Trade: freeports and free zones

What are freeports?

Freeports are a special kind of port where normal tax and customs rules do not apply. These can be airports as well as seaports. At a freeport, imports can enter with simplified customs documentation and without paying tariffs. Businesses operating inside designated areas in and around the port can manufacture goods using the imports and add value, before exporting again without ever paying the full tariff on the original goods they imported – although a tariff may be payable on the finished product when it reaches its final destination, including if that destination is in the same country outside the freeport.

Freeports are similar to free zones, or ‘enterprise zones’, which are designated areas subject to a broad array of special regulatory requirements, tax breaks and government support. The difference is that a freeport is designed to specifically encourage businesses that import, process and then re-export goods, rather than more general business support or regeneration objectives.

What is the UK proposing on freeports?

In the 2021 budget, the UK government announced eight new freeports located in East Midlands Airport, Felixstowe and Harwich, the Humber region, Liverpool City Region, Plymouth, the Solent, the Thames, and Teesside. The government hopes that these freeports will act as national hubs for global trade and investment in the UK, promote regional regeneration and job creation and be hotbeds of innovation.^[1] They are due to begin operations in late 2021.

Some of the measures governing the UK’s new freeports were announced in the Queen’s Speech and the 2021 budget, including the core exemption from customs duties (tariffs) for goods imported into a freeport and less burdensome customs procedures. Freeports will also benefit from a range of tax incentives, such as enhanced capital allowances and relief from stamp duty and employer national insurance contributions for additional employees. Finally, freeports will have access to a regeneration and infrastructure fund worth up to £175 million.

The UK government has also said that it hopes to establish at least one freeport in each of Wales, Scotland and Northern Ireland. It has not, however, announced the location of any of these. As freeports policy involves devolved matters (such as land taxation), the UK government will need to work in partnership with the devolved administrations.

Did the EU prevent the creation of freeports?

No. The UK could have created freeports as a member of the EU. Indeed, the UK hosted seven freeports as an EU member state between 1984 and 2012, when it decided not to renew the legislation governing them. These were located at ports including Liverpool, Southampton, Tilbury and Glasgow Prestwick Airport. Across the EU, there are currently 72 free zones in 20 member states.

The UK will, however, have more freedom over the flexibilities and tax concessions it can offer in free zones. This is because EU freeports are governed by the Union Customs Code as well as by EU rules on state aid, which stop member states using selective tax exemptions and financial incentives to distort competition.

Are there economic benefits to freeports and free zones?

Freeports and free zones are intended to stimulate economic activity in their designated areas. Economic studies have found the main advantage of freeports is that they encourage imports by lowering duty and paperwork costs. Manufacturing businesses that are inside the freeport can benefit from cheaper imported inputs in comparison to those outside the area.

One report, written by Rishi Sunak for the Centre for Policy Studies while he was still a backbench MP, suggested that freeports in the UK could create 86,000 jobs.^[2] A further report by the consultancy Mace indicated even larger benefits, with freeports boosting trade by £12 billion a year, UK GDP by £9 billion and 150,000 new jobs.^[3]

Other economic commentators such as the UK Trade Policy Observatory (UKTPO) have suggested, however, that these studies were based on questionable assumptions.^[4] The figure for new jobs in the Sunak report, for example, was produced by taking the number of people employed in the US’s Free Trade Zones (FTZs) and reducing it in line with the size of the UK’s total workforce. This assumes, however, that every job in an FTZ is a new job that would not exist in the absence of the FTZ – an assumption that one US Congress report suggests is implausible.^[5]

In addition, the success of the US’s FTZs been based in a large part on a peculiarity of the US tariff schedule by which the tariff on some finished goods is lower than the tariff on their parts – a phenomenon known as “tariff inversion”. This sometimes makes it advantageous to import parts into an FTZ, complete the final stages of processing there, then have the finished good enter the US at the lower tariff. Tariff inversion is very rare in the UK, however, so this benefit would be unlikely to materialise.

Finally, the UK’s own experience with freeports and enterprise zones suggests that there is a severe risk of merely diverting business from other parts of the UK, rather than creating genuinely new economic activity – and doing this at a considerable cost in incentives paid and taxes foregone.

Ultimately, the UKTPO concludes that “whilst some form of free zones could help with shaping export-oriented and place-based regional development programmes, policymakers should (i) devise measures that counteract possible diversion of economic activity from elsewhere, and (ii) offer a wider set of incentives than just free zones, while keeping within the WTO [World Trade Organization] and any ‘level playing field’ obligations that arise from our trade agreements.” It is not clear that the current proposals achieve these goals.

Do freeports risk increased smuggling and tax evasion?

In April 2019, the European Parliament called for freeports to be scrapped across the EU as a result of a report on tax evasion and money laundering. The report argues that freeports provide operators “with a safe and widely disregarded storage space, where trade can be conducted untaxed and ownership can be concealed.” The lack of scrutiny on imports means that high-value items like art, for example, can be bought and easily stored in freeports without the kind of checks and controls they would normally face. The likelihood of this will become clearer when the freeports are operational.

1. Webb D and Jozepa I (2021), UK government policy on freeports: Briefing paper, House of Commons Library, https://researchbriefings.files.parliament.uk/documents/CBP-8823/CBP-8823.pdf
2. Sunak, R. (2016) The Free Ports Opportunity: How Brexit Could Boost Trade, Manufacturing and the North, Centre for Policy Studies, London, www.cps.org.uk/files/reports/original/161114094336-TheFreePortsOpportunity.pdf
3. Mace (2018) Mace Insights. Supercharged Free Ports. The Ultimate Boost for Britain’s Economy, www.infrastructure-intelligence.com/sites/default/files/article_uploads/Insights%20-%20Supercharged%20Free%20Ports.pdf
4. Serwicka I. and Holmes P, What is the extra mileage in the reintroduction of ‘free zones’ in the UK, UK Trade Policy Observatory Briefing Paper 28, February 2019. https://blogs.sussex.ac.uk/uktpo/publications/what-is-the-extra-mileage-in-the-reintroduction-of-free-zones-in-the-uk/
5. Bolle MJ and Williams BR (2013) U.S. Foreign-Trade Zones: Background and Issues for Congress, Congressional Research Service Report, https://fas.org/sgp/crs/misc/R42686.pdf