Freeports are big news right now. In April 2021 the UK’s Chancellor of the Exchequer Rishi Sunak announced the country will be establishing eight new freeports – and there are high expectations for the positive impact these will have on areas where they are located.
So what is a freeport, how are they used around the world, and why is the UK keen to establish these special zones? We answer all these questions and more – including how inventory management software will help you manage your supply chain for your freeport warehouse or factory.
In this 2022 guide to freeports:
What is a freeport?
Freeports are government designated zones usually located around shipping ports and/or airports. While geographically located within a country’s borders, freeports exist outside of those borders for tax and customs purposes.
These designated areas are subject to a variety of special regulatory relief, tax breaks and government support to encourage economic activity. Companies that operate within the freeport areas benefit from tax incentives.
While incentives vary across different geographical and international locations, freeports are designed to stimulate employment and investment in the local area. They especially encourage manufacturing and design enterprises that import, process and then re-export goods.
These organisations can benefit from deferring the payment of taxes until their products are moved out of the freeport zone – or avoid them altogether when they bring in goods that are stored or manufactured on-site before being exported.
What other terms are used for freeports?
Different terms are used to refer to these zones – but while the terms differ slightly, the concept is similar. The three other main terms used are free trade zone, tax-free zone, and export processing zone – but they’re all slightly different. For clarity, here’s a quick definition of each term:
- A free trade zone – or free zone as it is also known – can refer to specific-purpose manufacturing facilities. Free zones can also be a region where the legal and economic regulations differ from the customary rules of the country concerned. Businesses in free trade zones may benefit from tax and customs duties reductions, and some easing of normal regulatory requirements.
- A tax-free zone is a fixed geographical zone where the absence of tax and duties helps to promote trade, as well as the import and export of a variety of goods. These zones may also result from a mutual agreement between several countries to create a customs-free region.
- Export processing zones are trade districts or industrial estates that import raw materials, manufacture them into goods, then export the finished product. Export processing zones are established to stimulate industrial development, promote exports, and increase foreign exchange earnings. In addition, export processing zones can become trade hubs for the dispersal of knowledge, expertise, and management skills to local companies.
When were freeports first used?
Freeports certainly aren’t new. In 1766 Britain’s Free Port Act was an important political and economic reform that occurred between the Seven Years’ War (1756–1763) and the American Revolution (1775–1783).
London policy makers conceived the idea of freeports as a means of extending Britain’s commercial empire and to ruin the rival Dutch trade economy. The act opened six British ports in the West Indies to traders of highly regulated goods, tying Spanish and French colonists to Britain’s merchant, manufacturing, and slaving economies by limiting or removing duties in freeport zones.
Another organisation, the North European Hanseatic League – which emerged from a loose alliance of German traders and towns – also evolved to develop mutually beneficial commercial interests. This league operated for 400 years across 194 cities in 16 countries, and played a significant role in shaping economies, trade conventions and even politics in the North and Baltic Sea region.
Members of this league benefited from special privileges, which ranged from protections against piracy to duty-free dealings, and diplomatic privileges for traders in affiliated communities and trade routes. In the 19th century, they also benefitted from bonded warehouses, which handed out tax concessions on alcohol and tobacco.
- Read more: What is a Bonded Warehouse? The 2021 Guide
Characteristics of freeports and free zones
The primary purpose of any freeport or free trade zone is to encourage economic activity and increase manufacturing in the local area. The most crucial factors in supporting this are tax- or tariff-free incentives and deferred customs duties.
In a freeport goods can be imported, manufactured, and exported without incurring domestic customs duties or taxes. These taxes are paid when the products enter the domestic economy, often at a reduced rate. Freeports also support economic activity with R&D incentives such as flexibility of regulations, tax credits, and tax reductions.
Four common categories of tax benefits found in freeports are:
- Duty exemption where products entering the freeport don’t incur import duties. This allows goods to be processed or manufactured into finished goods for eventual export to another country.
- Duty deferral where duty payment is delayed and only required when the goods leave the freeport zone and enter the host country. Duty deferrals allow businesses to process and store goods in the freeport zone before incurring duties. This helps to improve cash flow cycles and facilitate just-in-time inventory control.
- Tax incentives, which generally involve temporary financial support to incentivise new economic activity. Typically these incentives will include lower rates of GST or VAT on goods brought in through the freeport, and a reduction on corporate tax rates for companies located within it.
