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

Good afternoon. There shall be an fascinating second in Brexitland in the present day when the London mayor Sadiq Khan makes a speech on the Mansion Home warning that politicians need to stop “dodging or ducking” the Brexit issue as a result of it’s “dragging our economic system down”.

Attention-grabbing as a result of, a minimum of tonally, Khan’s plea to confront Brexit’s adverse impacts head on contrasts with Sir Keir Starmer’s fairly extra diffident “let’s make Brexit work” strategy, a phrase which itself belies an absence of ambition.

It is a signal of the inherent rigidity between Starmer’s development narrative and his plans to deal with Brexit’s affect, that are inherently restricted by purple strains ruling out EU single market and customs union membership. 

The ebook I wrote final 12 months is basically a take a look at what’s left over, however electing to not discuss Brexit (since you’re both embarrassed about it, or don’t have formidable options to deal with its downsides) doesn’t imply that Brexit goes away. 

Quite the opposite, it continues to inflict a drag on the UK economic system that — in keeping with modelling by consultancy Cambridge Econometrics commissioned by Khan — will depart the UK financial output 10 per cent smaller than it in any other case would have been by 2035.

As we mentioned final week, there are indicators that Labour, just like the Tories, are minded to focus on fixing issues at house fairly than investing political capital on an unsure and tough negotiation with Brussels, which brings me to in the present day’s foremost subject: freeports. 

This week Michael Gove and the funding minister Lord Dominic Johnson gave evidence to the Enterprise and Commerce choose committee on the progress of an idea that was talismanic for a lot of Brexiters, not least Rishi Sunak.

It adopted the publication of a delivery road map for freeports final December that, as one enterprise chief informed me, was written within the tone that it “retains taking quite a lot of time for this stuff to occur”.

Performative facets of freeports

What was fascinating within the Gove and Johnson look was the implicit acceptance of the performative facets of freeports that the Workplace for Funds Duty had stated would have such a small financial affect it might be unimaginable to measure.

As data analysis by Sussex college’s UK Commerce Coverage Observatory has shown, UK freeports don’t have the basic benefits of “responsibility inversion”, the place producers get to import inputs tariff-free and solely pay a tariff on completed items on the level of export. 

That’s as a result of, as Peter Holmes of the UKTPO identified to the identical committee some time again, the UK international tariff doesn’t create these tariff “wedge” alternatives, even though the federal government’s consultation on freeports described them as a “key profit”.

Not any extra, it appears. This isn’t to be churlish, however to level out that freeports are literally — to cite Gove in his highway map — automobiles for “rebalancing regional economies” or put one other means, they’re a “levelling up” gadget.

Which means utilizing freeports, which now share most of the tax breaks handed to allied Funding Zones, to draw funding and create hubs in key sectors comparable to renewables — uncommon earths at Humber Freeport, for instance, or wind generators at Teesside.

‘Glorified bonded warehouses’

Johnson, who will get a very good rep from enterprise teams as an lively salesman of UK plc, urged the committee not to consider freeports any extra as “glorified bonded warehouses”, including that it was “necessary to not over-analyse” an idea that he described as extra akin to a branding train.

(On the purpose of over-analysing, Gove was sometimes foggy about the place the federal government had acquired its 200,000 freeport jobs prediction from, or how lengthy it might take for these jobs to materialise. We nonetheless await readability on that.)

However Johnson’s level was to not get slowed down within the element, however to embrace the massive image supply to buyers. Levelling up, he stated, was an idea that was recognised around the globe and freeports have been “enormously highly effective as a hook” to assist him promote the UK internationally.

This dovetails with Lord Richard Harrington’s review into bettering the UK supply to worldwide buyers by utilizing freeports to enhance the “place-based, sector-specific gives throughout the UK” as different nations, comparable to France and Sweden, already do.

Briefly, freeports are a regional industrial technique that dare not converse its title, and could possibly be used because the spur for brand new clusters and funding, though how a lot of this exercise is “further” will at all times be tough to find out as this very good Institute for Fiscal Studies report explains.

Will freeports work?

The larger query is whether or not this technique — when seen within the context of the adverse Brexit impacts famous above and the mega-subsidies being dished out by the US and EU — goes to ship the type of development that each Labour and the Conservatives are promising.

The Treasury extended the freeport tax breaks from 5 to 10 years on the Autumn Assertion which was a recognition that the tasks take a very long time to ascertain, and in addition introduced a brand new £150mn fund to help freeports get up and running.

Gove described the fund as a “beneficiant monetary package deal”, however in fact, as David Phillips, who co-authored the IFS report talked about above factors out, it’s “fairly small beer, even for what the OBR expects to be a fairly small coverage”.

Or because the Scottish Nationwide occasion MP Douglas Chapman contended, whereas Gove talked in regards to the UK authorities “irrigating the soil” to draw funding, the federal government was “utilizing a teacup as an alternative of a power-hose”.

In the end, freeports are right here to remain. They’re just one piece of the puzzle, however the authorities is getting behind them not simply with cash, but in addition a dedication to place them entrance and centre of its inward funding supply, in addition to expediting planning, grid connections, easing planning consents and the like.

However for all Gove’s admirable salesmanship, they’re not a magic bullet and should be seen within the wider context of an economic system that — per Cambridge Econometric evaluation above — is already £140bn smaller than it might in any other case have been. 

Brexit in numbers

Immediately’s chart is predicated on a piece of work by Boston Consulting Group that predicts that shifts in international commerce flows in direction of extra regional provide chains will end in UK items commerce with each the US and EU really declining over the subsequent decade.

Now fashions are solely fashions, however the assumptions within the BCG work mirror the anticipated shift in international commerce flows that may make the EU neighbourhood much more necessary to the UK simply as we’ve chosen to erect boundaries to commerce with that space.

This regionalisation development seems to be mirrored within the newest international commerce tracker from the UK in a Changing Europe, which finds that commerce within the third quarter of final 12 months with the EU amounted to 53.3 per cent of complete UK commerce, considerably up on pre-Brexit ranges.

Because the creator Stephen Hunsaker factors out, that isn’t due to booming EU-UK commerce, however as a result of the UK is struggling to deepen commerce ties with the remainder of the world. As he places it: “As but, the UK has been unable to defy gravity — the well-established incontrovertible fact that commerce along with your neighbours is less complicated than commerce with the opposite facet of the world.”  

Tim Figures, a former enterprise secretary adviser who’s now senior knowledgeable on geopolitics and commerce at BCG, says the “ongoing gradual decline” of UK items commerce within the BCG forecast displays the anticipated onward march of “nearshoring” as geopolitical forces (US-China decoupling, the EU seek for strategic autonomy, for instance) more and more localises international commerce flows.

The additional problem for the UK (which has a resilient companies sector), provides Figures, is that trendy items more and more come bundled with companies — like related vehicles — which can weigh on UK commerce. 

Quite pointedly, given Khan’s warning above, Figures additionally notes that the BCG forecast is predicated on the belief that given the present political atmosphere “there shall be little scope over the subsequent decade to enhance the UK-EU relationship in a means which makes a fabric distinction to the numbers.” 

That’s the problem 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 each Thursday afternoon. Or you’ll be able to take out a Premium subscription here. Learn earlier editions of the e-newsletter here.