With Liz Truss safely ensconced in Number 10 and the government’s obesity strategy in full retirement, the ‘fat freeports’ are back to menu, to the delight of the Conservatives who see it as a cloak and cloak declaration of intent. Traders, who tend to think Britain is not the kind of country created to benefit from free ports, are less enthusiastic, arguing that the policy will do little for growth. As always, the devil is in the details: Freeports could prove an economic boon for Britain, but only if the government gets it right.
The basic idea of freeports is very appealing. It is actually a small hole in a country’s customs territory, where goods can be easily imported without customs duties or taxes, incorporated into production processes, and then re-exported to foreign markets. If the goods enter the UK, companies can choose to pay the lower of the tariffs applied to the imported goods or the finished end product. All of this is exactly the kind of filibuster free trade spirit that the Conservative Party loves – but neither is it extremely useful for Brittany.
As I say in a new article for the Adam Smith Institute, the central problem is that the UK is already a pro-free-trade filibuster country. The customs duties we charge on inputs are already low – 1.6% trade-weighted average – and many goods are not subject to customs duties at all. We already have programs – Inward Processing Relief (IPR) and Bonded Warehouses in mind – that allow companies to import products, work with them, and re-export or release them with similar tariff reductions. Sure, they involve more paperwork than a freeport, but they provide a lot of the benefits. And if you had to relocate your activities to a free port to take advantage of these advantages, chances are that you are already enrolled in one of these programs.
This means that the basic idea of a freeport is not going to lead to the kind of growth that we want to see. Companies will use them, but much of that activity will be offshoring rather than job creation. So how can Britain turn freeports into something that really accelerates growth?
In short: by learning from what free ports are doing elsewhere. They are used in developing countries where state capacity is weak, and bonded warehouses or IPRs may prove too complicated to manage. They are also used in some developed countries like the United States, where there is a political consensus behind tariffs that are difficult to change. In other words, freeports are used to circumvent inefficiencies created by local and national government policies. Britain can use them to do the exact same thing.
A fat free port could free businesses from the distortions created by taxes and regulations. Our ability to track goods in and out of the country means they can be placed inland in areas we want to improve or where the economic return on investment is high.
The Urban Development Corporation
The biggest distortion in Britain and the one with the greatest potential for boosting growth when removed is our planning regime. Freeports offer the possibility of creating areas where the construction of factories, laboratories and other commercial infrastructure is quick and painless. We already have a working model for exactly this process. The Urban Development Corporation (UDC) set up by the Thatcher government to develop Canary Wharf had the power to buy land, build infrastructure and, most importantly, take over local authority planning approval. Combined with the Isle of Dogs Enterprise Zone, which offered tax breaks and relaxed planning controls, this allowed development to proceed quickly.
Using this model for freeports would mean that planning authorities had an interest in growth, particularly if the UDC were to be treated as a private enterprise with a duty to generate revenue for its owners – the government – and performance-related executive compensation.
An obvious extension of this model would be Partner Residential Areas, where the UDC would be able to grant permits for residential and commercial use, providing the high quality housing that skilled, well-paid workers tend to demand. Canary Wharf 2.0, with a free trade zone, dense housing and high-tech businesses, is a winning proposition for a Conservative party looking for growth.
But this growth is of much less value if it is concentrated in only a few relatively small areas – which is why free ports must have good transport links with the rest of the country to make the most of their special status. Another problem is that existing residents often oppose development on the grounds that local infrastructure – from roads and public transport to schools and doctors’ surgeries – will be overwhelmed. The government could address both of these concerns 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 skilled workers whose freeports will have need.
However, none of this means neglecting the main objective of a freeport: removing onerous taxes and experimenting with tax policies geared towards investment and growth. Corporate tariffs currently punish companies for investing in their property, which is a particularly crazy idea considering that these properties are an input into their production process. Free ports could eliminate them in favor of a tax on the value of the land. They could also offer a complete outlay of capital investments, thereby increasing the value of the investments made.
And finally, by providing the opportunity to play around with tax policy in this way, they could act as a regulatory sandbox for Britain as a whole. The government could play with changing regulations in geographically defined areas, see the effects play out in the real world, learn from them, and then adjust, approve or abandon the proposals.
If the government adopts these policies, then the truly wealthy freeports could prove a boon to both the UK economy and Liz Truss’ pro-growth credentials.
The columns are the author’s own opinion and do not necessarily reflect the views of CapX.