Free ports could turn Brexit to our economic advantage

One of the most exciting shifts in policy under the new government has been its whole-hearted embrace of free ports. But many people are still puzzled by what  they are.

In a nutshell, free ports are areas which are within the UK, but outside its customs borders. So you can bring your goods into the zone – usually by ship, though you can set them up around airports too – and pay no customs duty. 

You are then free to move those goods on to another country; to bring them into the UK (paying tariffs in the process); or to use a factory in the free port zone to process them and then either import or re-export the finished article. 

The government will often offer incentives to help free ports develop, for example offering tax breaks to firms that relocate there.

Now I have to declare an interest here. The idea of free ports as a way to boost Britain’s economy post-Brexit was first proposed in The Free Ports Opportunity, a 2016 report for our think tank by Rishi Sunak, one of the Tory party’s rising stars (and the new chief secretary to the Treasury). 

It’s a pretty exciting idea. 

Worldwide, there are roughly 3,500 free trade zones employing 66m people. America’s 250 zones handle $750bn in merchandise every year. Yet on the British mainland, there are none. 

Sunak has calculated that if a British free port programme was as successful as the American one, it could generate around 86,000 jobs. 

Of course, like everything to do with Brexit, the idea has its critics.

One of the most common objections is that free ports are allowed by the European Union anyway. So why do we have to Brexit to get the benefits?

Well, that’s technically true. But it comes with severe qualifications. 

As a member of the EU’s Customs Union, the UK does not control its own customs and tariffs. EU state aid rules mean that it’s extremely difficult to offer the kind of incentives that have made free ports a success elsewhere – indeed, any attempt to provide them (for example, favourable tax treatment) can and will be challenged by any member state. 

A United Nations study concluded that “free trade zones as originally conceived do not exist any more in the EU”.

The next claim – now being made by the Labour Party – is that free ports merely redistribute economic activity rather than generate it: firms move to the zones because of the tax advantages, leaving overall GDP unchanged.

But the evidence suggests that this isn’t the case. We all know that lower taxes and simpler regulation spur economic growth.

There would be a particular incentive for manufacturing firms, since raw materials can be processed into higher-value products within free ports without incurring customs charges.

And even if growth were simply redistributed, it would still be a very good thing. 

Britain is a country with cavernous geographical inequality – and of the UK’s 30 largest ports, more than half are in the poorest parts of the country. 

Free ports and accompanying low-tax zones may be just what’s needed to help these areas compete. That’s why Ben Houchen, elected mayor of Tees Valley, has been so vocal in his support of the idea: a detailed study for construction firm Mace showed that more than 17,500 jobs could be created on Teesside alone.

Another criticism is that these free ports become lawless areas – a haven for all manner of ill-gotten wealth to be stored. 

It’s true that the Geneva Freeport, the most famous such zone, has become a treasure trove of art and antiquities. But just 

because UK free ports would be outside our customs territory does not mean that they would be outside the UK. Indeed, the fact that British law would be enforced is a key attraction for investors.

A better point is that we should focus on making sure that the customs regime across the entire UK is so sympathetic that there is no need for free ports at all. 

Indeed, Brexit practically demands that we invest in developing a genuinely world-class customs regime. But even then, free ports could still have a role as economic incubators, with different incentives and structures tested and then rolled out more widely – a recipe that worked extremely well in China and elsewhere.

It was Victor Hugo who said that there was nothing as powerful as an idea whose time has come. 

Free ports are not a new idea, but they offer a tangible and welcome way that we could turn Brexit to our economic advantage – and in doing so spread prosperity more widely across the UK.

Main image credit: Stephen Chernin/Getty Images