Freeports are economically trivial and politically expensive

A new US administration, a fresh chapter for world trade, and what does that mean? Great excitement here at Trade Secrets as the policy buzzphrase industry launches an innovative new range of products in time for Christmas.

Frankly, the US has some catching up to do: it’s been more than half a year since the EU launched the glorious “open strategic autonomy”. (Another plug for our handy online slogan generator for you to have a go at home.) Wherever we hear or see the expression mentioned these days, which in Brussels is a lot, we’ve begun mentally to replace it with “Holy Roman Empire”, a cautionary tale of a poorly managed and ultimately failed imposition of an abstract theology on a disparate polity. To adapt Voltaire’s savage dismissal of the latter, the EU at present risks being neither open, nor strategic, nor autonomous. But we’re not mindlessly negative round here, so let’s give it time.

Anyway, here comes John Veroneau, a former deputy US trade representative, with the excellent “patriotic globalism”. A bit short for our liking — we’d have added an extra adjective à la façon européenne — but it’s certainly going on our Christmas present list. And then this week, Hank Paulson weighed in with “targeted reciprocity”. We’re not sure how you do reciprocity without targeting it, but we’ve never been US Treasury secretary or run Goldman Sachs, so what do we know? That’s all we’ve found for now, but if you come across more shiny new tag lines during the festive season, send them our way.

Today’s main piece is about how the UK’s plan to create “freeports” is a bad idea in even more ways than you suspected, while Tall tales of trade points out that similar interventions were extensively tried by the Labour governments under Tony Blair and Gordon Brown. Meanwhile, the FT Big Read “Why the developing world needs a bigger pandemic response” provides our chart of the day.

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Freeports, a free lunch for lobbyists

For a government dreading impending Brexit-generated logjams at British cargo terminals, you can see the symbolic attraction of giving towns “freeport” status, a process for which Prime Minister Boris Johnson’s administration launched a bidding procedure this week. The word has a nice Global Britain our-proud-mercantile-maritime-tradition feel to it, a little bit Hanseatic League, a little bit buccaneering colonial trader-adventurers, myths of Walter Raleigh sailing off to discover the potato and what have you. 

Unfortunately, as a solid consensus of trade experts will tell you, for a country such as the UK the proposal is basically pointless. Creating a freeport usually does a lot more to redistribute economic activity within a country than to increase it. This is true whether it’s the minimal kind that creates a production cluster by waiving tariffs for goods that are then processed and re-exported, or a more expansive free zone such as one with special planning, infrastructure and regulatory advantages.

The only cases where freeports really seem to work are under “tariff inversion” — where duties on components are higher than those on finished products — or in a stultified economy where political pressures prevent business and labour regulation being relaxed except in limited zones. Neither is really true in the UK. The UK’s proposed new tariff structure doesn’t look like that, and Britain can change its planning laws or taxes if it wants.

In fact, the Johnson government’s plans, in which it will give up to 10 towns (or local areas) freeport status, are likely to be worse than useless. Creating a limited number of freeports — there seem to be at least twice as many applicants as places — isn’t just a waste of time. It’s also bad political economy. It pits towns against each other; it encourages dollops of government cash to be chucked around inefficiently for prestige reasons; it has the potential to warp and corrupt the political process.

Boris Johnson wants to grant ‘freeport’ status to 10 UK towns. However, the government hasn’t had a great record when it comes to handing out contracts and benefits transparently and efficiently © Charlie Bibby/FT

By creating a competition to get limited slots and attaching tax breaks and other benefits to the customs advantages, the UK government has set port against port. As the Financial Times has written before, one of the keenest places on freeports is Tees Valley in the north-east: its Conservative mayor, Ben Houchen, has long been a fan. But a rival contender, Tyneside, which similarly wants to get the status to spark a wider industrial renewal, is only 40 miles to the north. It seems highly likely that trade and employment will be diverted much more than created if either place becomes a freeport. English localities and regions should be pulling together and creating integrated growth strategies, not being divided in scrambling for largesse from London.

The issue in general already seems to have become the subject of political lobbying. Johnson’s enthusiasm for freeports in principle, for example, cannot have been harmed by Bristol Port Company giving £25,000 to his successful campaign for the leadership of the Conservative party in 2019.

And when it comes to picking the winners, anyone who thinks his government capable of handing out government contracts and benefits transparently and efficiently hasn’t been paying attention. The government procurement of medical equipment for the pandemic is turning into a major scandal, with cash being sprayed around with minimal safeguards to politically connected types. In another example, money from a government fund for regenerating deprived towns, much of which was subject to ministerial direction, ended up headed for not particularly poor areas that happened to be marginal or target Conservative parliamentary constituencies.

The world over, the creation of freeports and free zones has been susceptible to inefficiencies, rent-seeking and political interference — and indeed money laundering and other serious crimes. These are obviously much worse in some places than others, and mechanisms of transparency can be developed to minimise them. But you’d be an optimistic, not to say naive, observer to imagine that freeports created in the current circumstances in the UK will be a good example to others.

Charted waters

In a crisis, it pays to be wealthy. The response of the developed world to the devastation of their economies by coronavirus has been to throw money at the problem. The IMF estimates that the combined fiscal and monetary stimulus delivered by advanced economies has been equal to 20 per cent of their gross domestic product. Middle-income countries in the developing world have been able to do less but they still put together a combined response equal to 6 or 7 per cent of GDP, according to the IMF. For the poorest countries, however, the reaction has been much more modest.

Tall tales of trade

Here’s another thing about freeports — you can see we’re quite wound up on this subject — addressing a simple contradiction in the UK government’s rhetoric. You can’t simultaneously say “we are a great free-trading nation, we will cut tariffs and be Global Britain” and “we need freeports so companies can escape tariffs”. Pick one, folks.

To be fair, the government’s sales pitch rests more on the regulatory/infrastructure/investment argument. But in that case, why call it a freeport at all? Call it a companies cluster or a business bailiwick or a productivity province or something. Or a command HQ for open strategic autonomy, come to that. The communications problem here is that similar interventions were extensively tried by the Labour governments under Tony Blair and Gordon Brown: Regional Development Agencies, a New Deal for Communities, Enterprise Areas, an initiative wherever you looked. But they didn’t really work. So the Johnson government has to pretend it’s trying something radically different and is giving it a misleading label to do so. All in all, it’s a bit depressing.

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Source: Economy - ft.com