- Tariff inversions encourage manufacturers to operate within freeports by allowing them to import components tariff free, manufacture their product and then pay a lower duty on the finished good when it enters the host country borders. This is because finished goods imported into a domestic market tend to have lower tariffs than component parts processed in a freeport.
Are freeports tax havens?
A tax haven is an overseas jurisdiction with low or no taxes. It also usually has no residency requirements for foreign businesses and individuals keeping money in the country’s financial institutions. Freeports, on the other hand, are zones within a country’s borders where goods and business processes are exempt from some regulations and taxes of that country.
So freeports are not strictly speaking tax havens, since they don’t involve bank deposits in financial institutions – instead, goods arriving at freeports from overseas origins are exempt from tariffs and taxes normally paid to the government.
Since no duties or taxes are levied within the freeport zone, this offers businesses an opportunity to lower costs and optimise the flow of goods between countries. Under these conditions companies from all sectors are encouraged to register new businesses and relocate them to the free zone.
What activities take place at a freeport?
Commercial and industrial activities such as manufacturing, R&D, warehousing, and logistics are undertaken in freeports, which are designed to attract manufacturers producing or assembling goods predominantly for export. This is because goods and services can be brought into a freeport, then processed, constructed, or provided as a service without payment of customs duty, excise duty, sales tax, or service tax.
Goods in a free zone can be assembled, broken up, distributed, manufactured, processed, stored, sold, sorted or repacked – and then sent to another free zone or exported. Activities and industries within freeports are subject to minimal customs regulations because they are deemed to be located outside of the primary customs area of a country where the freeport is located.
Activities within the freeport are determined by governments, regulators, developers, and operators. The government of the host country is the body that gives permission to utilise designated land and utilities as a freeport. It provides the trade, tariff and labour concessions, and relevant enforcement through customs authorities.
A regulator then manages and controls the freeport zone, while developers provide infrastructure services and promote the zone to attract investment. Operators within the freeport undertake the importation, manufacture, processing and export of goods and services.
Where are the major freeports in the world?
Dubai, Hong Kong, and Singapore’s freeports stand among the world’s leading commercial gateways. Each of these freeports is an important logistical, transportation, and trade area offering a competitive advantage to businesses that operate within them.
Some of the world’s major freeports are:
Dubai’s Jebel Ali Free Zone
The most significant freeport in Dubai is Jebel Ali Free Zone, 35km south of the city. Jebel Ali Port is the world’s largest fabricated port, and is serviced by over 100 shipping lines. The Jebel Ali Free Zone, which is built around the port, has around 1600 registered companies from 90 countries operating in the manufacturing, services, and distribution industries. Benefits for companies in this zone include no currency restrictions, corporate taxes for 15 years, and 100% foreign ownership and repatriation of capital and profits.
Dubai’s targeted IT-related free zones
Dubai established the first free trade zone in the Gulf region and now has several free zones targeted to specific industries. These include Dubai Internet City, the world’s first internet free zone; and Dubai Media City, which is a free zone designed specifically for companies involved in media. These new technology and eCommerce hubs have been successful in attracting investment in IT-related goods and services to the region.
Hong Kong freeport
Hong Kong province is a freeport in its entirety. The country is a founding member of the World Trade Organisation and pursues a free trade policy that does not charge customs tariffs. At the heart of this is its port. Hong Kong Port is one of the world’s largest container ports, and one of the most developed. The port is renowned for its rapid handling of marine traffic and turnaround.
Many factors have attracted foreign companies to Hong Kong’s freeport shores. Firstly, the ease of company registration and compliance, and secondly the absence of sales tax, dividends tax, and a variety of other taxes found elsewhere. Excise duties are limited to alcoholic beverages, tobacco, hydrocarbon oil and methyl alcohol, regardless of whether they’re imported or locally manufactured.
Singapore was established as a freeport in 1819. Singapore’s strategic location along the world’s major trade, shipping and aviation routes makes it an important global transport network – and one of the world’s most connected countries. Changi Airport serves over 100 airlines flying to around 100 countries and territories. With 200 shipping lines passing through the port and connecting to 600 ports globally, Singapore is one of the world’s busiest and most strategically important maritime hubs.
Singapore-based companies benefit from a single-tier taxation system that charges no tax on overseas income, and ensures that companies that generate income or have assets outside of Singapore are not taxed by both countries.
Multiple countries can agree to create a joint free zone that abolishes all barriers to trade. In November 2020, fifteen countries of the Regional Comprehensive Economic Partnership did just that, creating the world’s largest free trade area that expands from Kazakhstan’s southern borders into Southeast Asia and the South Pacific, including Australia and New Zealand.
