The future of freeports

In 1983, 36 years ago, Dr Eamonn Butler and Dr Madsen Pirie, founders of the Adam Smith Institute, wrote Free Ports. 3 years later, Dr Butler co-authored Free Ports Experiment. In 1981, the ASI had proposed freeports for the UK – and six were established – but their chances of great success were scuppered from both sides by the EU and HM Treasury. The European Union steadfastly refused to ease any of their choking regulations – and the UK Treasury, similarly, refused to ease VAT or tariffs. According to Dr Madsen Pirie in the Spectator today, ‘the freeports were effectively just reduced to being bonded warehouses, where goods could be stored, and only be taxed when they left.’

The Adam Smith Institute has long been clear that this isn’t what freeports should be about. Freeports could, and should, be hi-tech, high enterprise hubs for the British economy, springboards for regional and global competition through free trade, and gateways to local employment and prosperity.

Freeports aren’t a new concept – they rose to prominence in post-Renaissance Italy – and they aren’t a complex idea. As Dr Butler explains in his piece for the Telegraph today: ‘take a bit of land near a port or airport and treat it as if it were a foreign country as far as import/export trade is concerned. So, people can fly or ship in goods from abroad, store, consolidate, process, assemble, package or label them in the freeport, and fly or ship them out again. All this with no import tariffs, no VAT or any other taxes, and no paperwork when the goods leave. All plain and simple for the importers and exporters, and a nice generator of jobs, enterprise and investment for the local community.’

Despite the simple nature of freeports policy – and the limited cost to the public purse – government has insisted on getting them wrong in the past. The sites rolled out when the Adam Smith Institute first championed the idea were chosen by the government for political reasons, not for sound business ones. Freeports should have regulations which are as simple as possible – and tax codes to match. Freeports should be treated as foreign territory in many ways – and managed through an independent port operator – not a meddling government.

If done right, freeports can be a huge win for post-Brexit Britain. We can increase the capacity of our ports, develop strategic assets needed to be a serious global player on trade, and boost jobs and British products at the same time. As Dr Pirie said today: ‘Liz Truss, as the new International Trade Secretary should be bold. We should support her fight for real freeports, ones that can draw business, wealth and jobs to some of the UK’s ports, located in areas that have not kept pace with its economic expansion, and which could be regenerated with a such a boost. Low taxes and low regulation mixed with high-tech and tall global ambition — a recipe for success.’

Freeports are one of those policies which can make one really excited for the future – if they’re rolled out in the right way. Since 1981, the Adam Smith Institute has led the calls for freeports policy – and there’s now a wealth of evidence from around the world that shows we’re right. If done properly, freeports can be serious assets to an economy – we look forward to continuing to make the case for them. 

Irregular Immigration in the EU

The last couple of years have seen a huge amount of migrants come into the EU. They have come for a variety of reasons, but the principal ones have been to flee conflict and secure a better standard of living. Much of the media and public will infer from the second reason that this is to claim extensive welfare benefits that are available for asylum seekers, and if this is true it is of course a problem. But the cost of asylum seekers is of course amplified by the fact they are not allowed to work. This makes them very costly as they are not contributing in taxes, and rightly or wrongly this causes resentment. The macroeconomic benefits of migration however, have long been documented, and two recent papers address the potential economic benefits of the irregular migration that has been seen on the continent.

A paper from the Federal Reserve Bank of Dallas notes that the US used to be the main recipient of irregular immigration, but this has shifted to the European continent for a number of reasons, mostly dependent on proximity. The open borders within the exterior EU border has previously made it easy for migrants to move where they want to go, principally Germany, Austria and Sweden. The standard economic benefits are again discussed, not just for the immigrants themselves, but for recipient countries; they have higher rates of GDP growth, private investment, innovation and entrepreneurial activity. This applies to both informal and formal labour, but with asylum seekers these benefits are not entirely applicable as long as they are restricted in joining the formal labour force, they are possibly going to be working in the formal sector but the fiscal benefit will not be seen by the government as it will not be taxed.

However, in order to protect those benefits over the long term, Orrenius and Zavodny make a case that an effective border control has to be implemented, and if asylum seekers are to be allowed to work then failed asylum seekers have to be removed. This is of course a huge policy challenge with the many entry points onto the European landmass, but will mean that the EU is able to welcome not only asylum seekers but those who wish to work in the EU, balancing the line between the huge fiscal cost of irregular migration and high wages behind a border which is rigorously enforced, sending an incentive for more irregular migration.

