Last week ‘bidding coalitions’ across the UK submitted their bids to secure freeport status. Informally, some local authorities have been told they should submit bids, or their card will be marked by the government when they ask for more devolved freedoms later. All the same, the evidence is mixed as to whether freeports really bring their intended benefits.
Freeports are tax, customs, and regulation light areas, allowing imports to arrive tariff free and with simplified customs arrangements. The idea is to enable businesses operating within the freeport to be internationally competitive by importing tariff free, lower cost inputs for goods that are manufactured and then exported back out of the UK. Bidding coalitions for freeport status can comprise of air, sea and rail ports, businesses, local authorities and wider stakeholders. Their aim is to encourage manufacturing onto (or back onto) UK soil. Success would amount to new investment and jobs in the UK. Announced in February last year, they are being pitched by the government as a critical part of the levelling up agenda.
Freeports are not a new idea. There were seven freeports in the UK between 1984 and 2012, including in Liverpool and Southampton. While they were quietly dropped by the Conservative-led coalition government in 2012, we have since seen the introduction of 24 new enterprise zones that serve a similar purpose.
In recent years there has been some very upbeat analysis about the economic impact of freeports. Proponents argue that they will encourage businesses that import, process and re-export goods to do so in the UK. A Centre for Policy Studies (CPS) report (written by none other than Rishi Sunak back in 2016) suggested that freeports could create “86,000 jobs for the British economy if they were as successful as the US Foreign Trade Zone programme.” A 2018 report from Mace, an international consultancy and construction business, argues that “super-charged free ports could boost trade by £12bn, create 150,000 jobs in the North of England and add £9bn to the UK economy”. There is good reason to stress test this analysis and three key areas to keep check on as the policy develops.
Both assessments of the benefits of freeports are optimistic about the likely agglomeration benefits. The Mace report identifies “agglomeration and cluster effects brought about by the freer trade policy” as the “missing ingredient”. The 86,000 jobs that are forecast to be created in the CPS report is simply the number of people employed in US free zones (420,000) adjusted to the relative size of the UK population, assuming the agglomeration effects enjoyed in the US would apply equally in the UK. But as Professor Neil Lee of the London School of Economics sets out in a briefing note from the UK Trade Policy Observatory (UKTPO), there is cause to question this key assumption. Professor Lee argues that the smaller geographical scale in the UK means the agglomeration effects will be smaller.
There is also cause to question whether the US example represents net job creation or instead displacement of jobs from one part of the country to another, including from the US Congressional Research Service. Additionally, there is the counterfactual question of whether these jobs would exist without the presence of the US free zones. To assume all 420,000 jobs are the result of the free zones – as the CPS report does – seems unrealistic. This is borne out in the UK’s experience of enterprise zones in recent years. An evaluation of the performance of 24 of these zones between 2012 and 2017 by the Centre for Cities found job creation was only about a quarter of the 54,000 expected by HMT. At least one third of the jobs created were a result of existing jobs being moved from elsewhere and the majority were low skilled. All of which suggests that freeport job creation in the UK may be underwhelming.
It will also be critical to ensure freeports don’t end up merely subsidising low skill and low pay work. There are a wide variety of other factors that dictate where businesses set up operations. Tax incentives do little to attract high value-added industries if prospective employers don’t have access to a skilled workforce, as revealed in the Centre for Cities evaluation. In tandem, it is possible that freeports will seek to compete internationally by lowering labour costs. This is why the TUC has warned of a possible race to the bottom on workers’ rights. It is critical that freeports amount to more than micro tax havens, as campaign group Tax Justice UK have warned, and instead make an investment in skilled work in left behind places.
The government is pressing ahead with the introduction of freeports. The challenge now is to ensure they create good jobs. Under this model, freeports would be part of coordinated local industrial strategies to retain and attract high value add industries. Working with local leaders, the government could use the momentum to help meet its commitment to doubling public R&D spending by 2027. And, as outlined in a recent Centre for Progressive Policy report, there are a wide range of high value-added opportunities across the UK to build on. For this to work, the tax and customs incentives in freeports must work in tandem with other policy initiatives – such as skills development and infrastructure investment – to build on existing local assets with local leaders in pursuit of well paying, secure careers for residents.
The role for central government is to ensure this does not become a zero-sum-game, where one part of the country benefits at the cost of another. Whitehall should compensate local areas where economic activity has been displaced by the introduction of freeports elsewhere. The government should also clarify how freeports facilitate “seizing the opportunities presented by leaving the EU”. If the new aim of freeports is to re-shore manufacturing back from the EU, freeports could at best only take costs back to where they were when the UK was part of the EU single market. Both these elements require central government to play a coordinating role, ensuring freeports amount to a coherent strategy at the national level.
Freeports don’t come for free. If freeports are to be successful they must boost UK high value-added manufacturing and create new, good jobs above and beyond the tax reliefs applied to any displaced economic activity. To level up, areas must not be pitted against each other in a race to the bottom on taxes and workers’ rights – there are better reasons to invest in the UK.