Understanding the UK’s Supercharged Freeports
Many news media outlets have recently covered plans to create "supercharged freeports" in the UK. But what exactly is a "supercharged freeport" and what does it mean for businesses in the UK?
On January 9 2020, UK MPs approved the first stages of the European Union Withdrawal Agreement. This leaves the door wide open for the government’s plans to create Supercharged Freeports in locations such as Tees Valley.
For example, we collaborated with VisualPolitik to make a video about the new freeports.
Freeports would allow manufacturing businesses to avoid certain tariffs on goods that they re-export. These incentives are critical for certain types of business such as manufacturing or logistics. If the ports are “supercharged,” then they will also have other tax and regulatory incentives.
To better understand the concept of a freeport, suppose there is a wheelbarrow manufacturer in a fictional country, Rohan.
The wheelbarrow manufacturer, located in Rohan, must import wheels from another country, Gondor. He sells some of his wheelbarrows domestically in Rohan, but exports others to a third country, Mordor.
Without a freeport, the wheelbarrow manufacturer’s business would look like this:
First, he would pay the tariffs on the wheels as they arrive from Gondor. He would then manufacture the wheelbarrows in Rohan. For the wheelbarrows he sells domestically, within Rohan, would not need to pay any tariff as they are manufactured locally. The wheelbarrows he exports to Mordor would need to pay a tariff there.
If our wheelbarrow manufacturer relocates to the “Rohan Freeport,” the dynamics of his business change.
He no longer pays tariffs on the wheels as they arrive from Gondor. If he wants to sell his wheelbarrows in Rohan, he will still have to pay the tariffs as they leave to enter the domestic market. However, if he exports to Mordor, he only needs to pay the Mordor tariffs as the goods enter that country.
In the example above, freeports would allow the wheelbarrow exporter to sell his products at a cheaper price in Mordor because he didn’t have to pay the tariffs on the wheel as they arrived in Gondor.
This means that the wheelbarrow manufacturer is more competitive in international markets, and has a better chance of competing against other manufacturers in countries with cheaper labor such as the Shire or Isengard.
UK Freeports will be very helpful to certain types of industries, especially export oriented manufacturing.
In addition to special customs clearance, the ports might have other as of yet unspecified regulatory incentives. These might include tax breaks, exemptions from certain labor regulations, and one stop regulatory shops. These other benefits would further help manufacturers doing business in the freeports.
There are concerns that freeports may have unintended consequences. The three most common criticisms are that freeports can evolve into tax havens, they occasionally increase crime, and that governments spend too much money building them.
If the additional tax incentives are too strong, then freeports may become tax havens. This would reduce tax revenue in neighboring jurisdictions, as well as draw businesses away from other parts of the country.
Freeports have, occasionally, also become implicated in illegal activities. Freeports in countries like Laos have become hubs for narcotics trafficking, money laundering, and the endangered species trade. This usually occurs when countries have laxer enforcement of existing regulations inside the freeport than outside.
Finally, freeports occasionally become financial boondoggles for the governments that invest in them. Roughly 80% of the UK economy consists of the services sector, which does not need free zones. Governments sometimes spend billions of dollars creating freeports that lack the demand to make the investments worthwhile. For example, Chinese investors spent nearly $1 billion USD building Hambantota Port in Sri Lanka which has failed to attract significant amounts of business.
If freeports will succeed in the UK, the government will need to be careful to avoid these common pitfalls. They will need to ensure that the freeports are not too competitive incentive wise relative to the rest of the country, are well policed, and avoid unnecessary spending.
Supercharged freeports have the potential to be a major boon for the UK economy, and also risk causing a wide range of issues. The government will need to work hard to ensure that they mitigate the risks, and attract considerable private sector investments.