Whatever happened to Freeports? Trade and Local Development in the General Election

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3 July 2024

Tom Arnold is a Researcher at the Heseltine Institute for Public Policy, Practice and Place at the University of Liverpool; Patrick Holden is a Reader in International Relations at the University of Plymouth; Peter Holmes is a Fellow of the UK Trade Policy Observatory and Emeritus Reader in Economics at the University of Sussex Business School; and Ioannis Papadakis is a Research Fellow at the Centre for Inclusive Trade based at the University of Sussex.

Introduction

Freeports have been a central part of the UK Government’s regional development policy over the last five years. The 2019 Conservative Party manifesto pledged to create “up to ten Freeports around the UK”,[1] emphasising their potential to create new jobs and additional income streams for local government. They were also promoted as key to improving the UK’s international trade prospects following its exit from the European Union. UK government has specified three economic objectives for Freeports: to establish them as hubs for global trade and investment; to promote regeneration and job creation; and to create hotbeds for innovation.[2]

Despite this, Freeports have not featured strongly in the current general election campaign. The 2024 Conservative manifesto includes a promise to “create more Freeports and Business Rates Retention zones”, emphasising their potential to create new jobs and provide additional income streams to local government.[3] While the opposition Labour Party pledges to develop Local Growth Plans aligned to national industrial strategy, there is no mention of Freeports.

The UK Freeport programme looks likely to continue in some form, regardless of the outcome of the election. The 2023 Autumn Statement extended tax relief funding for English Freeports from 2026 to 2031, meaning Freeport operators and occupiers will benefit from reliefs on stamp duty, business rates and employer national insurance until this ‘sunset date’. Nevertheless, several concerns will need to be addressed by the next government. This piece sets out the key issues for Freeports over the coming months and years, and suggestions for improving on the current model.

Issues with the current Freeport model

In April 2024, the House of Commons Business and Trade Committee published the findings of its inquiry into the performance of Freeports and investment zones in England, to which some authors of this article contributed evidence.[4] The report summarises the benefits and limitations of the UK Freeport model, highlighting evidence which suggests:

• The customs benefits available to Freeports are limited. Businesses in Freeport customs sites can utilise tariff inversion – calculating import duties based on the value of inputs rather than the value of the finished product. However, analysis by the UKTPO found that only 1% of the value of UK imports would benefit from this practice.[5] Bluntly, as UK tariffs are already very low, the customs benefits derived from location within the Freeport for business, would not be very high. Moreover, if Freeports did benefit UK competitiveness, trading partners would be entitled to invoke “duty drawback” provisions in FTAs to deny preferences to the UK or to use anti-subsidy countervailing duties.[6]
• There are some tax benefits at Freeport sites that may contribute towards attracting employers and creating new jobs. Government estimates suggest Freeports have created 5,600 jobs in England since their creation.[7] However, evidence provided to the Committee suggests that around two-thirds of these jobs may not be ‘new’, but jobs that would have been created regardless, or displaced from elsewhere.[8]
• There are concerns about governance and transparency. While all English Freeports are governed through partnership boards incorporating both the public and private sectors, the level of business involvement and degree of control by local government varies. The well-documented allegations of financial mismanagement linked to the Teesside Freeport highlight the risks posed by complex governance and weak accountability.[9]

Making Freeports work

Despite these concerns, we argue that the UK Freeport experiment should not be abandoned, but may need modification. Given the limitations of the customs benefits associated with Freeports, the government should focus on the role they can play as part of an active, place-based industrial strategy. While Freeports have been portrayed as a central element of the government’s ‘Levelling Up’ regional development policy, the relationship with broader government objectives on key national issues such as net zero is unclear.

This confusion is partly a result of the dual purpose of the current UK Freeport model, which aims to both boost international trade and operate as traditional Special Economic Zones with a focus on attracting jobs and regenerating ‘left behind’ places.  Aligning Freeports more closely with national policy targets and providing greater certainty about the purpose of regional policy could help to clarify their purpose. This could be particularly significant in places which continue to face acute socio-economic problems following the mass decline of industry in the second half of the 20^th century.

UK Freeport and Investment Zone locations

To achieve this, we highlight five areas for improvement in the current government’s strategy for Freeports.

