Free Trade Zones (FTZs) are those locations or areas that allow the import, storage, manufacturing of goods, etc., without subjecting them to customs duties or taxes.
Although FTZs have been around for quite some time, their responsibilities are now diversifying to illustrate the nation-state’s and the private sector's roles in boosting local, national, and global economic development. For instance, in an FTZ, the interaction between the private sector and government policies shapes the local and regional development.
Companies setting up in an FTZ can take advantage of its various regulatory and fiscal incentives. These include the right to duty-free imports, retain and reinvest foreign exchange earnings, and tax rebates, to name a few. Moreover, organizations can avail of additional benefits if they adhere to the customs control and filing requirements.
In short, an FTZ intends to attract investment, increase employment and, thus, reduce poverty and unemployment in the local area.
What are Free Trade Zones in International Trade?
As mentioned earlier, an FTZ is an area of land designated as a Special Economic Zone (SEZ) wherein, through specified customs regulations, the storage, shipment, manufacturing, and handling of goods can occur.
The Organisation for Economic Cooperation and Development (OECD) defines an FTZ as a grouping of countries within which tariffs and non-tariff trade barriers between the members are generally abolished but with no common trade policy toward non-members.
Usually, one can find an FTZ near international airports, seaports, and national borders. Compared to the rest of the country, an FTZ has a liberalized system for foreign trade. With the rise in mercantile activities and international investments, developing countries tend to possess more FTZs.
What is the Purpose of Free Trade Zones?
The key purpose of creating free trade zones is to facilitate cross-border trade. This is achieved by ensuring there are no obstacles in the form of any customs regulations in the area. Free trade zones also faster turnaround of planes and ships as they have to deal with generous and less stringent customs-related formalities.
These zones help both importers and exporters as they are designed to help reduce labor costs and tax-specific expenditures. Free trade zones can be used by traders to leverage all the available business opportunities and maximize their benefits. These zones also support export-oriented industries and ensure increased foreign exchange earnings. Free trade zones also help in generating employment opportunities and helps the lesser developed countries tackle the problem of unemployment to a significant extent.
What are the Benefits of Free Trade Zones?
The benefits offered by a free trade zone vary from one region to another. However, these are some of the common benefits associated with all free trade zones:-
• Free trade zones offer duty reduction. It is also known as inverted tariff. It means users do not have to pay any duty on labor costs, overheads, and profits on goods produced within a free trade zone.
• Traders can defer on payment of duty till such time the goods are moved outside the free trade zone. The goods exchanged within the free trade zone are duty free till the time they leave the zone.
• Traders enjoy exemption of duty as they don’t have to pay duty on exports, re-exports, or imports.
• Free trade zone offers a reduced Merchandize Processing Fee (MPF). Traders are charged a single payment per shipment instead of and that too at a reduced rate. They are spared the cost of having to pay MPF on all goods moving out of the free trade zone.
• Free trade zone offers the benefit of a streamlined logistics system. Those using the facility can deliver goods directly within the FTZ. They just have to make a single entry for multiple days of import and export.
• Quota Avoidance is another benefit of using free trade zones. Imported goods with an entry quota placed on them can be kept in an FTZ. These goods can be converted or manufactured into items that do not fall under the imposed quota within the zone.
• Some free trade zones also offer other vital benefits such as reduced harbor fees or reduced insurance costs.
How do Free Trade Zones Work?
Immediately on their import, the FTZ allows the entry of goods without the payment of customs duties and taxes. Then, once admitted to the zone, the goods can be stored, altered, manufactured, repaired, renewed, and assembled. However, they cannot be sold in the FTZ.
Since the goods are in the FTZ, they are considered outside the region’s customs territory. Consequently, they are not subject to duties, tariffs, or quotes in the FTZ. The goods can either be re-exported or moved to the domestic market for consumption. However, all applicable duties, taxes, and fees are due once the imported goods are withdrawn from the FTZ and formally entered into the domestic territory for consumption.
Also Read :- How To Apply For Import License In USA
What happens in Free Trade Zones?