The second paper, from the IMF again repeats the message of the first “Rapid labor market integration is also key to reducing the net fiscal cost associated with the current inflow of asylum seekers. Indeed, the sooner the refugees gain employment, the more they will help the public finances by paying income tax and social security contributions. Their successful labor market integration will also counter some of the adverse fiscal effects of population aging.”

We know that the general effects on wages at the lowest level are mostly temporary and limited, so this shouldn’t stop policy makers from loosening restrictions on asylum seekers to mitigate the potentially huge fiscal and political impacts of having many hundreds of thousand of new dependents on the state.

Is Ted Cruz a policy wonk's dream come true?

Now that Ted Cruz seems to have a slim chance of winning the Republican Party presidential nomination, a couple of British commentators have said that he seems even worse than Trump. I do not care for his positions on gay marriage or abortion, and his immigration policy is absolutely terrible, but on many other issues he is actually rather good. It’s often the case that there is a bigger difference between policy wonks and politicians than there is within within those professions, even across ideological divides. On a surprising number of issues, Ted Cruz appears to have sided with the wonks:

• He opposes ethanol subsidies, and still won Iowa, where corn is king.  In doing so he may have broken a path for future presidential candidates to drop their support for this piece of corporate welfare.
• He (correctly) blames tight money for the Great Recession, not greedy bankers or loans to poor people. He once flirted with a gold standard, but it looks like he's gotten over that, fortunately. (Update: Perhaps not. Darn.)
• He wants a broad-based VAT to replace payroll and capital taxes, which according to the Tax Foundation would lead to a 13.9 percent higher GDP over the long term, a 43.9 percent larger capital stock, 12.2 percent higher wages, and 4.8 million more full-time equivalent jobs. VATs are relatively efficient taxes, and shifting taxation to them from capital taxes is agreed by most economists to be a good idea.
• He wants to expand the Earned Income Tax Credit, a cash transfer to the working poor, by 20 percent.
• He has introduced a bill in the US Senate that would allow for drugs and medical instruments approved by other developed countries to be used in the US, bypassing the expensive and time-consuming FDA approvals process.
• He supports states’ rights to legalise marijuana.
• He attacked other Republicans who demanded more mass surveillance of American citizens after the San Bernardinho massacre.

Like all politicians he is a mixed bag, but many of these are truly smart policies that most politicians wouldn't touch with a ten-foot bargepole. My opinion is of course irrelevant, but if he would soften his crazy immigration restrictionism I think he would be the outstanding candidate to policy wonks.

Five questions for scaremongers

Let’s be real. No-one knows what the economic effect of Brexit will be. Anyone who says they do is either kidding themselves or trying to kid you. But we do owe it to ourselves to make intelligent estimates and to set out our assumptions for scrutiny. So here goes. To start with, we break down the UK economy into sectors, using government definitions. No controversy there. Next, we make a couple of estimates.

First, an estimate of the shock for each sector of leaving the EU. This is a big part of what no one knows. This leads us to capture the vulnerability of each sector with the most punishing figures from the record: the collapse in output after the global financial meltdown of 2008 which was worse than any since WW2.

Second, an estimate of the recovery for each sector after five years. Once again we start with the post 2008 recovery after the financial meltdown. This provides a sense of the inherent resilience of each sector. And here is a good place to argue with us: we also include a small factor to reflect the policy response of government and the benefits which experts in international trade have observed from less restrictive trading arrangements. In fact we take only half of the benefit the experts have observed, erring on the side of caution.

Goods

The pie chart shows that the UK’s output of goods is made up of five more-or-less similar-sized elements: the most important ones are finished manufactures, oil and food. Basic materials are not as much in international trade as once they were; and “other” consists of the small sectors of semi-manufactures together with spares & repairs. Our figures are for 2013, but little has changed since.

Chart 1. UK goods

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Source: ONS (2013)

Charts two to five below show the position, sector-by-sector, starting with trend growth from over the ten years from 2002 to 2011, that is including the financial crisis. Our estimates for these sectors, together with our estimates for the goods sector as a whole, show an hit from Brexit after one year (save for food etc, whose complement of entrepreneurs make it particularly resilient), with all recovering by the end of five years.

Charts 2 to 5. Outlook for selected UK goods sectors after Brexit

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Sources: Authors, ONS (2013), Andriamendjara et al (2013), Berden et al (2007), Erixon and Bauer (2010), Helble et al (2007) and Petri, Plummer and Zhai (2011).

Services

Our pie chart for UK services is simplified by drawing like sectors together. We’ve followed Douglas McWilliams’ recent coinage, the “flat white economy”, bringing together professional services, culture/recreation, communications and technology services. Finance, insurance and real estate are self-explanatory. T&T is transportation and travel. The sectors not involved in international trade are utilities, distribution, healthcare, education and public administration.

