Port Policies: On the Reintroduction of Freeports to the UK

The UK port industry has suffered setbacks as a consequence of Brexit and the pandemic. Freeports are part of the Government’s plans to promote a sustainable and inclusive economic recovery at the national and local level. However, there is mixed evidence on whether freeports will achieve these aims.

By Christie Thomson

Background

The UK port industry contributes around £9.7 billion to the economy annually. 95% of imports and exports by volume pass through ports, and 75% by value. In January 2021, the UK formally left the EU, and border controls have since been introduced in phases. In the first quarter of 2021, total freight tonnage decreased by 9%, while traffic fell by 13%. Whether this was due to Brexit or the pandemic is difficult to ascertain as this period coincided with the start of the third national lockdown.

Freeports are areas surrounding air, rail or seaports where there are lighter economic regulations. Businesses operating in these free trade zones benefit from simplified customs arrangements and tax exemptions, such as relief from stamp duty. Freeports were introduced under Margaret Thatcher in the 1980s. There were seven freeports across England from 1984 to 2012, when the legislation maintaining them was not renewed.

In a paper written for the Centre for Policies Studies in 2016, Rishi Sunak argued that as leaving the EU would provide Britain with greater economic freedom, this would enable the flourishing of free trade zones similar to those seen in the US. As Chancellor, Sunak announced in the March 2021 Budget plans to create eight freeports in England, including East Midlands Airport, and the Port of Liverpool and surrounding Liverpool City Region. In England, £25 million has been allocated to each freeport, which will be used to provide planning support and build infrastructure. Agreements have now been made with national governments to establish freeports to Wales and Scotland, and the Government intends to introduce at least one in Northern Ireland.

Implications

The Government has stated that the main objectives of the freeports are to create centres for global trade and investment, encourage private and public sector investment in research and development, and provide sustainable economic growth to local communities. There is currently not a consensus on whether freeports will encourage global investment, provide clean growth, or contribute to the levelling up agenda.

Freeports may present the UK as more attractive for foreign trade. Though the Brexit trade deal still requires government incentives to be justified, the UK has greater flexibility as it no longer needs to agree on tax exemptions with the European Commission. Fewer regulations may increase imports to these regions, and lower taxes may attract businesses and private investment.

Whether freeports will negate the impacts of Brexit on port volume however, is as yet unclear. Welsh ports have been particularly negatively impacted by Brexit border controls, which have seen a 30% decline in traffic in 2021 compared to 2019. Welsh ports, such as Holyhead, Fishguard and Pembroke, had been important for trade between Ireland and the EU as Irish traders travelled from Dublin to Holyhead then drove across the land bridge to Dover before continuing into France. However, Brexit has prompted Irish ferries to travel directly from Ireland to France in spite of higher costs and travel times in order to avoid border controls. Agreements were concluded in May 2022 to introduce freeports in Wales. The Westminster government initially offered £8 million of investment to Welsh ports, however, they have since agreed to provide £26 million of non-repayable funds to all freeports established in Wales in line with the funding provided to English ports. Holyhead is one of the ports which have expressed interest in becoming a freeport. If successful in achieving this status, Holyhead may again see greater use by Irish ships, though this will likely depend on the specifics of the free trade zone regulations.

Tariff inversion is another proposed benefit of freeports. Tariff inversion is where businesses import components without duties, and pay a tariff only on the finished product, thus exploiting the difference between the total tariff amount. However, critics argue that while this benefit is seen in America, it is unlikely to materialise in the UK due to low import tariffs on both inputs and finished goods. The businesses likely to make savings on the difference between input tariff and the tariff on the finished product are businesses in the animal feed sector or the dairy sector, which make up only a small percentage of UK imports.

Evidence is also mixed in terms of the role of freeports in driving clean growth. In Scotland, two ports can gain the status of ‘Green Freeport’, applications for which close on 20th June 2022. While they will be similar to freeports in England in that there will be lighter economic regulations, these ports must demonstrate their commitment to reaching net zero by 2045, the target set by the Scottish government in the Climate Change (Emissions Reduction Targets) (Scotland) Act 2019. Ports are essential parts of renewable energy plans, as they are the bases for constructing and operating offshore renewable energy plans, such as wind farms.

The Scottish Greens are, however, firmly opposed to the plans. The Scottish Greens’ finance spokesperson, Ross Greer, stated that the plans were ‘greenwash’ and that freeports would not benefit the local economy, instead being ‘associated with crime, money laundering, smuggling, low wages’. The issue of minimal local economic benefits was also raised by the European Parliament in 2019, which called for freeports to be abolished in the EU over concerns that they would become havens for smuggling and money laundering.

This raises the question of whether freeports will be able to contribute to the levelling up agenda Freeports are thought to benefit local economies by providing new jobs and infrastructure. However, it is also possible that the creation of freeports will only move economic benefits from one part of the country to another, and exacerbate underdevelopment in other areas. On the issue of low wages and poor working conditions, the Scottish government has attempted to offset this by requiring firms operating within freeports to pay the living wage and show a commitment to inclusive growth. However, the greater regulation on Scottish freeports may make them a less attractive option for businesses in comparison to the freeports in England.

What next?

Most of the newly established freeports in England have recently begun operating, and the freeports in Scotland and Wales are expected to be launched in 2023. Whether they will deliver on the economic and social benefits purported by the Government remains to be seen. 

Christie Thomson (Committee Member) is a second-year student at Christ Church.