As mentioned, the FTZs are special areas dedicated to the handling, storing, re-configuring, and re-exporting of goods without tariffs, fees, or other restrictions. Free trade zones can be used for importing any domestic or imported goods that are legally allowed to be traded under the laws of the country where the FTZ is located. This covers even those goods that qualify for payment of duty.
Goods that are subject to restrictions as per the law of the land may be permitted to enter only after thorough inspection. There may also be some goods that you cannot import because local authorities regulate them. For example, hazardous materials’ handling, storage, and disposal are regulated by the federal agencies in the US.
Furthermore, goods that may violate health and safety regulations or unintentionally harm the public are likely to be prohibited. These include weapons, firearms, and other items or materials that are legal in the country but highly regulated. Also, products that can generate additional internal tax, such as alcohol, tobacco, and perfumes, might be banned from production within the FTZ unless a special license is granted for the same.
Lastly, the sale of foreign goods for profit is not permitted inside an FTZ. Foreign goods may be displayed, examined, sampled, and displayed in an FTZ, but you cannot sell them.
Where are Free Trade Zones Located?
Typically, FTZs are based near significant seaports, international airports, and national boundaries.
Geographically, FTZs exist worldwide, but most are concentrated in two continents. 48% of FTZs are in Latin America and the Caribbean, while 42% are in Asia. However, back then, a majority of the FTZs were established in Europe and the US. This was because of the high trading activities occurring in those regions. But, over the years, India, Singapore, Dubai, and other countries have also emerged as key FTZ destinations.
For instance, Singapore presently has nine FTZs facilitating intermodal trade and transshipment activities. In Dubai, around 30 FTZs are vital to the economy and account for 41% of Dubai's total trade.
Important Global Special Economic Zones (SEZs)/World's Major Free Trade Zones The most significant and most essential zones around the world are as follows:-
- North American Free Trade Alliance (NAFTA) / United States-Mexico-Canada Agreement (USMCA)
The NAFTA is a free trade agreement between the US, Mexico, and Canada enacted in 1994. The NAFTA lowered/eliminated its tariffs for imports and exports between its three participants, creating a substantial FTZ.
On August 27, 2018, president Donald Trump announced a renegotiated trade agreement with Mexico to replace the NAFTA. This trade agreement between the US and Mexico provided duty-free access for agricultural goods on both sides. It eliminated non-tariff barriers to encourage more agricultural trade between the two countries. As of September 30, 2018, Canada was included in this agreement, and the NAFTA was entirely replaced by the United States-Mexico-Canada Agreement (USMCA), taking effect on July 1, 2020.
With a GDP of US$ 24.9 trillion, the USMCA is the largest FTZ in the world.
- European Union (EU) Single Market
The EU Single Market refers to a market of 27 member states of the EU. It is similar to a free trade area in that it doesn’t impose tariffs, quotas, or taxes on trade activities. However, it does facilitate the free movement of services, capital, and people. The EU Single Market with a GDP of US$ 14 trillion is the second-largest FTZ in the world.
- African Continental Free Trade Area (AfCFTA)
Based on the number of countries involved, the AfCFTA is the largest free trade area in the world. A total of 1.3 billion people are connected by this pact across 55 countries, with a combined GDP of US$ 3.4 trillion.
- China’s Special Economic Zones
The SEZs of China offer the opportunity to integrate a free-market approach to bring in more foreign direct capital into the country. Essentially, they serve as dynamic environments that promote innovation and productivity.
- Southeast Asian Free Trade Area
The ASEAN Free Trade Area (AFTA) was signed in Singapore in January 1992. Initially, the group included Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand. However, Vietnam, Laos, Myanmar, and Cambodia have joined since then. In general, the trade between the member nations involved with various agreements has mainly been void of export and import duties. Several other countries, including China, have also signed agreements to eliminate tariffs on around 90% of imports.
Conclusion
As read above, companies/countries engaging in international trade can certainly attain an array of benefits from FTZs, as they streamline production, transportation, and regulation, the key processes in trade. Moreover, FTZs reduce tariffs and fees for manufacturers, importers, and exporters, thereby boosting their competitiveness and the host country’s GDP. This poses as a win-win situation for all parties involved.
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