The claims and counterclaims about freeports

Good afternoon and happy holidays everyone. The magnolia tree is in bloom outside my window in Brighton which is a sure sign that spring — at last — has sprung. 

But to business. Firstly, thanks for responses to last week’s callout for insights on services. Lots of interesting responses. I’ll return to this topic after Easter, but if you were going to email, but were too busy, don’t be shy. Use one of those Bank Holidays to send me a note. Confidentiality assured.

Otherwise, it’s another busy week in Brexitland. The coach chaos at Dover was interesting for two reasons. The first is because a full complement of French border police showed up this time (unlike in July when Dover blamed a police aux frontières no-show for the chaos). So even fully staffed, the extra passport post-Brexit checks mean the port’s bureaucratic capacity is less than the capacity of ferries. This has led to effective caps on coach numbers at peak times, although they’re not being called that.

The second is the denials from both Tories (Suella Braverman) and Labour (Lisa Nandy) politicians that Brexit had anything much to do with it. Obviously, it did. The checks take longer now. 

Politicians shouldn’t take people for fools, but the fact that neither party can have a fact-based conversation about Brexit issues is a huge impediment to addressing broader challenges on trade and business investment created by leaving the EU. (John Springford at the Centre for European Reform was very good on this subject this week; worth a read.)

Secondly, there was also an announcement that the UK, finally, is going to implement proper border checks on EU imports into the UK. There’s a consultation and the devil will be in the implementation of this.

In short, the government will have to strike a balance between risking supply-chain disruption in the UK as a result of smaller EU companies giving up trading with the UK (as UK ones did in 2021 when the Trade & Cooperation Agreement came into force and the EU fully imposed its border controls) . . .

. . . whilst also imposing a sufficiently robust border to create some leverage with Brussels over customs facilitations in future negotiations in the TCA, since EU countries will be keener on customs easements when their own exporters are facing border frictions.

Today, however, I want to go back to freeports which have just passed their two-year anniversary and remain a cornerstone of the government’s policy agenda — both for levelling up, but also for what passes for industrial policy. 

As this excellent Institute for Fiscal Studies report by Stuart Adam and David Phillips points out, UK freeports differ from previous iterations of these schemes both in the UK and rest of the world because each port is deliberately designed to foster a particular industry cluster. In theory, this is also a cluster that wouldn’t have arisen without the tax breaks and other incentives on offer in the freeport zones.

So, for example, Humber Freeport is meant to be a rare earths processing hub (producing inputs for electric vehicle and wind turbine production); the Teesside Freeport is to be a new offshore wind turbine manufacturing facility; and Plymouth and South Devon Freeport is looking at testing autonomous maritime vehicles. 

Post-Brexit governments have made great claims for freeports. Going back to the 2019 election, they were touted by Boris Johnson as a key part of the Brexit “boost”, while Rishi Sunak has always been a freeports fan, writing a paper on the subject for the Thatcherite Centre for Policy Studies on the subject called The Free Ports Opportunity.

So what exactly is the opportunity? And will the UK be able to grasp it? The IFS paper quoted above tries to dissect whether this new generation of UK freeports will be able to avoid the issues that have plagued previous generations.

Namely that the tax incentives available in freeports — lower business rates, tax deductions on plant and machinery, reduced national insurance contributions on hiring new employees — tend to displace economic activity.

This displacement can either be from elsewhere (a factory closes in one place and reopens inside the zone); or a substitution of activity that would otherwise have happened (the factory would have set up anyway, without the incentives); or, in a tight labour market, employing workers in “new” jobs inside a freeport zone who would have been working elsewhere anyway.

The UK scheme does put a burden on freeport consortiums and local government to avoid these displacement activities, and the government has committed to monitor them in the future.

Not that that uncertainty stops the prime minister and the freeports consortiums from making huge claims about the benefits their ports will bring.

For example, Sunak went on Twitter following the announcement of two new Welsh freeports last month in Anglesey and the “Celtic Freeport” in Port Talbot and Milford Haven saying they could create “20,000 jobs”.

I asked Number 10 how Sunak had arrived at that number and was told it was a mid-range figure between assessments that the bids had made themselves. So the government relies on the estimates of the freeport bid winners, who clearly have an interest in not underselling themselves.

