Boris’s new government abounds with good people and good ideas to boost business – and we are already reaping the rewards. Liz Truss, as the new President of the Board of Trade has announced today that once we leave the European Union, the UK will be a global free trader, with freeports and safe harbours to help this aim along.
Freeports are areas next to shipping ports or airports that we designate as effectively foreign territory. That doesn’t mean they are owned by foreigners; it simply means that for tax and regulation purposes, they are treated as if they were outside the UK. They’re areas where HMRC has no right of entry or the authority to pick pockets.
In particular, it means that goods coming into them are not subject to UK tariffs, taxes or regulations. Those burdens only apply if the goods then enter the domestic economy. If they are shipped abroad, even if they have been processed to add value, they do so without having paid UK taxes that make them more expensive, and without being subject to the minutiae of bureaucratic rules that goods for the domestic market have to struggle through. They are free trade writ large.
Freeports are not some new idea dreamed up by theoreticians; they have a long and distinguished history. They rose to prominence in post-Renaissance Italy, where city states such as Genoa and Livorno sought to draw in worldwide trade by designating special enclaves where merchants could engage in business activity without the heavy hand of state interference. Their success was copied elsewhere, such that there are now huge numbers of them scattered across the globe. In practice, many freeports these days rely on electronic monitoring of the movement of goods, rather than on physical borders and barriers.
In 1981 the Adam Smith Institute proposed freeports for the UK, and six were established, but their success was thwarted by both the EU and the UK Treasury. The EU would not permit any easing of their constricting regulations, and the Treasury here would not ease VAT or tariffs. There was no relief from the paperwork needed for imports and exports, and instead of the freeport management handling relations with the UK authorities, every individual trader had to do so. The freeports were effectively just reduced to being bonded warehouses, where goods could be stored, and only be taxed when they left.
This is not what freeports should be about. The aim is that goods coming into them from abroad can be processed to add value, and can then be exported, without being subject to domestic taxes, tariffs and regulations. It is as if this were done overseas, instead of in designated enclaves around some of our ports. The difference is jobs. When freeports can bring in raw materials and turn them into finished goods for export, this creates British jobs. If it is done in freeports that escape the heavy hand of state interference, it can be done more cheaply and more rapidly, and make these goods more competitive on world markets.
The EU does not like freeports because it does not like anything that might be outside its control. It is trying to shut down overseas tax shelters for the same reason. It fears what it calls ‘a race to the bottom,’ meaning that areas with more friendly tax and regulatory regimes will draw business and investment away from the control of its sclerotic regime.
This is precisely why we should create freeports once we are outside its control. It is a bottom we should want to race to because areas that lower taxes and cut unnecessary red tape will expand business activity and create both wealth and jobs.
Liz Truss, as the new International Trade Secretary should be bold. We should support her fight for real freeports, ones that can draw business, wealth and jobs to some of the UK’s ports, located in areas that have not kept pace with its economic expansion, and which could be regenerated with a such a boost. Low taxes and low regulation mixed with high-tech and tall global ambition — a recipe for success.
A UK that is determined to be a global player, once free of a narrow EU protectionist bloc, can assert itself as a free trading nation. There is no better way of doing this than by creating freeports that trade freely with the world. Prosperity looms, but only if we have the courage and determination to grasp it.
Dr Madsen Pirie is President of the Adam Smith Institute.