Free Trade Zones (FTZs) have been around for 50 years or more and they continue to offer important economic benefits for host countries and hosted companies. A FTZ is considered a Special Economic Zone, or SEZ, which is a designated area for commercial purposes. In the said area, economic trade is free from any trade related fees like taxes or duties.
There were also many discussions on the influencing factors and linkage effects of the development of FTZ while most of the characteristics and their advantages are attracting foreign direct investments and generating employment.
Today, there are over 5,400 SEZs in the world. Of them, 1,000 were established in the past five years. Experts expect the establishment of more than 500 new special economic zones over the next few years.
A FTZ has been defined as a specific area where trade is based upon the unrestricted international exchange of goods, with customs tariffs used only as a source of revenue and not as impediment to trade development.
FTZs often located at key ports, in 130 countries or economies in North and South America, the Asia-Pacific region, Europe and Africa, up from just 79 spread across 25 countries or economies in 1975. The special zones facilitate trade by offering businesses advantageous tariffs and lighter regulation on financing, ownership, labour and immigration, and taxes. They have helped emerging economies to attract foreign investment and generate jobs and growth. Source: United Nations Conference on Trade and Development (UNCTAD)-World Investment Report 2019 Special Economic Zones.
MAPPING THE WORLD’S MAJOR SPECIAL ECONOMIC ZONES (SEZs)
KEY BENEFITS OF THE FTZ
KEY DIMENSIONS DRIVING SEZ SUCCESS
NEW CHALLENGES FACING SEZs
Source: United Nations Conference on Trade and Development (UNCTAD)-World Investment Report 2019 Special Economic Zones.
MAIN ELEMENTS OF THE REGULATORY FRAMEWORK OF SEZs
China now has more online shoppers than the US, United Kingdom and Australia combined, this has transformed cross border ecommerce throughout the country.
To support this growth in domestic and international trade China has opened 21 nation SEZs and 109 import pilot zones for cross border E-commerce (CBEC) across the country, covering 30 provinces, autonomous regions and municipalities, which have been critical to meet rapidly changing trade patterns.
The main benefits of the SEZs are to boost China’s foreign trade, creating higher demand and more value-added products, effective prices, and more efficient management of the labour market by integrating domestic and foreign trade channels.
To reflect the unique industrial vertical clusters for each of the 21 SEZs, each zone has adopted policies to promote regional industrial clusters building upon the unique strengths and characteristics of the area.
Each SEZ in China has a specific industry cluster, like technical and digital innovation, financial services, smart logistics, technology, fintech, biomedicine and agri-tech. For foreign investors the aggregation of companies in a specific industry cluster can be a major advantage as there are existing networks of suppliers, service providers, and specialist labour pools.
Pilot SEZs are areas marked out by the government where a series of test policies are trialed, such as tax cuts, streamlined customs clearance, and industry-specific liberalisation. If the pilots are successful, they are replicated and scaled up to the national level.
A free port is a specific area where importing rules differ from the rest of the country. Hong Kong is an important international transit hub. It not only enjoys more international, flexible policies as a free port than its mainland counterparts, but also leads the world in trade and customs facilitation.
Free ports encourage business involved in importing and re-exporting, benefiting from a lack of trading tariffs and simplified customs documentation and procedures.
Free ports can be hubs for industries such as manufacturing, enabling them to produce goods from cheaper imports, and thereby promote cost efficiency.
The reliability of Hong Kong’s transportation and logistics infrastructure and logistics services is also among the best in the world. Thus, many leading international brands and companies dealing in high value‑added goods choose Hong Kong for inventory management, labelling, packaging and other processing procedures. Easy access, an international airport with large handling capacity, free port status and reliable logistics services all help to make the city an ideal cargo transit port for distributing goods to other countries and regions and tapping the growing demand in China and other Asian countries for high‑end goods. Source: Hong Kong Trade Development Council.
Free trade area and customs union both deal with tariffs and trading. However, they are different in many ways.
FREE TRADE AREAS
Not to be confused with an FTZ, a free trade area (FTA) is concerned with removing tariffs, and regulations that are applied to member countries who trade with each other. Members establish a common set of policies that regulate trade terms, tariffs, and quotas.
Another thing about a free trade area is that imports from outside the area do not confer the benefit of the free trade agreement. For example, two countries that are members of a free trade area, such as the US and Mexico, refrain from imposing tariffs on each other. However, if a US company imports bananas from South America, they would be subject to tariffs.
A customs union, similar to an FTA, also removes tariffs between its members, but it also sets up a common external tariff to non-members on imported and exported goods. The main difference between an FTA and a customs union is that more compliance is involved under an FTA transaction.
A single market runs deeper than a customs union because it promotes frictionless trading. Every member recognises that every single product manufactured by the group’s members is suitable for sale, for distribution to all members, and for consumption.
A single market basically creates a level playing field for every member and not only encompasses tradable products and goods but also allows the citizens of each member country to work freely throughout the area.