I then asked the freeport bids how they’d arrived at the numbers, and they both declined to produce concrete details, citing commercial confidentiality. 

Anglesey said its number of “up to 13,000” jobs was based on modelling by the Centre for Economic and Business Research (CEBR) and was based on “trade impacts” by mapping the freeport uplift on historical Holyhead data. But the statement it provided wasn’t concrete enough to be subjected to expert analysis.

Anglesey’s focus on the trade benefits was slightly odd, however, since — as the FT has reported before — these traditional benefits of a freeport (via so-called ‘tariff inversion’) are very minimal indeed.

The Celtic Freeport also declined to provide enough detail to really assess its estimates, except that it follows Treasury “Green Book” guidance and relates to the downstream impact on net zero industries and appraising offshore wind opportunities. 

It’s not clear what Celtic’s claim of supporting “16,000 new green jobs” is based on, and whether those “new” jobs can be attributed to the freeport. 

Which is to say, if a welder or engineer comes to work in the Celtic Freeport as a result of a subsidy to encourage offshore wind, how do you know they wouldn’t have been working elsewhere in the UK? Is that really a “new” job? Or would they have been working anyway, and without a subsidy? It may, honestly, even with the best endeavours, be hard to say.

The broader point is there isn’t much transparency. Sunak himself has form for fudging the numbers. His CPS report claimed freeports could create 86,000 jobs, but that number was simply derived from taking the number of jobs in US freeports and then adjusting them, pro-rata, to the UK workforce. 

As the IFS drily notes, Sunak’s numbers were based on “significant methodological flaws”, not least because US freeports (where tariff-inversion is real) are a very different proposition to UK freeports. 

The IFS also notes that when the government was asked by the House of Commons International Trade Committee in the summer of 2021 to publish its own assessments of the costs and benefits of freeports, it refused to do so. I asked Downing Street if it has since done so. It hasn’t. 

Given this is such a flagship government policy, and it will receive up to £75mn in annual tax breaks and £25mn each in seed funding, it doesn’t seem unreasonable to expect the government to provide the basis for its calculations of how this will be money well spent.

At the moment it is too early to tell. The independent fiscal watchdog, the Office for Budget Responsibility, has said, based on past performance, the benefits of freeports will be too small to measure, with most of the activity being displacement. 

The IFS is slightly more optimistic in its paper, particularly on localised upsides to freeports, but makes the point that activity inside freeports will always be hard to measure, since we never live the counterfactual of how much of that activity would have happened anyway. 

That’s a roundabout way of saying we’ll never really know. Which, I suspect, is exactly the way the government wants it.

Brexit in numbers

A survey of decision makers at 750 UK-based businesses that are trading internationally, conducted by Opinium for Deloitte’s 2023 Attitudes to Trade Survey, has found that 74 per cent of participants whose businesses traded in Europe saw a negative impact to EU trade as a result of Brexit. About one-third said trade with the rest of the world had compensated for those losses. But net-net, it’s negative. 

This chimes strongly with an Institute of Directors policy paper launched this week which was based on a survey of 580 IoD members conducted in September 2022.

It found that: “Brexit has affected the ability to export both through creating barriers to trade and also increased competition from EU-based firms. Some firms are trying to reorientate to new markets, but it is not straightforward and feels like second best.”

Both of those papers point to two basic truths about Brexit. One, that it isn’t going to go away — the trade barriers are structural and permanent — and two, that they amount (as a roomful of CEOs I spoke with this week said privately) to a low-grade but persistent erosion of UK competitiveness. But the frog is being boiled, not splattered. 

This, I fear, is why — unless we get some political honesty, which I doubt (see above) — confronting the costs of Brexit is going to continue to be very difficult indeed.

And finally a tip for your lunchtime diaries after Easter. My colleague Stephen Bush and I will be taking part in an exclusive webinar for FT subscribers on: Is a Labour victory over the Conservatives inevitable? (April 19, 1-2pm BST — sign up here)

Britain after Brexit is edited by Gordon Smith. Premium subscribers can sign up here to have it delivered straight to their inbox every Thursday afternoon. Or you can take out a Premium subscription here. Read earlier editions on the newsletter here.