How has the number of freeports worldwide increased over time?
The number of global freeports or special economic zones increased from about 79 in 1975 to 5,400 in 2018, and there are currently around 3,500 worldwide. The fluctuation in freeport numbers over the years is largely due to politics, with some decision-makers seeing freeports as key to economic growth and social prosperity.
The primary factors that have shaped the increasing numbers of freeports are comparable to the same four factors that shape any market trend:
- The government – through monetary and fiscal policy
- International transactions and the corresponding effect on economic strength
- Speculation driving prices on future expected value
- Supply and demand changes that push market rates
All four factors are linked in guiding the decisions of governments to establish freeports and the policies and regulations relating to them. Currency exchange, tax benefits and incentives offered by free trade zones can cultivate innovation, investment, and business confidence. The competitive advantages that free trade zones are perceived to offer in other areas serve to encourage the creation of more.
Freeports in the European Union
The European Union has over 70 free trade zones across all but 7 of the 27 countries that make up its member states – but its freeports take a more limited form than in other locations. Croatia has the highest number of freeports in the EU with Austria, Belgium, Finland, Ireland, the Netherlands, Slovakia, and Sweden having none.
Companies that do operate within the EU’s free trade zones can manufacture products using imported goods and then export those goods without paying tariffs on the imported items. In some cases, however, tariffs may be payable once the finished goods reach their final destination, even for destinations elsewhere in the EU but outside the freeport zone.
In April 2019, prompted by reports of tax evasion and money laundering occurring in freeports, the European Parliament called for their closure across the EU.
Freeports in the United States
The US has 293 freeports, which are referred to as free trade zones or foreign trade zones (FTZ). In these zones manufacturing and production accounts for 70% of free trade activity, while warehousing and distribution makes up the remaining 30%.
Most goods entering these FTZs are of US domestic origin, but manufacturers process these with components imported from overseas to create the finished product. Industries such as car manufacturing can realise significant savings through inverted tariffs. For example, Volkswagen was able to save nearly $2 million in component tariff at its Chattanooga assembly plant where it manufactures 150,000 cars every year.
Companies taking advantage of the relaxed warehousing arrangements can alleviate cash flow problems or save on administrative costs by combining several shipments into bulk customs declarations. Warehousing and distribution activity in US FTZs accounts for some $235 billion in merchandise annually.
Freeports in the United Kingdom: Why are they in the news?
Even as a member of the EU, the UK had seven freeports from 1984 to 2012 in various locations, including Liverpool, Southampton, and Glasgow’s Prestwick Airport. In 2012 the then-Prime Minister decided not to renew their licences on the basis that freeports had had limited success during their lifetime and the UK already enjoyed considerable advantages through its EU membership.
Nearly 10 years on, post-Brexit and after 18 bids from regions vying for freeport classification, Rishi Sunak, Chancellor of the Exchequer, announced in the UK’s March 2021 budget that eight new freeports would be established in the UK. These would be located at East Midlands Airport, Felixstowe and Harwich, Humber, Liverpool City, Plymouth, Solent, Thames and Teesside.
Why is the UK establishing more freeports after Brexit?
So what has prompted this turnaround and who will benefit from these freeports?
Rishi Sunak has long been a proponent of freeports and the benefit they bring to host countries. Five years ago, before becoming Chancellor of the Exchequer, Sunak authored a paper that looked ahead to Britain’s post-Brexit future.
Sunak’s report argued that the government could revive manufacturing by seizing on the opportunity to create several freeports around the country. Other benefits highlighted in the report included job creation to the tune of 86,000 jobs to boost the British economy, with freeports located in areas where the economic need was greatest.
The hope is that the newly announced freeports will serve as national hubs for global trade, bringing new investment and encouraging regional regeneration of disadvantaged and socio-economically deprived areas. However, critics argue the opposite – suggesting that deregulation and limited oversight is potentially harmful to environmental and labour standards.
Companies inside the freeport sites will have access to a £175 million regeneration and infrastructure fund. They will also be offered temporary tax breaks, including reductions to taxes on property and new building purchases. Other benefits include enhanced capital allowances and relief from stamp duty. Employers will also benefit from national insurance contributions for hiring extra employees.
Will Scotland, Wales and Northern Ireland get new freeports?
The UK government currently plans to establish a freeport each in Wales, Scotland, and Northern Ireland.
