Freeports are a regional industrial strategy that dare not speak its name

Good afternoon. There will be an interesting moment in Brexitland today when the London mayor Sadiq Khan makes a speech at the Mansion House warning that politicians need to stop “dodging or ducking” the Brexit issue because it’s “dragging our economy down”.

Interesting because, at least tonally, Khan’s plea to confront Brexit’s negative impacts head on contrasts with Sir Keir Starmer’s rather more diffident “let’s make Brexit work” approach, a phrase which itself belies a lack of ambition.

This is a sign of the inherent tension between Starmer’s growth narrative and his plans to address Brexit’s impact, which are inherently limited by red lines ruling out EU single market and customs union membership. 

The book I wrote last year is essentially a look at what’s left over, but electing not to talk about Brexit (because you’re either embarrassed about it, or don’t have ambitious solutions to address its downsides) doesn’t mean that Brexit is going away. 

On the contrary, it continues to inflict a drag on the UK economy that — according to modelling by consultancy Cambridge Econometrics commissioned by Khan — will leave the UK economic output 10 per cent smaller than it otherwise would have been by 2035.

As we discussed last week, there are signs that Labour, like the Tories, are minded to concentrate on fixing things at home rather than investing political capital on an uncertain and difficult negotiation with Brussels, which brings me to today’s main topic: freeports. 

This week Michael Gove and the investment minister Lord Dominic Johnson gave evidence to the Business and Trade select committee on the progress of a concept that was talismanic for many Brexiters, not least Rishi Sunak.

It followed the publication of a delivery road map for freeports last December that, as one business leader told me, was written in the tone that it “keeps taking a lot of time for these things to happen”.

Performative aspects of freeports

What was interesting in the Gove and Johnson appearance was the implicit acceptance of the performative aspects of freeports that the Office for Budget Responsibility had said would have such a small economic impact it would be impossible to measure.

As data analysis by Sussex university’s UK Trade Policy Observatory has shown, UK freeports don’t have the classic advantages of “duty inversion”, where manufacturers get to import inputs tariff-free and only pay a tariff on finished goods at the point of export. 

That’s because, as Peter Holmes of the UKTPO pointed out to the same committee a while back, the UK global tariff doesn’t create those tariff “wedge” opportunities, despite the fact that the government’s consultation on freeports described them as a “key benefit”.

Not any more, it seems. This is not to be churlish, but to point out that freeports are actually — to quote Gove in his road map — vehicles for “rebalancing regional economies” or put another way, they’re a “levelling up” device.

That means using freeports, which now share many of the tax breaks handed to allied Investment Zones, to attract investment and create hubs in key sectors such as renewables — rare earths at Humber Freeport, for example, or wind turbines at Teesside.

‘Glorified bonded warehouses’

Johnson, who gets a good rep from business groups as an energetic salesman of UK plc, urged the committee not to think of freeports any more as “glorified bonded warehouses”, adding that it was “important not to over-analyse” a concept that he described as more akin to a branding exercise.

(On the point of over-analysing, Gove was typically foggy about where the government had got its 200,000 freeport jobs prediction from, or how long it would take for those jobs to materialise. We still await clarity on that.)

But Johnson’s point was not to get bogged down in the detail, but to embrace the big picture offer to investors. Levelling up, he said, was a concept that was recognised around the world and freeports were “enormously powerful as a hook” to help him sell the UK internationally.

This dovetails with Lord Richard Harrington’s review into improving the UK offer to international investors by using freeports to improve the “place-based, sector-specific offers across the UK” as other countries, such as France and Sweden, already do.

In short, freeports are a regional industrial strategy that dare not speak its name, and could be used as the spur for new clusters and investment, although how much of this activity is “additional” will always be difficult to determine as this very good Institute for Fiscal Studies report explains.

Will freeports work?

The bigger question is whether this strategy — when seen in the context of the negative Brexit impacts noted above and the mega-subsidies being dished out by the US and EU — is going to deliver the kind of growth that both Labour and the Conservatives are promising.

The Treasury extended the freeport tax breaks from five to 10 years at the Autumn Statement which was a recognition that the projects take a long time to establish, and also announced a new £150mn fund to help freeports get up and running.

Gove described the fund as a “generous financial package”, but in truth, as David Phillips, who co-authored the IFS report mentioned above points out, it’s “pretty small beer, even for what the OBR expects to be a pretty small policy”.

Or as the Scottish National party MP Douglas Chapman contended, while Gove talked about the UK government “irrigating the soil” to attract investment, the government was “using a teacup instead of a power-hose”.

Ultimately, freeports are here to stay. They are only one piece of the puzzle, but the government is getting behind them not just with money, but also a commitment to put them front and centre of its inward investment offer, as well as expediting planning, grid connections, easing planning consents and the like.

But for all Gove’s admirable salesmanship, they’re not a magic bullet and need to be seen in the wider context of an economy that — per Cambridge Econometric analysis above — is already £140bn smaller than it would otherwise have been. 

Brexit in numbers

Today’s chart is based on a piece of work by Boston Consulting Group that predicts that shifts in global trade flows towards more regional supply chains will result in UK goods trade with both the US and EU actually declining over the next decade.

Now models are only models, but the assumptions in the BCG work reflect the anticipated shift in global trade flows that will make the EU neighbourhood even more important to the UK just as we’ve chosen to erect barriers to trade with that area.

This regionalisation trend appears to be reflected in the latest global trade tracker from the UK in a Changing Europe, which finds that trade in the third quarter of last year with the EU amounted to 53.3 per cent of total UK trade, significantly up on pre-Brexit levels.

As the author Stephen Hunsaker points out, that isn’t because of booming EU-UK trade, but because the UK is struggling to deepen trade ties with the rest of the world. As he puts it: “As yet, the UK has been unable to defy gravity — the well-established fact that trade with your neighbours is easier than trade with the other side of the world.”  

Tim Figures, a former business secretary adviser who is now senior expert on geopolitics and trade at BCG, says the “ongoing slow decline” of UK goods trade in the BCG forecast reflects the anticipated onward march of “nearshoring” as geopolitical forces (US-China decoupling, the EU search for strategic autonomy, for example) increasingly localises global trade flows.

The further challenge for the UK (which has a resilient services sector), adds Figures, is that modern goods increasingly come bundled with services — like connected cars — which will weigh on UK trade. 

Rather pointedly, given Khan’s warning above, Figures also notes that the BCG forecast is based on the assumption that given the current political environment “there will be little scope over the next decade to improve the UK-EU relationship in a way which makes a material difference to the numbers.” 

That’s the challenge for Starmer if he wins. We’ll see. 

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 of the newsletter here.

Source: Economy - ft.com