Freeports

Many economists would argue that the case for freeports is by definition a second best one. If tariffs are too high or regulations too burdensome, they should be lowered for the whole country. If, on the other hand, the level of tariffs or regulation is justifiable, why would they be lowered for one part of the country? In practice, therefore, the real case for freeports is in developing countries where either the customs administration is chaotic or regulation is too high/ dysfunctional, and there are political economy reasons why governments cannot change that for the whole country. That isn’t the case for the UK.

In particular, the practical benefit of tariff inversion is likely to be minimal in the UK. When the Government’s initial freeport consultation started in February 2020, it was not known what post-Brexit tariffs the Government was planning to introduce. Now that these tariff schedules have been published, it appears that the benefits of tariff inversion are likely to be negligible, because there are very few cases where tariffs on components are substantially higher than the tariffs on the final goods made with them. Put simply there is no tariff wedge to invert and so little economic case for US-style freeports. The only groups that are certain to benefit from freeports in the UK are businesses (presuming they decide to relocate operations to the freeports) and high net-worth individuals. The disadvantages of freeports, by contrast, will be experienced more broadly in the UK due to the public cost of maintaining them, which will be exacerbated by the necessity of providing financial incentives for businesses to relocate to UK freeports. Proponents of freeports point to job creation as a justifier for these costs. But the capacity of freeports to create additional jobs is unclear. The main impact of freeports – and any associated reductions in regulation – is therefore likely to be to relocate rather than create economic activity and jobs. That said, freeports in the UK could be a part of a broader industrial policy drawing on recent experience with enterprise zones. For example, they could be used to solve specific problems – perhaps attracting jobs to a lagging region, or focusing them on a specific sector which is particularly struggling due to tariffs, or in opening up new financing models for local authorities. But, as a general policy tool, it is doubtful that they can lead to the sort of transformation that the Government seems to be hoping for. And some key problems with freeports need to be borne in mind in designing the policy framework around them. Since freeports are very much on the agenda, for areas of deprivation being awarded a freeport would be a boost. But the more the Government advocates the benefits, the more disappointment there will be for those regions which miss out – and the more they risk losing out to areas which are awarded a freeport.