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Sunday, December 5, 2021

Freeports embody the low-tax Brexit dream. The Treasury can’t stand them

It took the Treasury a few years to kill off the first wave of freeports created in the 1980s. Now, with the appetite for free-ports reinvigorated by Brexit, they are trying to strangle the idea at birth. 

That comes as no surprise to me. Mrs Thatcher endorsed freeports after a 1981 proposal by the Adam Smith Institute. We saw them as a way of demonstrating the power of free trade, low taxes and deregulation. Freeports would be treated largely as if they were foreign territory, allowing people to bring in goods from abroad, work on them — processing, assembling, packaging — and ship them out again without facing VAT paperwork and customs duties. There were already hundreds of freeports in other countries, generating business and jobs. 

Six UK freeports were designated in 1984. But the Treasury hated the idea. They cited EU regulations (although EU countries had their own freeports such as Hamburg and Cadiz). They would not concede on VAT or customs duties. Employment regulations were not eased. Each firm in the freeport area had to deal with the import-export paperwork instead of letting the freeport handle it centrally. Then the sites were chosen for political reasons (regional pride, unemployment) instead of where they made economic sense. In the end, the freeports experiment fizzled out. Most of its benefits had come, not from trade, but from grants, subsidies, and planning gain.

After Brexit, Boris Johnson’s Government wanted to revive Britain’s historic role as a trading nation, and to roll back forty years’ worth of enterprise-sapping regulations. Freeports would bring in new jobs and show the world that Britain was back. The new Prime Minister said as much on the steps of Downing Street. Freeports would also become one of the few market-orientated approaches to boosting economic growth, from a government that has otherwise ratcheted up taxes and spending.

The idea of reviving freeports had come from then-International Trade Secretary Liz Truss. She invited me and others to join a working group to push it forward. When I got there, I was pleased to see Rishi Sunak, who had recently published a think tank report extolling the virtues of freeports. I was less pleased to see ranks of Treasury civil servants, almost outnumbering those of us round the table. “They insisted on being here,” a trade official told me. This was now a joint Trade-Treasury project.

I had the sinking feeling that — despite the support of the Prime Minister, the Trade Secretary, and the man who would become Chancellor — the freeports revival was already in its last throes. And so it proved. Oxbridge professors on the panel said freeports would only relocate jobs from one part of the UK to another. (Oxbridge economics says very little about entrepreneurship. It regards firms as a ‘given’ rather than asking how and why new ones are generated. Hence the idea that jobs can only be moved around, not created.)

The Treasury officials, meanwhile, complained of the complexity of changing the customs and VAT rules, hinting of fraud and tax avoidance. The number of freeports would be limited to 10 and politics, not economics, would decide where they were located. And they would have to focus on ‘high-tech’ jobs (the politicians’ mantra) rather than what the market might produce. None of the people I suggested, who actually created or ran successful freeports around the world, were ever contacted. After one meeting, the freeports ‘working group’ quietly expired.

Recently there have been reports that ministers and businesses have said that Treasury is killing freeports with a lack of ambition on tax cuts and planning relaxation. This comes as the first freeport started operating in Teesside on Friday.

The sad truth is that the Treasury always focuses more on the downsides (like potential revenue losses) than opportunities (like new trade and employment). And they hate concessions. Maybe the answer to that is to turn the whole country into a freeport. Business would boom. But the Treasury would eventually find a way to kill it

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