As part of his “Levelling Up” agenda^[i] to reduce regional inequalities, former Chancellor, Rishi Sunak, announced in 2021 the creation of 8 new freeports in the UK. These freeports are designed to stimulate economic activity with the promise of new investment, new employment opportunities and regeneration. 

What is a freeport?

Freeports are custom areas around ports. The idea is to make it easier and cheaper for firms to engage in business. Goods can be imported into freeports with zero tariffs^[ii] and finished goods can be re-exported without paying any duties. This helps promote free trade as firms benefit from lower costs and less bureaucracy. Firms within freeports can also claim tax breaks as well as simplified planning regulations, which help incentivise investment into the local economy. 

What are the benefits of freeports? 

Firms within freeports benefit from a wide range of tax breaks including stamp duty and business rate relief. This helps lower a firm's costs and increases their profits, making them more competitive. Higher profits may then act as a means and motive to expand and invest in the economy. A positive multiplier effect^[iii] may ensue whereby business expansion leads to higher derived demand for labour. As such unemployment is lowered and average incomes rise, thus, consumers have more purchasing power and can increase their consumption, improving their material living standards. Increased demand will also indirectly create jobs in other sectors such as retail, boosting the wider economy. Moreover, the government gains a fiscal dividend^[iv] from higher tax receipts from income and corporation taxes. This can help reduce the budget deficit and keep government finances stable for the long term as well as reducing the risk of austerity^[v] measures. 

Ministers have claimed that freeports could help reduce regional inequalities by encouraging firms to relocate to deprived former industrial areas. Firms locating in these areas creates job opportunities and contributes to the regeneration of the areas, reducing inequalities as average incomes start to rise. 

Consequently, the social costs of inequalities such as crime or drug abuse may decline resulting in better living standards. People in deprived areas may also benefit in the long run from higher quality public services as increased government tax revenue allows more public sector spending. This can lead to an increase in productivity in these deprived areas, if taxes are spent appropriately, leading to a boosted economy in the short and long term.   

Promoting freeports may also lower the UK’s current account deficit as export industries which move in face fewer and lower costs so are more price competitive. A greater volume of exports can lead to export-led growth and move the economy closer to balance of payments equilibrium. A lower current account deficit also reduces the need to sell UK assets to overseas investors. In the long term, less foreign ownership reduces profit leaching and underinvestment in many vital industries such as the rail network. 

What are the costs of freeports? 

There is a fear that freeports do not create any net positive economic growth for the whole UK as they encourage economic activity to simply move in from another part of the country. It may potentially improve the economy in one area while simultaneously depriving another, which could worsen regional inequalities.  

In the short term the Office for Budgetary Responsibility has predicted the tax breaks given to firms within freeports in England to cost £50 million. This incurs a major opportunity cost^[vi] as the government could have used the revenue to improve public services or invest in infrastructure. Less government tax revenue can also worsen the budget deficit and risk austerity measures such as spending cuts and higher taxes. These measures could erode the living standards of consumers and the price competitiveness of firms and damage the economy. 

Some are concerned that freeports may have unintended consequences, such as encouraging illicit activities like drug trafficking. Anything imported into freeports is not subject to customs checks making it tougher to tackle crime. In addition, regulation within freeports is planned to be outsourced to independent agencies which may lack the muscle and efficiency to properly enforce rules and regulations. Higher crime rates can lower living standards and force the government to spend more on law and order. Such illegal activity has previously been witnessed within freeports in the EU, for example, in 2018 it was discovered the “Le Freeport” in Luxembourg enabled criminals to commit money laundering and tax evasion. 

The freeport programme in the UK has also raised concerns in the EU as they fear it could lure investment away from them. Under the Trade and Cooperation Agreement, signed in 2020, trade between the UK and the EU must be done on a “level playing field for open and fair competition”. The EU fears exporters within UK freeports can gain an unfair advantage over their own domestic producers despite the EU fielding around 80 freeports of their own. Such a perception could provoke retaliation from the EU in the form of protectionist policies and hurt trade. 

Footnotes: 

[i] "Levelling Up” agenda - an attempt to grow the economy, create jobs and spread opportunities by increasing investment into local areas.

[ii] Tariff - a tax or duty to be paid on a particular class of imports or exports.

[iii] Positive Multiplier Effect - an initial injection (government spending, investment and/or exports) into an economy’s circular flow causes a larger than proportionate final increase in national income.

[iv] Fiscal Dividend - the government receives a fiscal dividend when there is economic growth, leading to an increase in tax revenue and a decrease in spending on unemployment and poverty related welfare benefits .

[v] Austerity - a set of political-economic policies that aim to reduce government budget deficits through spending cuts, tax increases, or a combination of both.

[vi] Opportunity Cost - the next best alternative given up when making a choice.

Bibliography: 

What are freeports and where will they be? | Metro News 

EU to raise concerns over UK’s freeports scheme | Financial Times (ft.com)