Chart 6. UK services

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Source: ONS (2013)

Our estimates for the traded sectors - together with our estimates for the services sector as a whole - show smaller initial hits from Brexit (in the case of finance etc, none at all), with all making excellent progress after five years.

Charts 7 to 10. Outlook for selected UK services sectors after Brexit

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Sources: As charts 2 to 5.

Boris Johnson spoke of charts like these as “Nike ticks” and putting this all together we get the “Nike tick” for the economy as a whole.

Growth stays positive throughout, despite falling in the first year. The premium after five years should be seen as a spike on the benefits of deregulation and new markets.

Chart 11. Outlook for UK GDP after Brexit

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Sources: As charts 2 to 5

Conclusion

Is it wrong to find these estimates encouraging? We make no apology for doing so, while fully admitting that ultimately all such estimates can only be a quantitative and graphical expression of assumptions. So are they dead right? Of course not. Are they a misleading basis for discussion? We don’t think so. Scaremongers who wish to dismiss them from consideration need to answer five questions:

• Why would the shock of Brexit be worse than the shock of the financial crisis?
• Why would UK firms be less resilient in bouncing back after Brexit than they have been since the 2008 turmoil?
• Take a look at our companion paper “Five questions for stayers”; why wouldn’t the UK and its trading partners benefit from relief from what the WTO shows as the world’s most complicated tariff regime, what the World Bank reports as a system of nontariff barriers second only to Russia, and priorities which put trade with the rest of the world at the back of the queue?
• Why would the UK government sit on its hands for five years after Brexit rather than develop new trading relations?
• Why would the benefit of those relations be less than the figures we are using, one half of the benefits from less restrictive trading environments attested by experts in the field?

To our way of thinking, our figures illustrate that the scare stories about Brexit are just that - scare stories. Do they prove it? No more and no less than the scare stories themselves!

The In and Out campaigns are both wrong about wages and immigration

Earlier on this week, Lord Rose, head of the campaign to keep Britain in the EU, made a somewhat large mistake in claiming that EU migrants are depressing wages in the UK. The Out campaign has jumped on his blunder, using it as ammunition to argue that leaving the EU will lead to wages rising for Brits.

However, this claim may not be as straightforward as it seems. The issue of immigration and wages has always been a contentious one, and there are a number of perspectives to consider.

Firstly, it is too much of a broad brush to simply say “wages will rise” if we leave the EU. When looking at this issue, we must assess exactly whose wages will be affected. The people whose wages will be most affected by immigration are those who are of a similar skill level to the arrivals. Seeing as the majority of EU immigrants are unskilled, it is therefore the lower-skilled workers whose wages are most affected, as they can be substituted for immigrant workers, who are often prepared to accept lower pay. In other words, in the UK it is only the bottom 20% of earners who are likely to be negatively affected by immigration.

While it may be fair to blame the EU for this increase in unskilled work supply (of the unskilled workers who arrived in the EU in 2013, 80% were from the EU), there is no evidence to show that these arrivals in fact contribute to a decrease in income levels across the population as a whole. 

A 2008 study shows that while 20% of the workforce may be negatively affected, the decrease in wage levels is unlikely to be more than -1.5%. Furthermore, a 2012 study showed no statistically significant impact on claimant count rates as a result of immigration, suggesting that unemployment of UK nationals was not affected either. The evidence actually shows that there is in fact a net positive impact on wages in the UK, as higher-skilled worker’s wages benefit from immigration. From a 2013 paper by Dustmann:

These estimates indicate that an increase in the foreign-born population of the size of 1% of the native population leads to an increase of between 0∙1% and 0∙3% in average wages. As the average yearly increase in the immigrant–native ratio over our sample period (1997–2005) was about 0∙35% and the average real wage growth just over 3%, immigration contributed about 1∙2–3∙5% to annual real wage growth

It’s therefore clear to see that the claims regarding wages from both campaigns can be debunked. Dustmann isn’t the only one to argue that immigration has a minimal effect on wages either, with other economists such David Blanchflower recently arguing the same thing.

Although it is true that wages on the bottom of the scale are negatively affected, restricting EU immigration does not seem like the best way to rectify this. The benefits of immigration and wealth created as a result would more than pay for the redistribution of wealth to those who lose out, for example through the system of tax credits. The EU may have many problems, but the case that immigration leads to decreased wages is not one.

