How Do Freeports Work?

Having been in the news a lot more recently than ever before, ‘freeports’ are becoming something of a buzzword, sitting alongside the likes of ‘Brexit,’ ‘free-trade deal,’ ‘tariff-free access’ and other well-used terminology, but how do freeports work? what are freeports and does the UK have any freeports?

Freeports work by providing benefits for businesses involved in importing and re-exporting, with the country’s normal rules for tax and customs not applying to freeport zones. This enables imports to come into freeports more easily than other areas of the country, with no tariffs applied, and simpler requirement for customs documentation.

Businesses can only benefit from freeports when staying within their designated area. If goods are then moved outside the freeport zone to other areas of the country, they must undergo the standard importing process, which includes paying for tariffs. Therefore, freeports are most beneficial for businesses involved in importing, processing goods, and then re-exporting. Also, with potentially huge trade deals already being mooted with the likes of the USA, Australia, India and others, freeports may prove to be a gem in the global free trade crown of the UK.

What Is a Freeport?

A freeport is a specific area where importing rules differ from the rest of the country. As previously mentioned, they encourage business involved in importing and re-exporting, benefiting from a lack of trading tariffs and simplified customs documentation. Freeports can be hubs for industries such as manufacturing, enabling them to produce goods from cheaper imports, and thereby promote cost-efficiency. Interestingly, although only coming to the fore in recent months, many MPs, politicians and commentators have been talking about freeports for quite some time, including current front-bencher and minister, Rishi Sunak.

Does the UK Have Freeports?

No, the UK currently does not have freeports, however was previously home to several before the year 2012 (when the country stopped renewing legislation establishing their active use). Below is a list of places where freeports used to be in the UK:

• Southampton
• Liverpool
• Glasgow Prestwick Airport
• Port of Tilbury

Whilst the UK may not currently hold active freeports, they do have similar zones known as enterprise zones. These zones offer benefits such as government support and tax breaks, made to encourage and promote business more generally rather than freeports that specifically benefit those involved in imports and re-exports.

What Are the Benefits of Freeports?

Freeports can offer benefits not only for the businesses within their zones, but also for the economy as a whole. Both freeports and free zones (such as enterprise zones) are built with the intention of stimulating economic activity throughout the areas they are established in.

Freeports can be used to encourage imports, which can further support and promote certain industries, helping them to grow within the country. For example, businesses involved in manufacturing can thrive in these zones, benefiting from cheaper imports and thereby boosting their cost-efficiency and overall productivity.

However, whilst UK industries could well benefit from freeports, some expert bodies in the field have claimed that the benefits of these zones are mixed. The UK Trade Policy Observatory has stated the following on the matter:

“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 and any ‘level playing field’ obligations that arise from our trade agreements.”

Others have also raised concerns over the use of freeports, specifically how they may potentially increase the risk of tax evasion and smuggling if not properly managed. Last year, the European Commission reported that freeports might be “potentially vulnerable to money laundering or terrorism financing” as the zones offer a less controlled space where valuable items can be bought, stored and smuggled. However, this is not guaranteed to be the case and many argue that the benefits of freeports far outweigh any of the disadvantages or potential pitfalls.

With post-Brexit trade negotiations between the UK and the EU very much underway, freeports are being seen as one of the trump-cards of the government when it comes to exerting some pressure on the EU, by further opening up the UK to the rest of the world. With Boris Johnson and the UK keen on a free trade agreement with the EU and the EU keen on ‘regulatory alignment,’ what emerges remains to be seen.

Is the UK Introducing Freeports Next Year?

Post-Brexit, there are many options for the UK economy, which although already forecast to grow faster than the economy of the Eurozone, and with the UK tech sector outstripping global growth, could unleash further potential through various options including post-Brexit free trade deals and freeports. As part of the UK’s plan to bring investment and growth to the UK post-Brexit, the government have launched an open consultation on establishing new freeports to the country, with many ministers and potentially Prime Minister Boris Johnson all very keen on the prospect of UK freeports.

It is unclear precisely how the UK’s new freeports will affect the country. Whilst ministers are arguing this may help to promote growth throughout a post-Brexit Britain, some critics are sceptical; expressing concerns similar to that of the European commission on money laundering and smuggling through freeport’s less controlled zones.

According to a summary on the consultation, set to close on the 20th April 2020, the government state it is:

“working to boost economic activity across the UK, ensuring that towns, cities and regions across the country can begin to benefit from the opportunities of leaving the EU. As part of this work, the government aims to create up to 10 freeports in locations across the UK.”

The consultation description further reads “The government wants to establish freeports, which have different customs rules than the rest of the country, that are innovative hubs, boost global trade, attract inward investment and increase productivity. In doing so, the government wants freeports to generate employment opportunities to the benefit of some of our most deprived communities around the UK.”

The government has also stated it will be announcing the locations for the freeports during this year, aiming for the first zone to be opened in 2021. After the open consultation finishes, areas around the UK will be invited to offer themselves up as potential locations for the new freeport zones.