A free port or free zone is a specifically designated area where tariffs on imports are either substantially cut or waived in the hope of stimulating economic growth and trade.
The concept is currently been debated due to a plan unveiled by the UK in August 2019 to launch several free ports in order to protect its trading links.
The government is planning to establish ten of them across the country, but what are free ports and how will they affect trade and the economy?
How do free ports work?
Essentially, free ports, also known as free trade zones, are meant to cut costs and bureaucracy, at the same time as encourage innovation.
A free port or zone is an area inside the boundary of a country, but is considered a separate entity for the purpose of customs.
In some cases, businesses that operate within these areas are given incentives, such as tax breaks.
A good example of this is the free zone in the Canary Islands, Spain, where the there is a corporation tax of 4%, compared to 25% in the rest of the country.
Can free ports boost the economy?
Numerous economic studies suggest that free ports can stimulate growth by making it easier to import goods.
Manufacturing businesses operating within the surrounding free zones ultimately benefit from cheaper components compared to those outside.
There are also advantages to be had from the ‘agglomeration effect’, which is where a particular sector and subsequent economic activity is concentrated in one area.
However, they aren’t a guarantee. The UK Trade Policy Observatory (UKTPO) warns that there needs to be investment and innovation in numerous areas alongside free ports if they are going to work.
These areas include design, transport infrastructure, skilled labour and sufficient capital within the free zone.
Furthermore, free ports and zones could not so much create new revenue but rather divert existing economic activity into the area through the promised tax breaks.
This would ultimately cost the economy more in the long run. There are also fears free ports could increase tax evasion and money laundering, which led to the European Parliament calling for them to be scrapped across the EU in April 2019.
The plans were announced by Secretary of State for Trade Liz Truss MP, which said the new free ports could create ‘thousands of jobs’.
They were also backed by Prime Minister Boris Johnson in the belief that they could help the economy in so-called ‘left behind’ former industrial areas.
As if to prove the point, the ports of Tyne, Tee, and Milford Haven all expressed interest in joining the initiative shortly after it was announced.
However, the idea of using free ports as a means of stimulating growth isn’t new. In 2012 the country had five free ports, but these were closed by the government and if the stated plans are executed then it will have more than it ever has done.
Whether or not they will help maintain trade is yet to be seen and that can only really be judged once Brexit and all its consequences has been fully realised.