Obsession with migration undermined serious reform of Europe

David Cameron’s renegotiation of Britain’s relationship with the European Union is not widely regarded as a resounding success. The ‘red card’ system allowing a 55% majority of national parliaments to scupper EU legislation, may, never be used as it is unlikely that a measure that gets through the legislative process would provoke such inter-state opposition. The Commission’s commitment to ‘try’ to reduce red tape could translate into little to no actual results. Freeing Britain from the commitment to ever-closer union and the official recognition that currencies other than the Euro exist may be merely symbolic.

The greatest ire-magnet has been the ‘diluted’ migration proposals agreed by Cameron and Donald Tusk. To the chagrin of opponents of ‘mass migration’, the proposals to limit in-work and child benefits for new migrants falls far short of the desire to ‘regain control of our borders’.

This was inevitable. For many Eurosceptics uncontrolled migration is the issue with the EU. Although demonstrably false, the perception that migrants ‘steal jobs’ and live off benefits are articles of faith. Equally, free movement of labour is so essential to the EU’s purpose and ideological priorities that the euro-elite would never grant any serious curtailment of migration between Member States.

Had migration not been the main emphasis of renegotiation, much more could have been achieved. Rather than quibbling over benefits, forcing Europe to confront its two-tiered reality should have been the primary focus of reform. Although the measures do not go far enough, weakening the commitment to ever-closer union, and even marginally restricting the quixotic euro-project’s ability to dominate EU policy, is a step in the right direction.

Whilst greater political integration has always been a feature of the European project, the EU’s real purpose and success has been the development of a single market where labour and capital move freely. For many Member States, and from an economic perspective, it is the latter that is the real attraction of the EU. Federalism and the Euro need not define the Union. Britain should be established as the leading voice for a looser, wider, trading bloc, which could be institutionally protected as existing in tandem with an increasingly politically integrated Eurozone.

Obsession with migration, and the perception that Britain is hostile to Europe, has directly undermined greater progress. In particular, countries such as Hungary, Slovakia, and Poland, who should be allies in reform, have mostly been on the other side of the negotiation table. Denmark, Ireland, the Netherlands, and Croatia, are sympathetic to a Single Market that is both deeper and less regulated, but have been wary of Britain’s apparently antagonistic approach.

Not only has Cameron secured weaker reforms than he may have done, Britain’s position in Europe will remain less central than it could be. Rather than being an essential counter-balance to quasi-hegemonic Germany, protectionist France, and integration-infatuated Belgium, Britain is at risk of having exhausted its political capital on insufficient reform.

The EU: A View from Florida

The EU is already a Federal State in all but name. It has a Parliament, embassies, the right to speak for all the component states and to over-rule those that fail to fall in line. It cannot give the UK the right to be different because then all the other member states would want to be different too and there would be no EU. The difference between the EU and the USA, and maybe the only difference of importance, is that the USA has a constitution defining the matters for the federal government – all others being left to member states. That constitution is stoutly defended by their Supreme Court, notably by Antonin Scalia who died this month. The EU has treaties but no constitution. The treaties, notably Maastricht and Lisbon, say that matters that do not have to be decided by the EU as a whole, should be left to member states (“subsidiarity”) but Brussels has blocked any attempt to define either EU or subsidiary matters or to limit its own area of responsibility. The European Court of Justice, per contra to the US, routinely promotes centrism over subsidiarity. If Brussels decides to determine the right size for strawberries in Sweden, it can and does do so.

“Subsidiarity” is derived from the German word and came to prominence in European discussions of the US constitution in the 19th century. Strangely, the German Federal Republic has no constitution and maybe that’s why the EU has none either. German law rests on the “Basic Law” devised in 1949 by the Western Allied occupying powers, which is similar to a constitution in many ways, but was seen as a stop-gap until Germany could be re-united. In essence, the EU has neither constitution nor the practice of subsidiarity nor the defence of subsidiarity because Germany sees no need for these things. Power, to be effective, should, in this Weltanschauung, be centralised. No one gets more annoyed than Berlin when the Greeks, or whoever, step out of line on migrants or economic matters.

The lack of recognition of subsidiarity renders the EU unfit for purpose and ultimately it will founder. That was the windmill against which Cameron was tilting and it is no surprise he got nothing but a broken lance for his pains. But that is not the issue. One can take the view that the Germans are going to win on penalties anyway, and join them. Or that we have the political players talented and strong enough to exploit the EU’s weaknesses.

Or, and this is my favourite, play the “Irish Bluff”, i.e. vote to leave now and then vote in the second referendum to accept a better deal.