Scotland is proposing to adopt their own freeport model and create green ports across clusters of high productivity areas in Scotland’s regions. The focus will be on using these green zones to deliver a high standard of environmental protections and net zero while maintaining fair work practices and economic wellbeing.
There have been delays in establishing a free trade port in Wales, and it is feared that the delays mean shipping and trade will be established elsewhere with Wales losing many potential benefits. Adding to the frustration, any Welsh freeport is set to receive less funding than its English counterparts.
Did the EU prevent the UK from having freeports?
Post-Brexit, freeports are being sold to industry and regions under the perception that without governance by the EU, the UK has more freedom over the flexibilities and concessions it can offer in the free zones announced. Critics argue that this is the very same free market thinking from which the government is attempting to distance itself.
The UK’s own experience with freeports, however, suggests there is a very real risk they will merely divert business from other areas of the country, rather than genuinely creating new economic activity. If this should happen, it comes at a considerable cost in forfeited taxes and incentives paid out to the businesses that use them.
What are the economic benefits of freeports?
Freeports and free trade zones are created to stimulate economic activity in their designated areas. They have been found to encourage imports by lowering tax, duty, and administration costs. Inside the freeport, manufacturers can benefit from lower costs of imported components compared with those purchased outside the freeport zone.
Other advantages include:
- Companies benefit from capital allowance on plant and equipment, tax relief, and simplified local planning due to easing of regulations within the zone.
- Communities benefit from job creation, skills development, and better transport infrastructure to support the freeport area.
- Countries benefit through increased foreign trade and investment, technological advancement, innovation, R&D, and renewables. All of these have a flow-on effect to the businesses in and the communities around freeport zones.
- Shipping is more efficient around freeports largely because they are located near commercial gateways and trade routes that help to leverage the shipping and transportation of goods to and from freeport zones. Relaxed regulations and less administration cut red-tape and processing time, making entry into and out of these areas quicker and more efficient.
The disadvantages and dishonest dealings of freeports
While the benefits of freeports are well recognised, the primary disadvantages are the attraction they have for organised crime and illegal activities such as money laundering and counterfeit goods. Without the usual checks and balances, a ship’s cargo can be landed and re-exported with minimal to no safeguards to ensure the legality of the cargo.
Freeports can become easy conduits to and from other free trade zones. If not regulated and monitored properly, light-touch customs and borders controlled by private companies enable organised crime, drugs, money – and even people smuggling – to go undetected.
Meanwhile, lax regulations can threaten security and local business, and the decline in tax revenues means local authorities can lose money that would otherwise be spent on local services.
Other disadvantages are that freeports cannibalise manufacturing activities outside of the free trade area. In other words, existing trade and employment simply moves to the freeport, without creating any real new opportunities.
Two UK Case Studies: The new Solent and Teesside freeports
Here we take a closer look at two of the UK’s new freeports, including how and why they’ve been granted freeport status, and what the future looks like for each of these.
The UK’s new Solent freeport
The Solent region extending from Southampton, Portsmouth and west to Bournemouth has always been a strategic part of the UK’s global gateway. Currently over £77.5 billion worth of goods pass through the ports of Southampton and Portsmouth, including nearly £48 billion in exports.
Ports of the Solent provide UK companies with direct access to over 70 ports worldwide through their unrivalled proximity to shipping lanes into Europe. Strategic national connectivity of the Solent by rail, highway and air provides a geographic advantage over most other regions in the UK.
The area, however, is not all booming ports and industry. It is estimated to be home to 10% of the most deprived communities in the UK. Many of these coastal areas are up to 23% poorer than inland urban areas, and they currently rely heavily on the declining hospitality, tourism and fishing industries.
Bidding for growth: How the Solent became designated as a freeport
A strong track record of international trade was at the heart of the Solent’s bid to become one of the UK’s new freeports. Already contributing £31 billion annually to the economy and its unique geographic advantage made the Solent a strong contender for freeport status
By establishing the Solent as a freeport it’s anticipated 52,000 jobs will be created in the region and even across other parts of the UK. It’s predicted the Solent freeport will contribute £3.57 billion to the economy. The Solent’s geographic location places it at a significant advantage to compete under highly competitive global post-Brexit conditions.
An innovation revolution: the Solent’s Green Growth Institute
With links to three world-class universities and a number of national research assets, the Solent freeport will capitalise on innovation, maritime transformation and green growth.
