Chris LeTourneur takes a closer look at the Free Trade
Zone (FTZ) phenomenon.
Free or Foreign Trade Zones (FTZs) are fast becoming the global mechanism for facilitating international trade, technology and manufacturing.
Although they benefit from proximity to international airports, FTZs can be located almost anywhere where goods and information flow in-and-out of a country, whether at an airport, seaport, rail hub or info port.
FTZs were originally created in the United States to provide special customs procedures to US
manufacturing plants engaged in international trade-related activities.
Tax or duty-free treatment is accorded to items whereby the component raw materials are imported then processed in the FTZ and re-exported as finished product. Duty tax payment is only made for these items if they are sold in the country of final manufacturing.
Indeed the US’s Commerce and Treasury departments definition of a Foreign Trade Zone is a specially designated area, in or adjacent to a US Customs Port of Entry, which is considered to be outside the Customs Territory of the US.
The US, however, in many ways now lags behind the rest of the world in embracing the FTZ concept which has been adopted, copied and reinvented by many different countries to help boost both local and national economies.
Some of the more prominent examples of FTZs today are in the United Arab Emirates (UAE), South Korea, China and Jamaica with an ever-increasing number emerging around international airports.
And as their locations vary, so often do their names as depending on what the country you are in an FTZ could be known as a Free Zone, Free Economic Zone or even a Special Economic Zone.
Benefits of conducting business in FTZs include:
- Zero duty on exported assembled products
- If products are sold domestically, duty is paid only when it leaves the FTZ
- Duty on scrap is eliminated or dramatically reduced
- If foreign components/materials are manufactured within a FTZ into a product with a lower duty tax rate, then the lower duty rate applies on the foreign content if the products are sold domestically
- Imported products in a FTZ may be stored, re-packaged and manipulated.
Dubai Airport Free Zone
Dubai International Airport in the UAE is an FTZ pioneer, establishing the Dubai Airport Free Zone on a 175-acre site within the secure boundaries of the gateway 12 years ago.
It remains one of the most progressive collections of FTZs in the world today, boasting over 1,100 global tenants involved in everything from aviation services, freight forwarding and logistics to the manufacture and distribution of telecommunication equipment, jewellery, pharmaceutical products and cosmetics.
It includes office space, light industrial sites and shared business/conference facilities with all tenants enjoying a range of tax and investment incentives that include:
- 100% exemption from corporate, import, export and personal income tax
- 100% repatriation of capital and profits
- Access to over 1.5 billion consumers with rapidly increasing demand
- Abundant and inexpensive energy
- An available and affordable workforce
Tenants are also assured of fast and efficient cargo clearance services (8-24 hours), ‘one-stop-shop’ administration and online services and the ability to operate 24 hours a day year-round.
And it is not alone as a variety of Free Zones have emerged throughout the UAE beyond the secure boundaries of the international airport. Each, seemingly, with an emphasis on niche business activities that include technology, information processing, semiconductors, bio-technology, healthcare, precious metals/stones, automotive parts, heavy machinery/equipment and multi-media production.
Among these are Dubai Internet City, Dubai Media City, Knowledge Village, Dubai Studio City, Dubai BioTech, Gold And Diamond Park, Dubai Health Care City, Dubai Silicon Oasis and Heavy Equipment & Trucks FZ.
With the enormous property development that is occurring in all sectors throughout the UAE from tourism to residential to offices, the Free Zone approach, which started at the international airport, has clearly propelled the local economy onto the international stage.
Incheon Free Economic Zone (IFEZ)
Another airport with big ambitions for its FTZ is Incheon International Airport, which has plans to expand today’s Incheon Free Economic Zone (IFEZ), a vast 21,000-hectare area covering the gateway’s Yeongjong Island and the surrounding areas of Songdo and Cheongna.
The airport’s ultimate aim is to create the entire area – it opened Korea’s first FTZ in 2003 – into a ‘globally competitive business and living environment designed to attract foreign investment and international companies’.
New Songdo City – an eco-friendly development of knowledge-based industries, information processing, communications technology and bio-technology – will form a key part of these plans. Being developed by Gale and Posco and linked by bridge to the airport, it also features offices accommodation, a convention centre, hotels, shopping malls and multiple high density residential buildings.
In addition to the $6.7 billion worth of industrial logistics and residential accommodation planned for Yeongjong Island – the airport wants to create housing for up to 145,000 people – airport city projects include tourism and industrial business parks, a marina and cultural and public facilities.
Meanwhile Cheongna is to be turned into a leisure and tourism hub with housing for another 90,000 people, a $530 million golf park and $118.6 million worth of theme parks.
The main finance and business complex is a $6.3 billion development on 3,920 acres (1,586 hectares).
