22 September 2022

Yes, freeports can boost economic growth – but only if they focus on the right things


With Liz Truss safely ensconced in Number 10 and the government obesity strategy in full retreat, ‘full-fat freeports’ are back on the menu, much to the delight of Conservatives who see them as a swashbuckling statement of intent. Trade wonks, who tend to think Britain isn’t the sort of country set up to benefit from freeports, are less enthused, arguing that the policy won’t do much for growth. As ever, the devil is in the detail: freeports could prove an economic boon to Britain, but only if the Government gets it right.

The basic idea of freeports is very appealing. They’re effectively a small hole in a country’s customs territory, where goods can be easily imported without tariffs or taxes, incorporated into production processes, and then re-exported into foreign markets. If the goods enter the UK, then companies can choose to pay the lower of the tariffs charged on the imported goods, or the finished final product. All of this is exactly the sort of buccaneering free trade spirit that the Conservative Party loves – but it’s also not hugely useful for Britain.

Why not?

As I argue in a new paper for the Adam Smith Institute, the core problem is that the UK is already a buccaneering pro-free-trade country. The tariffs we charge on inputs are already low – averaging 1.6% when weighted by trade – and many goods face no tariff at all. We already have programmes – Inward Processing Relief (IPR) and bonded warehouses prominent among them – that allow for companies to bring products in, work with them, and either re-export or release for circulation with similar tariff reductions. Sure, they involve more paperwork than a freeport, but they do provide a large chunk of the benefits. And if you were going to relocate your activities to a freeport to reap these benefits, the odds are that you’ve already registered for one of these programmes.

This means that the basic idea of a freeport isn’t going to drive the sort of growth we want to see. Companies will make use of them, but much of this activity will be relocation rather than job creation. So how can Britain turn freeports into something that really does ‘turbocharge’ growth?

In short: by learning from what freeports do elsewhere. They are used in developing countries where state capacity is low, and bonded warehouses or IPR are likely to prove too complicated to administer. They’re also used in some developed countries like the USA, where there’s a political consensus behind tariffs that’s hard to shift. In other words, freeports are used to get around the inefficiencies created by local and national government policies. Britain can use them to do exactly the same thing.

A full-fat freeport could liberate businesses from the distortions created by taxes and regulations. Our ability to track goods coming in and out of the country means they can be placed inland in areas we want to level up, or where the economic return on investment is high.

The Urban Development Corporation

The biggest distortion in Britain and the one with the highest potential for boosting growth when removed is our planning regime. Freeports offer an opportunity to create areas where building factories, laboratories, and other business infrastructure is fast and painless. We already have a working model for exactly this process. The Urban Development Corporation (UDC) established by the Thatcher government to develop Canary Wharf had the power to buy land, build infrastructure, and – critically – took over planning approval from the local authority. When combined with the Isle of Dogs Enterprise Zone, which offered tax breaks and relaxed planning controls, this allowed development to take place at pace.

Using this model for freeports would mean planning authorities had an interest in growth, particularly if the UDC were to be treated as a private company with a duty to generate returns for its owners – the Government – and executive pay linked to performance.

An obvious extension of this model would be partner residential zones, where the UDC would be able to grant permission for residential and retail use, providing the high quality housing skilled workers on good pay tend to demand. Canary Wharf 2.0, complete with free trade zone, dense housing, and high-tech businesses is a winning proposition for a Conservative Party going for growth.

But that growth is worth a lot less if it’s only concentrated in a few relatively small areas – that’s why freeports must have good transport links to the rest of the country to make the most of their special status. Another issue is that existing residents often object to development on the grounds that local infrastructure – from roads and public transport to schools and GP surgeries – will be overwhelmed. The Government could address both concerns at once by providing each freeport with a package of investment in local services and infrastructure, with the added benefit of making the area more attractive to the skilled workers freeports will need.

None of this, however, should mean neglecting the core purpose of a freeport: punching through burdensome taxes and experimenting with tax policies geared for investment and growth. Business rates currently punish firms for investing in their property, which is a particularly mad notion when you consider the point that those properties are an input into their production process. Freeports could scrap these in favour of taxing the value of land. They could also offer full expensing of capital investments, increasing the value of investments made.

And finally, in providing an opportunity to play with tax policy in this way, they could act as a regulatory sandbox for Britain as a whole. The Government would be able to toy with altering regulation within geographically defined areas, seeing the effects play out in the real world, learning from them, and then adjusting, approving, or abandoning proposals.

If the government adopts these policies, then genuinely full-fat freeports could prove a boon both to the British economy, and Liz Truss’ pro-growth credentials.

Sam Ashworth-Hayes is a writer and economist.

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