Business focus: Fears grow over new Chancellor's tax-lite free ports push

Amid all the uncertainties triggered by the putsch at the Treasury, one fact is assured; new Chancellor Rishi Sunak will push for the rapid establishment of free ports across the country. It was Sunak who got Conservative MPs energised by the idea that these tax and regulation-lite zones would ensure that Britain has a glorious future after Brexit. He first made his case in a report for the Thatcherite Centre for Policy Studies think-tank in 2016. 

The prospect has excited Conservatives of all colours, from Theresa May's old adviser Nick Timothy to the current Number 10 Rasputin, Dominic Cummings. It formed a key part of Boris Johnson's election manifesto. Last week, just days before his sudden elevation to the top of Number 11, Sunak and other ministers officially launched a plan to create 10 free ports. 

The news was greeted by plenty of cheerleaders, but a backlash is quietly growing. Not everyone, it seems, is as thrilled by these Singapores-on-Sea as it first appeared. Critics accuse the Government of building policy on shabby economics and low-tax ideology rather than evidence.

Free ports are nothing new. To quote the introduction to last week's consultation document: "In the Ancient World, Greek and Roman ships -- piled high with traders' wines and olives -- found safe harbour in the Free Port of Delos." The idea is that a country creates an area around a sea, air or rail port in which the rest of the nation's laws on tax and regulations are relaxed.

Goods can be imported duty free, only being taxed as they are moved out of the port to be sold domestically, or not at all if they are exported again. The theory is that they attract companies to build factories in the area, employing local people. As the Government puts it, "hotbeds of innovation" will be created.

Britain used to have seven free ports, from Tilbury to Liverpool. They were abandoned by David Cameron's government in 2012 because they were deemed of limited use.  The current administration says this time it will be different.

Released from the shackles of Europe, British free ports will offer employers far greater benefits, it argues. Sunak's 2016 CPS article, which seems to inform much of last week's plan, declared free ports could create 86,000 jobs. This figure is sketchy at best.

Asheem Singh, director of economics at the Royal Society of Arts, calls it "laughably back-of-a-cocktail-napkin stuff".  Sunak got there by simply dividing the number of US workers in free ports by the ratio of the entire US-to-UK workforce. He used no weighting at all for the variations in our economies, populations, industries or other local factors.

Singh says: "This methodology would be laughable if the man responsible for it weren't now the Chancellor." The World Bank found that growth of jobs and economic activity in free port areas generally starts off with a spurt but soon retreats to that of the surrounding area. When Delaware opened a free port in 2015, unemployment fell, but only at the same rate as the rest of the country.

Other research suggests free ports merely redistribute existing jobs, rather than create new ones. As for "hotbeds of innovation", International Labour Organization data suggests most companies who set up in free ports are simple, small-time processing industries that "lack professional management". Singh worries that this translates into grim, unskilled jobs, made grimmer by the lack of workplace regulations free ports can offer.

Jim O'Neill, the former Goldman Sachs economist who used to run the Northern Powerhouse project, is unimpressed, too. Says Lord O'Neill: "It's not clear to me what the 'wow' is about it. I can't see how it really creates new demand in itself.

Presumably it just switches it from other places."  Europe, which has many free ports, is going in the opposite direction as Britain, clamping down rather than encouraging them. It says they have become havens for money-launderers and tax evasion.

A European Commission study in 2018 found growing demand for them from customers was largely the result of curbs on illegal transactions in banks. Free ports' lack of regulation makes them "conducive to secrecy", the report warned. It cited the Bouvier Affair, where free port owner and art dealer Yves Bouvier allegedly defrauded clients by misrepresenting the cost of artworks and subsequently overcharging them.

The report said the allegations, denied by Bouvier, highlighted the opacity of free ports: "No one really knows exactly what is stored [there] as the inventory is not consistently tracked. Moreover, the beneficial owners of many of the goods are unknown."  Given the controversies, critics question how the idea turned from an article by a then-junior new MP into Government policy so quickly.

A mysteriously strong current seems to have driven the idea forward through the political process, sweeping all before it.  So, it emerges that a panel of free ports experts assembled last August to advise the Government met only once before last week's plans were launched. And that a widely used justification that they have the backing of 85% of the public comes from a dubious poll commissioned by Mace, the main corporate lobbyist for free ports. (The pollsters told respondents free ports were hoped to "encourage domestic manufacturing and increase international trade and job creation" before asking if they were for or against.)

Alexandria Reid, national security studies researcher at the Royal United Services Institute, has long criticised free ports for harbouring illegal activity. She says: "It is positive that the Government is taking an evidence-based approach. But a consultation is only useful if the Government listens to the evidence it receives."

The consultation document does acknowledge the risks around tax avoidance and art storage. But other questions remain unanswered.  With a strong majority of its Brexiteer MPs in the Commons, there is a risk the Government's plans will be driven through, right or wrong, by the sheer momentum of the current political tide.

We may repent at leisure.

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