. This provides a timely opportunity for UK companies to embed themselves into the supply chain for wind turbines and supporting equipment. The UK could build intellectual property and world-leading commercial expertise during the decade that it leads in installations. 

Expanding those existing east-coast freeports on the Humber and the Tyne so they specifically cater to small and medium-sized enterprises will help ensure that intellectual property is locally exploited, and the UK can become a leader in offshore wind, engineering and services. This will be a high-margin business, just like its counterpart in mining. Get that equation right now and in 10 years, we could excel as a parts supplier – just like our aerospace industry.  

Free trade Brexit enthusiasts need to face up to a global economy defined by market distortions and a government constrained by fiscal and regulatory pressures. Radical freeports offer a way out. They’ve worked in Asia. If Jacob Rees-Mogg wants inspiration, he should look East. 

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Phil Radford is a trade analyst. His is the author of ‘Prospects for a Global Britain: Three Strategic Export Industries and How Freeports Can Help’ published by the Civitas think tank.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.