Liverpool – and a region extending as far as the outskirts of Salford – will soon be hosting a freeport, which will eliminate custom tariffs, reduce taxation, and provide light touch planning in a bid to encourage trade and innovation. An undoubted consequence of Brexit, is there a hidden ideological agenda to develop it into a so-called charter city?
Will it simply attract investment and jobs from other parts of the region and become an onshore tax haven? Or, accepting that it’s the only game in town, can Liverpool find a way to manage the potential negative consequences of deregulation in order to benefit from it?
Why is the government promoting freeports?
The Conservative Party manifesto included a commitment to create up to ten freeports around the UK as national hubs for global trade and investment across the UK. The aim was to promote regeneration and job creation as part of the policy to level up communities. They were also seen as hotbeds for innovation.
The creation of freeports is now government policy. Bids were invited and, as announced in the 2021 budget, eight were successful: East Midlands Airport, Felixstowe and Harwich, Humber, Liverpool City Region, Plymouth and South Devon, Solent, Teesside and Thames.
There are many freeports in the EU and the UK previously had several – including Liverpool. However, these were scrapped in this country because they were believed to be ineffective. Now, Brexit is seen by the government as allowing it to implement freeports in a new way, achieving more than was previously possible under EU rules. Freeports are, however, subject to World Trade Organisation rules and sometimes to free trade agreements.
“In the UK, freeports are designated areas where a range of economic incentives are available. These include incentives related to tax, customs, business rates, planning, regeneration, innovation and trade and investment support. While being within a country’s geographical borders, freeports are effectively outside a country’s customs borders.
“Goods imported into the freeport customs site benefit from simplified customs documentation and can delay paying tariffs. Businesses operating in designated areas can make products using these imports and export them without paying tariffs and again benefit from simplified customs procedures.”
The Liverpool City Region freeport
Each of the new style freeports has a port (the primary customs zone) and a region of up to 45km in diameter, within which specific areas can be designated for custom and/or tax reductions. As the map of the Liverpool freeport region shows, it extends to the fringes of Manchester in the east, and includes the towns of Warrington, Wigan and Widnes, Halton and the west side of the Mersey including Ellesmere Port and Birkenhead. The concept is to allow industrial and logistical zones at or close to the port to benefit from the special customs and tax arrangements, which should encourage investment and innovation and benefit the whole region. Areas many miles from the port will need to be physically fenced off, with customs controls in place for goods leaving the area for the rest of the UK.
The successful Liverpool City bid is summarised here. In addition to the Liverpool port, which is of course the primary customs site, there are three so-called Tax and Customs sites in the region included in the initial plan – Wirral Waters, 3MG in Widnes and Parkside in St Helens. These will look to use the incentives available to build on existing strengths in education, transport, logistics, manufacturing, and R&D. Transport hubs such as Liverpool airport will be integrated in later phases of the plan. In the words of the bid document:
“The [Liverpool City Region] Freeport will be shaped to support the delivery of LCR’s vision outlined in the Local Industrial Strategy and Economic Recovery Plan: for a globally competitive, environmentally responsible and socially inclusive City Region.”
What’s not to like?
One of the acknowledged problems with providing tax and other incentives to a freeport is that it simply attracts investment and business from surrounding areas and the net benefit to the country is negligible – the incentives are wasted because overall, no new activity is generated.
This is known as ‘displacement’. A study on the impact of Enterprise Zones (with similar incentives to freeports) showed that only a quarter of the expected new jobs were delivered and a third of these had been displaced. The jobs also tended to be low skilled (perhaps reflecting the fact that low margin businesses will be particularly attracted by the freeport benefits).
The Office for Budget Responsibility assumed in the October 2021 economic and fiscal outlook report that “on the basis of historical and international evidence … the main effect of freeports ‘will be to alter the location rather than the volume of economic activity’”.
The government required freeport bidders to ensure that the risks of displacement were mitigated, but it remains to be seen how effective these measures will be.
There are two further potential drawbacks to freeports, which are frequently mentioned. Firstly, employee rights might be included in future de-regulation in these areas (so that workers there might have reduced protection against redundancy or lower entitlement to holidays). However, this is not currently proposed for freeports in the UK.
Secondly, the EU Commission has noted the potential for freeports to be used for criminal activity. They are useful places to store high value assets such as works of art and can be used to conceal the true origins of items by exploiting the simplified customs paperwork. The UK Government has included safeguards in its own proposals, such as requiring HMRC authorisation for companies operating in freeports and bidders for freeports to demonstrate how they will secure their customs sites.
Freeports and charter cities
A charter city is a concept proposed by economist Paul Romer, in which a city in one country is handed over to be administered by another country or even private company, with lower taxes, de-regulation and other business friendly policies supposedly leading to faster economic growth.
The similarity in concept has led to concerns (on social media at least) that the new UK freeport regions were a kind of Trojan horse leading to them becoming charter cities. This seems to be overblown in the case of the UK, as there is no legal basis for this to happen at present. The Byline Times article ‘Beware the Charter Cities Conspiracy Theory’ is a good analysis and concludes that this particular threat is greatly exaggerated.
The only game in town
There’s no question that freeports and the set of Enterprise Zones being pushed by the government are ideologically driven. If you believe that de-regulation and tax cutting are the keys to business success, you must believe that the more de-regulation and the lower the tax burden, the more successful you will be – even if that might lead you to some extreme scenarios, where workers’ rights and environmental standards are sacrificed.
The authors of the successful Liverpool bid have clearly thought very carefully about the values they want to be at the core of their approach, which show they are fully aware of the possible downsides:
- Collaboration on efforts to drive social mobility, equality, and inclusion.
- Continuous assessment of core skills requirements and a proactive collaborative approach with key skills providers.
- Consideration of activities in line with Fair Employment Charter / Real Living Wage.
- Effective promotion of job opportunities to all communities via local recruitment channels.
- Promotion of low carbon initiatives and helping deliver the Net Zero ambitions of LCR.
They are seeking to leverage the resources within the region, encourage development and open up sites such as the old Parkside colliery in St Helens that have lain empty and unused for decades. The freeport is clearly an opportunity to receive multi-million-pound funding and to improve prosperity for local residents.
Of course, the possibility to create a freeport is the only game in town at the moment, so it is impossible to ignore. But the joined-up thinking represented by the Liverpool City Region bid could be applied to the whole region – the whole UK in fact. Business values a well-educated, skilled workforce, good infrastructure, and high-quality transport links as much as it does low taxes.
Only time will tell if the experiment Liverpool and seven other English cities are embarking on will succeed in expanding the UK economy or will simply erect a complex set of arrangements to be exploited by those competing in a race to the bottom on costs and standards.
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