The Promise of Freeports

New York City’s only freeport, an ultra-high tech facility named “Arcis” after the Latin word for “fortress,” recently announced its unceremonious closure after less than two years. The precipitous shuttering of the $50 million facility isn’t surprising -- no amount of bling and retinal scanners could overcome the fact that Arcis was based on a defective model pioneered by scandal-hit Swiss art dealer Yves Bouvier, or that New York’s hefty state taxes defeated much of the purpose of the facility.  

Freeports nevertheless have significant potential as engines of economic growth and job creation. Boris Johnson has made a network of ten new freeports one of the cornerstones of his economic policy, taking advantage of greater post-Brexit regulatory freedom to revitalize disadvantaged communities and become a more competitive trade partner.  

Republicans would be wise to follow suit and make a sustainable freeport model a pillar of their vision for how to return the American economy to health after the coronavirus pandemic. Democrats recently rolled out their “THRIVE Act”, a classic big-government agenda that banks on their cherished Green New Deal as the primary driver of job creation -- despite the fact that the U.S. National Bureau of Economic Research has determined that green policies are likely to have limited effects on employment. Well-designed freeports, in contrast, have a proven track record of creating thousands of good manufacturing jobs and sparking genuine growth. 

Flawed from the get-go 

Freeports have existed for centuries in their simplest form -- warehouses in which tariffs are suspended to ensure that goods in transit aren’t excessively taxed. Arcis, with its James Bondesque bells and whistles and its focus on high-end artwork, was a particular breed of freeport pioneered by “freeport king” Yves Bouvier.  

Bouvier founded a $100 million freeport -- dubbed “Asia’s Fort Knox” -- in Singapore in 2010 and followed it up with Le Freeport Luxembourg in 2014. The facility’s grand opening, in fact, sparked American entrepreneurs Kenneth Cayre and Tom Sapienza’s interest in opening a Luxembourg-style freeport in Manhattan. 

In retrospect, Yves Bouvier wasn’t the best entrepreneurial role model. His own freeports are in dire financial straits after his snowballing reputational problems -- the Swiss entrepreneur is being pursued by a former client for allegedly conning him out of over $1 billion, investigated by Swiss tax authorities for apparently hiding $360 million in profits, and accused of hiring a call girl to blackmail a tax inspector -- spooked clients and investors

But there was another problem that crushed Cayre and Sapienza’s freeport dreams. Freeports’ essential appeal is the ability to store -- and even buy and sell -- goods without incurring taxes as long as they remain in the facility. The Manhattan freeport’s clients, however, were still on the hook for New York State taxes -- often pretty substantial, since New York is one of the most tax-happy states in the country. Arcis’s developers loudly trumpeted the freeport’s proximity to major auction houses, but this only served to highlight the facility’s fatal flaw. A client could pick up an Old Master at Christie’s and have it delivered straight to Arcis -- and still get hit with a bruising tax bill for the short journey uptown. 

A smarter kind of freeport 

Given that the American Legislative Exchange Council recently rated New York’s economic outlook as the worst in the entire country, in part due to its love of taxation which is making it an increasingly unattractive place to do business, the Empire State could have used the boost which a properly-designed freeport could provide. 

The facilities’ real value, though, is not in becoming another cog in the economic machinery of America’s biggest city, but in revitalizing areas that have been left hung out to dry. Shannon, Ireland, enjoyed a surge in prosperity in the early 20th century as commercial aviation took off -- flights would stop there to refuel before venturing across the Atlantic. Once expanded-range allowed planes to fly directly from Europe to North America, Shannon risked being left behind -- until the airport which once hosted Charles Lindbergh on his jaunts across the Atlantic was converted into an industrial freeport. 

Unlike Arcis and Yves Bouvier’s freeports, the Shannon free trade area wasn’t simply a black hole for luxury goods -- the area took advantage of the tax cuts and lack of red tape to set up factories inside the free zone, making everything from pianos to textiles. The freeport employs more than 7000 people and generates €3.3 billion in trade -- a remarkable success story for a city which once seemed like it had lost its economic lifeline.  

Boris Johnson is hoping to replicate Shannon’s boom by dotting freeports around the UK in areas such as Teesside, where 170 years of proud iron and steel-making tradition collapsed when a Thai-owned firm went belly-up, leaving 3000 people unemployed. There are countless areas of the United States in a similar situation, as decades of cheap products flooding in from China have left American workers out of luck. 

A network of the right sort of freeports -- not gilded vaults like Arcis, but back-to-basics facilities where the focus is on the right cocktail of tax policies rather than $1000-a-bulb lighting -- could turn the tide and make American-made products more competitive on the global scale. Take America’s ailing auto industry, for example. Taxes on individual car parts, like radios -- mostly manufactured in Asia -- are often higher than on the finished car itself, making domestic car manufacturing less competitive. Freeports could offer a workaround, allowing manufacturers to import car parts tax-free, manufacture the car in the United States and then pay a lower fee when the car is sold on. A similar effect could be seen in any number of industries which often have very global supply chains, such as pharmaceuticals and chemicals. 

Arcis’s collapse was inevitable given its narrow focus and New York’s sky-high state taxes. The facility’s closure, however, should draw renewed attention to the broader concept of freeports, which if implemented properly could give the U.S. economy the shot in the arm it needs after damaging lockdowns this spring. It would certainly do more for the Rust Belt than pie-in-the-sky dreams of a Green New Deal. 

Image: Oaktree b

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