Align with other special economic zones. In addition to Freeports, there are two other main special economic zone (SEZ) programmes currently operational in the UK: Investment Zones (introduced in 2023, with 13 across the UK); and Enterprise Zones (introduced in 2011 and expanded in 2016, with 48 across England only). The presence of three different types of SEZ presents complexities for local government in attracting investment and developing industrial strategy, particularly in areas where all three are present (such as Liverpool City Region). As part of a broader industrial strategy, the government should be clear about the purpose of each SEZ and where possible align governance of SEZs under a single accountable body (such as a Mayoral Combined Authority. Where appropriate SEZs could be merged to create clusters with complementary activities – comprising universities, ports and dynamic SMEs. There is particular potential to align Freeport activity with national and local objectives to achieve net zero carbon emissions, particularly through decarbonisation of freight transport.

Assess the value of customs benefits. The government should review whether customs reliefs are worth retaining or should be wound down to save money and time for local authorities and to allow more focus on the place-based industrial policy elements of the programme. Policies and funding could be focused more narrowly on other Freeport priorities such as improving infrastructure and upskilling local workers. The UK Freeport model should be understood more accurately as a type of SEZ rather than a focus on international trade.

Enhance governance. The Business and Trade Committee report recommends that accountability for Freeports should be held by a single leader, in the form of an elected ‘metro mayor’. This can offer clarity for businesses, the public and other stakeholders. However, only three English Freeports are currently located in areas with a mayoral combined authority (East Midlands, Liverpool City Region and Teesside). For Freeports without an elected mayor, it is less clear who the single accountable figure should be, but local authority leaders may be most appropriate for this role. While Freeports should be enabled to exercise flexibility in shaping policies to align with local aims and objectives, the UK government should retain overall scrutiny of the Freeport programme in England.

Improve transparency. While fears about the disconnection of UK Freeports from democratic accountability are exaggerated, public concern is understandable given the shortage of publicly available information about their geographies and powers. Efforts should be made to ensure all Freeport bodies publish clear, accessible and easy to digest information about site locations, governance arrangements and mechanisms for allocating retained business rates.[10] Making this information publicly available will facilitate learning about the effectiveness of UK Freeports.

Improve evaluation. The government should work with Freeports to develop metrics tracking benefits to businesses, the effectiveness of Freeport policies, and the costs and benefits of tax reliefs. The current Freeport programme has a strong monitoring and evaluation system in place at the national level, but there are challenges in the provision of local data and developing sound counterfactuals.

Conclusion

While Freeports have not featured strongly in the 2024 general election campaign, the issues the current UK Government purports that they resolve – particularly improving economic prospects in ‘left behind’ places – will remain central to the success of the next government. We suggest not throwing the baby out with the bathwater but reassessing the UK Freeport model as part of a broader place-based industrial strategy, including due scepticism regarding the trade effects.

Footnotes

[1] Conservative Party manifesto (2019) https://assets-global.website-files.com/5da42e2cae7ebd3f8bde353c/5dda924905da587992a064ba_Conservative%202019%20Manifesto.pdf (p.57)

[2] HM Treasury (2020) Freeports: bidding prospectus. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/935493/Freeports_Bidding_Prospectus_web_final.pdf

[3] Conservative Party manifesto (2024) https://public.conservatives.com/static/documents/GE2024/Conservative-Manifesto-GE2024.pdf

[4] House of Commons Business and Trade Committee (2024) Performance of investment zones and freeport in England. https://committees.parliament.uk/publications/44455/documents/221158/default/

[5] Peter Holmes and Guillermo Larbalestier (2021) Two key things to know about Freeports. https://blogs.sussex.ac.uk/uktpo/2021/02/25/two-key-things-to-know-about-Freeports/

[6] Peter Holmes, Anna Jerzewska and Gullermo Larbalestier (2022) ‘Exporting from UK Freeports: Duty Drawback, Origin and Subsidies.’ UKTPO Briefing Paper 69. https://blogs.sussex.ac.uk/uktpo/files/2022/09/BP-69-Freeports-FINAL-28.09.22.pdf

[7] House of Commons Business and Trade Committee (2024)

[8] Business and Trade Committee (2023) Oral evidence: the performance of investment zones and Freeports in England. https://committees.parliament.uk/oralevidence/13744/html/ (Q9)

[9] Tees Valley Review (2024) https://assets.publishing.service.gov.uk/media/65ba58ec3be8ad0010a081a9/Tees_Valley_Review_Report.pdf

[10]  Nichola Harmer, Patrick Holden and Guillermo Larbalestier (2023) Written evidence submitted to the Business and Trade Committee inquiry into the performance of investment zones and freeports in England. https://committees.parliament.uk/writtenevidence/124415/html/

Additional Information

The authors would like to thank Guillermo Larbalastier for earlier research input and advice. Guillermo is not responsible for any views expressed in this article. The opinions expressed in this blog are those of the authors alone and do not necessarily represent the opinions of the University of Sussex or the UK Trade Policy Observatory.

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