Dr Peter Mowforth, INDEZ and Emil Stickland, Kotozo

Tax Free Trade Zones are an old idea. Almost one thousand years ago the Cinque Ports of England operated such a model. Being free from tax and tolls gave them preeminent status around trade. The wealth generated helped pay for their role in defence.

Today, Free Trade Zones are Government-designated areas that are based within a country but behave, for tax purposes, as if they are offshore. Their purpose is to boost economic activity by allowing businesses to defer tax or avoid some tax if re-exporting. For low-margin businesses as commonly exist within ecommerce, tax/duty-free storage can provide a massive commercial advantage to buffer products in essential supply chains. The key economic benefits that accrue from Tax Free Trade Zones are not so much from the activities within the Ecommerce Zone but from their catalytic ripple effects throughout the local economy. These zones can sometimes play a central role in bilateral trade deals between countries.

Free Trade Zones - A Chinese example

Nowhere is the idea of an ecommerce free trade zone better implemented than in the worlds largest ecommerce market - China. Across China, a number of ecommerce bonded warehouses operate as private/public partnerships, supporting both large and small traders selling directly to end-user customers as well as to other businesses within supply chains.

These ecommerce free trade zones have played no small part in the meteoric rise of Chinese ecommerce over the past two decades. China’s domestic ecommerce market grew 24% in 2018, with online retail sales totaling about $1.33 trillion. This makes it the largest ecommerce market in the world by some margin. Not only do these zones support domestic trade, however, but they encourage international trade also. 40% of new Amazon Europe sellers are now based in China, which is helped significantly by low cost logistics and warehousing provided through the free trade zones.

This type of policy making has undoubtedly helped China become the ecommerce behemoth it is today, and it has the potential to help the Scottish economy by making local suppliers not only more competitive at home (with the likes of Chinese ecommerce imports from example) but also on an international scale.

Free Trade Zones elsewhere

Across Europe there are 80 tax free zones spread across 21 different countries. Within England there are 24. Each zone has a particular strategic focus that fits the local economy. For example, Manchester operates a tax-free zone around bio-sciences while the Tees Valley operates a similar zone around advanced manufacturing.

There has been much talk of the great success of the Northern Powerhouse based around greater Manchester. If you analyse where the economic success has been focussed, it’s epicentre appears to be sectoraly around ecommerce and geographically around Manchester airport. The Hut Group’s $1bn new headquarters next to Manchester airport is just one of a string of similar initiatives currently fuelling the economic success of the region. Local colleges and Universities have helped drive the local high-value jobs market around digital while ultra-rapid warehousing and logistics operations have helped support same day delivery options for the major ecommerce players.

Why Glasgow should be the home of a Scottish Free Trade Zone

Glasgow is already Scotland’s hub for our national spirits industry. Because of the long-term storage needs for whisky, product is held within bonded warehouses. Taxes and duties only get levied once the products leave. Local companies such as JGRussell and Malcolm currently operate large tax-free operations close to Glasgow Airport. Each of these bonded warehouses operate as a mini tax free zone. The key to their operational success stems from their logistics and local infrastructure. A previous attempt to operate a tax free zone from Prestwick failed primarily because neither logistics nor infrastructure existed to the same degree as operates in Glasgow. Glasgow itself remains Scotland’s largest city and anyone reading its history is left in no doubt that Glasgow is a city that was both built on trade and defined by trade. Importantly, the west side of Glasgow contains a wealth of road, rail, sea and air links.

What we propose for a Scottish Free Trade Zone

What we propose here is an idea to develop an Ecommerce Free Trade Zone close to Glasgow Airport. Businesses that might operate within the zone would be those that operate within ecommerce supply chains either operating as supply buffers or by adding value to products before re-shipping out across the UK or through export. The common characteristic across all such companies is that their operations are both digital and largely automated.

The Government should subsidise the logistics costs through a local ecommerce logistics company capable of offering a service to Scottish companies. A system could then be developed relatively simply to monitor taxes owed by users of the zone. This initiative would provide a significant competitive advantage to Scottish businesses, who are currently losing out to overseas companies.

This type of initiative works best through public-private partnerships where the role of Government is to help create the vision around boosting the local economy and by helping pilot new approaches around high-productivity semi-automated warehouses. These operations could involve the latest innovations around pick, pack and dispatch operations as well as supply chain automation. These tax free zones can often involve commercial operations that can be involved in tasks around reconfiguring, branding and adding value to products prior to their onward distribution.

If Government, both national and local, were able to sanction such an initiative what might be the consequences? In addition to there being an almost immediate boost to local economic activity, the zone would spur a wide range of support industries. This would include robotics and hard automation around warehousing. In addition, there would be a plethora of digital suppliers helping feed the ecommerce systems needed for online trade and marketing. These developments would require local colleges and Universities to provide a steady stream of suitably skilled and qualified people capable of working in the ecommerce industry sector. The newly launched Glasgow-centred Institute of Ecommerce along with the Scottish Enterprise funded projects around ecommerce skills via Strathclyde University Business School represent timely initiatives. Together these help define an evolving strategy for the Greater Glasgow region.

It’s been a long-time coming but a whole string of local initiatives all now appear to be coalescing around Glasgow becoming a potential future hub for online trade. In much the same way that the Manchester-led Northern Powerhouse has revitalised the North of England, a Glasgow-led Scottish Powerhouse could help re-energise Scotland’s central belt.  New high-tech skills and jobs, new, high-productivity, industries and a potential surge in trade would follow. Glasgow delivered such an agenda 200 years ago. This time around, let’s hope that we can achieve the benefits in a way that benefits all the people of Glasgow as well as all those places we trade with in this ever-more connected world.