A defence of sweatshops

Sweatshops are certainly controversial. We often hear that it is wrong for us to wear clothes made by people working in terrible conditions, who get paid very minimally. Last year, the Institute welcomed Professor Ben Powell from Texas, who explained why this popular view was mistaken. And now, in this short video clip, my friend and Cato Institute Senior Fellow Johan Norberg explains how sweatshops have actually reduced poverty in Bangladesh and Cambodia.

Stepping into a wider world

Opponents of those inclined to vote to leave the EU often portray them as wanting to shut the UK off from the world and retreat into a narrow comfort zone. In fact the reverse is true for many of those I have spoken to. They regard the EU as a protectionist little backwater and want the UK to step into a wider world, dealing directly with many partners, and open to the world and its influences. Many countries outside the EU have negotiated trade deals with it that give them access to its markets and it to theirs. There is no doubt whatever that an important trading partner such as a non-EU United Kingdom would be able to do the same. More to the point is that a non-EU United Kingdom would be able to negotiate similar advantageous deals with other non-EU countries. EU countries have to let the EU negotiate on their behalf, blending their interests with those of the other members.

Some who want Britain to remain in the EU have warned that a 'leave' vote would constitute a leap into the darkness of uncertainty. Again, the reverse is more likely to be true. A vote to exit the EU would leave Britain able to have considerable influence on its own future, rather than having that future largely determined by other EU members.

There is no status quo. The EU is not static; it will not remain in the shape it has now. Many in the EU want "ever closer union." They want to be citizens of a country called Europe that has its own embassies around the world, its own police force and its own army. They want a Europe whose future is determined by a European Parliament and a European Prime Minister.

A UK that remains in the EU will not be able to prevent that; its voice and its voting power are too small. A non-EU United Kingdom would not be able to prevent that either, but it would not be a part of it. It would remain an independent United Kingdom, speaking or itself in the world's councils and representing its interests through British rather than European diplomacy.

It is false to suggest that the choice is between a UK connected to Europe and a UK that retreats into itself. The choice is between a UK that is a political part of the EU, and an independent UK that is connected economically to the EU, but able to deal with the wider world beyond the European Union.

Syrian Refugees in Jordan - What are they doing to the labour market?

With enormous numbers of refugees spilling of Syria due to the ongoing conflict, there has been a great deal of discussion around the effects of this displacement, particularly on the recipient countries. Although most of this discourse has focused on Europe, Syria’s neighbours, Jordan, Lebanon and Turkey have taken much larger numbers of refugees, in sheer numbers and as a % of the populations of the recipient countries. A recent paper “The Impact of Syrian Refugees on the Labor Market in Neighboring Countries: Empirical Evidence from Jordan” by Ali Fakih and May Ibrahim aimed to find out the effect of the 700,000 or so refugees on local wages and employment rates. According to Fakih and Ibrahim, there is “no relationship between the influx of Syrian refugees and the Jordanian labour market.” With Syrians barred from formal work in Jordan, the informal labour market becomes more important, with 160,000 Syrians estimated to be engaged in informal employment, in sectors like agriculture, construction and food services. If displacement has little to no adverse effects on the Jordanian informal market, one should look to other examples of refugee influenced increases in the labour market to find out if these lack of effects hold true; this is what we tend to see.

Evidence presented to the SOAS Policy Forum by Sam Bowman on a wide ranging talk about the effects of immigration suggested the effects of displacement were beneficial, with a small rise in native wages.Other research suggests that over the long term, the displacement is beneficial for both refugees and host countries. Data from Denmark and Miami, Florida, facing similar situations (in that large numbers of refugees were arriving because of political conflict. In the Miami example, the labour force was increased by 7% by refugees from Cuba) further suggests these effects are true.

Although the political situation in Jordan is complex, the huge cost ($1.7 billion) of hosting refugee’s (both, for the host country and the immigrants in refugee camps) should encourage the Jordanian Government to consider lowering restrictions on labour force participation for immigrants, or at least allow a framework of legal employment within the refugee camps to protect native workers from the small but politically contentious wage and unemployment effects that have affected other ‘developing nations’. A better solution would be work permits for employment in the economy generally This would also allow the Jordanian Government to face lesser fiscal pressures from the lowered cost of providing for Syrian refugees thus supporting themselves through employment..

This is what many policy makers in the EU and Western World have been calling for, but this must be supported by trade concessions and increased global aid. The latter is being provided by the UK, to enable Jordan to mitigate political consequences of refugee influx. If allowing refugees to work has minimal effects on local labour markets, this should not only be a policy prescription for Jordan, but also for western leaders with much lower refugee populations.