A Solent Freeport Green Growth Institute will be developed. This aims to provide a centre of excellence in green skill knowledge, abilities, and values to develop and support a sustainable and resource-efficient free trade zone. This aims to create new job opportunities to benefit local communities through environmental innovation.
Investment in transport links to the Solent freeport
Rishi Sunak announced in the 2021 budget that the Solent would become one of the first of the UK’s eight freeports. The Southampton region has since sought support from the region’s council to approve runway extensions that will ensure the Southport Airport will continue to be a key aviation link connecting the central south, both nationally and internationally. In November 2021 Portsmouth secured over £11million in funding to transform and improve its port.
The UK’s new Teesside freeport
Historically Teesside’s expansion grew out of the discovery of iron ore in the Cleveland Hills in the mid-19th century. In the ensuing years Teesside steel became a driving force behind the industrial revolution, gaining a global reputation for its high-grade steel construction.
At its peak the Teesside Steelworks formed a continuous stretch along the River Tees stretching from the towns of Middlesbrough to Redcar, operating 91 blast furnaces within a 16km radius of the area. By 2015, not a single furnace remained in operation nor any of the steelmaking, ship-building and bridge-building industries that they spawned. In 2016, after 140 years of industry in the region, the Teesside Steelworks closed their doors, and 1,700 jobs were lost.
Efforts to save the steelworks were unsuccessful. The £80 million Government aid package to help workers went into redundancy payments. As with any area reliant on a single industry, closure of the steelworks struck a blow to the many local businesses dependent on the industry for their livelihood. Small businesses and even the local cinema closed their doors.
Five years on and joblessness and deprivation have remained a common feature of the region, with unemployment at levels of over 6%. Many workers have been unemployed since the steelworks closed.
A chance at new beginnings in Teesside
In 2020, the government pledged £71 million to transform the old steelworks into a business zone – a green zone for clean energy, high-tech and clean manufacturing. Soon after the government announced bidding was open for its new freeport zones, and in the 2021 budget Teesside was selected as one of these sites.
Spanning 4,500 acres of land that includes both Hartlepool and Middlesbrough, the Teesside freeport in the northeast is billed as the UK’s biggest. This free trade zone will include Teesside airport, Teesport docks and the ports of Middlesbrough and Hartlepool.
This secure economic free trade zone will enable business to be carried out inside the country’s land border, but different customs rules will apply. Businesses operating within the freeport zone will benefit from deferred tax payments until their products are transported elsewhere. Or they can avoid taxes altogether if goods are imported and manufactured within the freeport zone and then exported directly from it.
How the Teesside freeport will provide new opportunities
The freeport status of the Teesside region’s freeport ensures that businesses will benefit from a range of tax relief, along with government support to promote regeneration and innovation. The region’s goal is to build on its steel-producing past to ensure they become part of the green industrial revolution. To do so they’ll utilise offshore wind power and other clean energy alternatives, and use advanced manufacturing processes to reduce environmental impacts.
Tax incentives for businesses investing in the Teesside Freeport include no National Insurance contributions by employers for each employee for up to the three years. This is on earnings up to £25,000 annually. Some business premises will qualify for total relief from business rates, and there will be greater tax relief for companies investing in new plant, equipment, machinery, and buildings assets that are eligible.
It’s anticipated that the Teesside freeport zone will create 18,000 new jobs and bring better wages for Teesside locals. Simplified customs processes and procedures, along with streamlined planning processes, will significantly improve efficiencies and augment the ease of doing business in the zone.
Manage your freeport business with inventory software
Whether you’re a manufacturer or a distributor using a freeport warehouse or factory, the most efficient way to manage this will be using using digital technologies and automation – to ensure you achieve the greatest benefits of using these zones.
At the core of your freeport management system will be inventory software, and you’ll want to look for a series of key features in this, including:
- Inventory management for multiple warehouses
- Multiple currencies
- Clarity over landed cost and cost of goods sold
- Centralised supplier and customer information
- Bills of materials management
- Batch and serial tracking
- Automated assembly of product bundles and kit sets
- Ability to integrate with other apps e.g. accounting and eCommerce
The most important feature to manage your freeport space is the ability to see real-time inventory levels in multiple warehouses – so you know exactly what inventory you’re holding, and where it is.
Managing the inbound and outbound flow of inventory in a busy port zone requires a flexible inventory system. SaaS cloud-based software offers you the ability to adapt your management system as your business grows and changes – and gives you peace of mind by offering the latest security measures and ongoing support.