Richard North, 04/08/2019  

One of the news highlights last week was an announcement by Liz Truss, international trade secretary, that the government intended to create as many as ten "Singapore-style" freeports once the UK has left the EU.

Truss indicated that the model would include customs and tax benefits designed to mirror the development corporations in areas such as the London Docklands in the 1980s. The freeports, she said, could also be free of UK regulations if the goods did not enter the UK economy but instead were re-exported. This, she averred, would help manufacturing firms to import the materials they need and create or return jobs to the UK.

"Freedoms transformed London's Docklands in the 1980s, and freeports will do the same for towns and cities across the UK. They will onshore enterprise and manufacturing as the gateway to our future prosperity, creating thousands of jobs", she said.

Another advocate of the concept, Rishi Sunak - now chief secretary to the Treasury – authored a paper in 2016 for the CPS think-tank. Three years down the line, with his "baby" in the front line of government policy, he now happily declares: "We are exploring freeports as an innovative way to drive growth and support thousands of high-skilled jobs across the UK", adding: "We will focus on those areas that could benefit the most, as we look to boost investment and opportunity for communities across the country".

But, in fact, Truss's reference to "London Docklands in the 1980s" gives us the clue that we're not dealing with anything "innovative". It is a tired old idea that is long past its sell-by date. While it has residual value for developing economies – when tailored with considerable "bolt-on" modifications – the idea has more downsides than advantages.

For sure, there are still many (heavily modified) freeports in action around the world, comprising some 3,000 in 135 countries with a total turnover in the billions of US dollars. In the United States alone, there are over 250 zones, employing 420,000 people.

And while the US example is widely quoted as justifying the UK move, these are actually legacy arrangements, set up to deal with a cumbersome, protectionist tariff regime. To that extent, they are addressing the symptoms of a greater problem which lies beyond the capability of the US administration to fix.

As to the current (pre-exit) situation for the UK, Rishi Sunak argues that EU regulations would make it difficult to create US-style Free Trade Zones in the UK. He also cites a United Nations conclusion that: "Free Trade Zones as originally conceived do not exist anymore in the EU", as if that was an argument for breaking free of the EU system.

The reality, though, is that the EEC was quick to exploit the opportunities afforded by what were called "free zones", promulgating a harmonising directive as early as 1969 although, to this day, the designation of free zones in the EU is the sole responsibility of Member States.

By 1998, based on information from Members, the EU was listing 31 sites, including eight in the UK, ranging from the West Midlands Freeport (Birmingham), to Prestwick, Southampton, Tilbury and Humberside (Hull).

Currently, the system has expanded substantially, currently listing over 90 sites (including inactive sites), but with the UK nominating only one site in the Isle of Man.

As such, the designation of free zones has become part of the process for encouraging regional development, where it forms one of a package of measures which may include tax breaks, state aid and incentives for inwards investment. Simplification of regulation is often proposed, so that hubs are "free of unnecessary checks and paperwork", while they may also benefit from liberalised planning rules.

Nevertheless, the distribution of countries operating free zones tells its own story. Currently, the long-standing Member States are reduced in number while the enlargement countries such as Bulgaria, Lithuania and Poland feature heavily.

In Poland, the first free zone was established in 1995, expanding to 14 designated regions. Then, in 1996, the Katowice Special Economic Zone (KSEZ) was set up, comprising 35 different sites in four subzones. Acceleration of growth had become particularly relevant in this old industrial centre of Poland as employment in its coal mines declined.

For the more mature economies, their story is told by the very United Nations report on which Rishi Sunak relies – a story conveniently omitted from his CPS report. The EU has moved on and has developed more sophisticated controls and different ways of doing things.

Of very great interest is the concept exploited by Rotterdam, one of Europe's largest and most successful ports. It has adopted what are called "Distriparks". These are large-scale, advanced, value-added logistics complexes with comprehensive facilities for distribution operations at a single location, which are connected directly to container terminals and multimodal transport facilities for transit shipment, employing the latest in information and telecommunication technology.

These are not free zones as such, but each company located in such a park can be considered as such, or a "free point", in and of itself. In the Netherlands there are approximately 1,500 of these free points.

Furthermore, it is claimed that the Distriparks can offer freer facilities than a free port. When a company fulfils certain conditions with respect to security, and when it has established an online computer connection meeting certain standards with Customs, it may obtain a license from Customs permitting it to carry out certain basic Customs formalities on itself. Such a system, the UN says, "makes the goods flow faster and more efficiently".

Not least of the reasons why systems have moved on is that the very conditions that make free zones attractive to businesses are the very same that attract criminals, so much so that they have become major centres for organised crime. Amongst other things, counterfeiting has become a major problem, while free zones have even become locations for internet fraud

Organised crime is no small thing, and militates against relaxing supervision and waiving regulation. Hence the EU has been reluctant to see the proliferation of free zones, preferring targeted measures in order to promote trade.

Then, notwithstanding the regulatory factors, the essential requirements for successful zones, where they are centred on ports, is that they should function efficiently, and benefit from good infrastructures. Thus, even with government intervention, ports such as Felixstowe and Southampton, with their creaking road systems, are not going to benefit from freeport designation.

Hence we see with Rotterdam a strong focus on handling and computer systems, and an emphasis on multimodal transport facilities, which can have far greater impact on economic development than the sometimes marginal benefits afforded by freeport status.

That is not to say that, in some rust-belt areas such as Teesside, the introduction of freeports would not be a good idea. But, for the best advantage, provision needs to be integrated with regional and industrial policy, with major investment on upgrading infrastructures. Without that, we are not going to compete with super-efficient continental ports, and neither will we be on a par with the likes of Singapore or Hong Kong, which rely on cheap immigrant labour to fuel their economic growth.

In other words, freeports – or whatever other terminology is used – are no panacea. As part of an overall, integrated industrial policy, they may have some value, but they are not the magic wand that the Johnson administration seems to believe they are. More likely, they are a throwback, attractive to the "ultra-Brexiteers" who are locked in the past and have no feel for how modern trade systems work.

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