By Professor David Bailey, Professor of Business Economics, and Dr Ivan Rajic, Research Fellow, Birmingham Business School
The UK has some of the widest regional disparities amongst developed countries. The government’s recent ‘Levelling Up’ White Paper was a welcome recognition of the scale of the challenge and that tackling this will need a long term strategy. But this has been an issue that has been around for a very long time and one which will require a level of investment and financing many multiple times more than that on offer via the government’s levelling up approach. It will also require a much greater degree of devolution than that currently on offer.
‘Freeports’ are one of the flagship post-Brexit policy initiatives seen as important in helping ‘left behind’ places and to tackle some of these disparities. What are freeports? Well, in essence, freeports are designated places or special economic zones – normally around seaports, airports, or rail ports – where firms typically enjoy benefits such as reduced taxes, various tariff (a tax paid on imports) reductions, quicker planning approvals and other administrative simplifications, and good quality infrastructure. The government’s hope is that benefits such as these will attract firms to invest in freeports, bringing more economic prosperity to the regions where they are located. And as noted, this is seen by the UK government as especially important for poorer regions.
The Scottish Government has now agreed its own version of freeports with the UK government, which they termed ‘Green Freeports’. This came after a disagreement with the UK government over its freeport policy. The Scottish Government initially rejected the UK approach and drew up its own ‘greenport’ plans, which would require firms to be signed up to a real living wage and agree to net zero commitments.
But these ‘red lines’ were rejected by the UK Government over fears about how competitive such freeports would be. A stand-off occurred with the UK Secretary of State for Scotland, Alister Jack, arguing that if Scotland were to go it alone on freeports, the Scottish Government would only have enough funding for one site and that tax rules would leave Scotland’s versions at a competitive disadvantage. That’s because the Scottish Government does not have the legal power to exempt goods from tariffs as it is a reserved policy area so cannot unilaterally be included in any Scotland-specific green freeport model.
The Scottish Government Minister for Business, Ivan McKee, was dropped as Scottish lead negotiator on the issue after he said that the UK freeport proposal “does not respect devolution, undermines the Scottish economy and fails to provide equivalent funding to what is on offer for ports in England”. In came Scottish Finance and Economy Secretary Kate Forbes as lead negotiator, and talks were revived around two ‘Green Freeports’.
These Scottish ‘Green Freeports’ are essentially the same as UK freeports, except that the SNP hopes that firms locating there will commit to paying living wages, pursuing inclusive growth, and to decarbonisation. While the Scottish government claim such goals are central to the Green Freeport idea (they have to “shift the dial on net zero” said Forbes recently), it’s not clear how binding any of these commitments will be, given the previous dispute with the UK government over such issues.
The Scottish Greens, despite being in coalition with the SNP, remain opposed to freeports, including the Scottish ‘greenport’ variant, calling them ‘greenwash’. They argue that freeports can attract low wage economic activities and money laundering and are often effectively a vehicle to transfer public subsidies to large international corporations. In 2020, for example, the EU announced a review of over 80 freeports across the EU after identifying that their tariff and duty status helped financing terrorism, money laundering and organised crime.
Standing back from the tussle between the UK and Scottish governments, freeports – whether ‘green’ or not – really need to be assessed from the perspective of whether they can create high-value economic activities (such as research and development intensive activities), and serve as hubs from which companies will establish strong regional supply chains. Unfortunately, this is probably too much to expect from freeports.
In one way or another, most of the benefits of freeports ultimately revolve around cost reductions. While firms are often happy to lower their costs, for high-value activities this is typically not the determining factor in where to locate. What counts more is labour skills, the presence of specialist suppliers in the same region, proximity to competitors, availability of relevant technology, close contacts with important stakeholders, the general quality of life in the area and so on. If a region does not already possess these characteristics, a freeport will not make them suddenly materialise there.
Rather, a freeport in a poorer region will simply attract activities, such as assembly, that firms already tend to locate in such regions to take advantage of cheaper labour, lower rents, etc. Rather, a much more holistic industrial policy will be needed to help regions develop, which was a key argument in our recent Manufacturing after Brexit report.
In this context, it is important to bear in mind that, even though many ‘green’ sectors represent advanced parts of an economy, they still contain many ‘simpler’ activities within them, such as assembly or routine repair and maintenance operations. So, even if a Scottish ‘greenport’ manages to attract the production of, for example, offshore wind turbines, it may still be the case that what is attracted may be assembly activities, while higher value activities such as research and development and the production of specialist components might be done elsewhere.
Another point to remember is that large firms can choose among many freeports (and other similar special economic zones) around the world. If they are coming to a freeport to cut their costs, why would they choose to commit to paying higher wages, when they can just as easily go to a location that does not pose this requirement?
Overall, just like freeports in the rest of the UK, Scottish ‘greenports’ can probably be a useful tool to attract investment to certain areas, and perhaps they can be used as part of a broader industrial strategy aimed at upgrading UK manufacturing. But, on their own they are unlikely to bring the sort of benefits that the Scottish or UK government are hoping for.