Rishi Sunak’s free ports are no silver bullet for our economy

Today Rishi Sunak is Chancellor of the Exchequer, responsible for an economy that suffered the worst recession and the worst growth of any major economy in 2020. But not that long ago, he was just a backbencher. One of the policies he wrote about back then is now at the centre of the government’s approach to our economy.

According to that paper, what Britain needs is free ports. Free ports, for those who don’t spend their time steeped in customs policy, are secure customs zones located at ports (which may be airports or rail ports, not simply sea ports) where business can be carried out inside a country’s land border, but where different customs rules apply. They’re not a new idea, and they’re not unique to the UK. We had a handful here in Britain from the 1980s to 2012, and there are 80-odd across the EU and 5,000 across the world – around half of them in China.

Usually, goods brought into a free port do not attract a requirement to pay duties until they leave the free port and enter the domestic market – and no duty at all is payable if they are re-exported. Sometimes items are stored in this customs-free state within the free port for indefinite periods.

The idea is that activities that might not be profitable (or not very profitable) elsewhere in the country may be profitable – or at least more so – in free ports. The classic business model for manufacturing companies based in free ports is tariff inversion, where firms import component parts or ingredients duty-free, manufacture a finished high-value product, and only pay a single tariff on the finished product when it is released onto the domestic market.

It sounds like a great idea, in principle. But because the UK government has deliberately set the new UK global tariff rates for many of the sorts of goods that might be used as components very low, there is very limited scope for this model to be a success in the UK. The UK Trade Policy Observatory, based at the University of Sussex, reckons that the principal exception to this – the form of economic activity that will derive a clear opportunity from tariff inversion in the UK – is the production of dog food. 

Close students of Rishi Sunak’s approach to the pandemic will be unsurprised to see some rather simplistic economic modelling underpinning the case he made back in 2016. To support the claim that they could create over 80,000 new jobs in the UK, he simply takes the total number of existing jobs in free zones in the United States, and scales it down for our smaller labour force. It’s not exactly sophisticated.

And that rather points to the strategic problem for the notion that free ports are the answer to securing our economy out of this crisis and onto the path to recovery. There is very limited evidence that free ports create jobs; instead, the risk is that they move existing jobs around. If a company can move 20 miles, benefit from lower tariffs, and still have access to the same workforce and same markets, it makes sense for it to do so. By itself, this doesn’t make the company more productive, or increase demand for their goods in the wider economy, or increase the tax take for the Treasury.

On top of that, concentrating businesses within particular boundaries can have planning and transport implications for local areas – perversely, it may end up intensifying deprivation in the area beyond the immediate vicinity of the free port. Those are solvable problems – bread and butter issues for hardworking Labour councillors – but they require more than warm words and reheated rhetoric from the government. 

Free ports also come with substantial risks around tax and duty avoidance, not least because high-value mobile assets beloved of organised criminals, like paintings, may sit there for years. Campaigners at Tax Justice UK have pointed out that the largest collection of art in the world sits in a free port warehouse in Geneva, and this time last year the European Union introduced tough new rules to try to crack down on some of the illegal activities going on in their free ports. The government has signalled its awareness of these issues, but with overstretched HM Revenue & Customs staff struggling to answer the phone on time last year, it doesn’t seem obvious that the UK is well-placed to make a success of keeping them legal.

This Friday, February 5th, is the deadline for local areas to put in bids for free ports. We know that many Labour councils will be putting in bids because for many individual areas, if the option is on offer, it makes obvious sense to do so. That’s especially true when the issues they can raise around planning and transport have been thought through clearly and a free port forms part of a wider strategy for economic growth and regeneration in an area. 

But as with previous versions of the government’s “put in a bid to our fund, and ministers will decide” approach, we have serious concerns over the process by which decisions will be taken. The National Audit Office was very unimpressed with the way Towns Fund money was allocated. We are keen to keep a very close eye on how they do the same with free ports, which will be partially funded from the same pot. The government has set out five ill-defined criteria that bids have to meet, and asked for a few thousand words of text. An essay competition for council officers – however good the bids are – is not the most intellectually rigorous or responsible way to be directing the shape of our future economy.

Labour wants to secure our economy, protect our NHS and rebuild our country after the pandemic. To do that, we will need growth across our country and for every part of our country, not just in a dozen or so special zones. As Keir Starmer said back in September, we need an economy that doesn’t force people to move hundreds of miles just to find a decent job. So while free ports may work for some places – and where they go ahead, we’re obviously keen they succeed – they are hardly the silver bullet the Tories like to suggest.