Like the Dubai Airport Free Zone, the IFEZ offers tenants a range of incentives for businesses that include simplified business start-up and license requirements; simplified customs procedures; subsidized infrastructure resulting in affordable rents and fiscal incentives such as relief from VAT, corporate, income, property and local taxes.
Although the individual components that comprise the IFEZ may not be directly situated at Incheon International Airport, they have been strategically designated and created to form a ring of activity around the airport. The airport is therefore the anchor for the international movement of goods and people in the IFEZ.
China’s Special Economic Zones
China’s flirtation with FTZs began in the early 1980s with its desire to become the manufacturing plant for the world.
Between 1980-1984 it established Special Economic Zones (SEZs) in Shantou, Shenzhen, Zhuhai in Guangdong Province), Xiamen (in Fujian Province) and the entire island province of Hainan and soon afterwards opened 14 coastal cities to overseas investment and created Open Economic Zones in a further seven areas including the Pearl River Delta region.
Other FTZs to follow since then have included the Pudong New Area SEZ in Shanghai, 32 state-level economic and technological development zones and 53 new and high-tech industrial development zones established in large and medium-sized cities.
As a result, a multi-level diversified pattern of integrating SEZ coastal areas with river, border and inland areas has been formed throughout China.
The appeal of China’s network of SEZs include special tax incentives for foreign investment, greater independence for domestic companies trading internationally and the opportunity for tenant companies to be Chinese-foreign joint ventures or 100% foreign-owned.
The Pudong New Area in Shanghai – which boasts Shanghai Pudong International Airport as a focal point – was specifically created to attract overseas investment.
And its success to date in absorbing foreign capital and accelerating the economic development of the Yangtze River Valley means that the state has extended it special preferential policies that are not yet enjoyed by other Chinese SEZs.
In addition to preferential policies for reducing or eliminating customs duties and income tax, the state also permits the Pudong New Area to allow foreign business people to open financial institutions and run tertiary industries. It has also given Shanghai permission to establish a stock exchange, expand its examination and approval authority over investments and allow foreign-funded banks to engage in Chinese RMB business.
Within its boundaries are Waigaoqiao, the largest SEZ/FTZ in Mainland China covering approximately 10 square kilometres, the 19 square kilometre Jinqiao Export Processing Zone and Zhangjiang Hi-Tech Park covering around 18 square kilometres.
With the enormity of its interconnected web of SEZs, China has clearly become the world’s leader in creating a multi-layered approach of FTZs and incentives to foster international investment and trade.
The Chinese examples also clearly show that FTZ activities can span far beyond the boundaries of international airports, but still have a connection to airports as one of the various components within the logistics chain for the movement of capital, investment, goods, people and information.
Montego Bay Free Zone
Montego Bay Free Zone (MBFZ) was established in 1985 on a 95-acre site next to the port and within a 30-minute drive of Jamaica’s biggest gateway, Sangster International Airport.
Designed by the Jamaican Government to encourage foreign investment and international trade, businesses operating within these zones have no tax on their profits and are exempt from customs duties on imports and exports as long as a minimum of 85% of their products are exported outside of the Caribbean Community (CARICOM).
The MBFZ has 488,110 square feet of factory/office space and is adding 103,000 square feet of space for information technology.
Like the other FTZ examples, the MBFZ offers duty tax exemption for imports and exports, 100% tax free profits, streamlined customs procedures, suspension of import licensing fees, competitive wage rates and wide market access through international trade agreements.
Four other FTZs in Jamaica include the 1.8 million square feet Kingston Free Zone (KFZ), Gamex Free Zone, Hayes Free Zone and the privately owned Cazoumar Free Zone. KFZ, Jamaica’s first free trade zone, was established in 1976 and enjoys 730,000 square feet of factory space adjacent to the Port of Kingston’s Container Terminal.
Many of the companies in Jamaica’s Free Zones are engaged in information technology and management including software distributors and dealers, Internet service providers, computer training, data processing, tele-services, geographic informatics, GIS/CAD digitising, multi-media/multi-lingual services, call centres, website development and software support services.
With the United States, Mexico and Latin America on their doorstep, the Jamaican Free Zones are strategically positioned to intercept goods in the logistics chain to add value, as well as to provide virtual web and information management services to these significant neighbouring economies.
Like in China, the role of international airports is not as significant in the operations of the Jamaican Free Zones, since the goods are primarily imported/exported by seaport, or through the Internet in digi-space.
Outlook
These examples provide a glimpse of the global reach that FTZs have on the manufacturing and movement of goods, services and information. They have also been a primary mechanism for fostering international capital investment that transcends borders.
In the emerging ‘global economy’, FTZs will increasingly become the bridge between countries for adding economic value. Alternatively, FTZs could be seen as not being part of any country but rather as the staging ground for seamless global economic convergence.
As global competition becomes stronger with the emergence of new economies in Asia, the Middle East and Eastern Europe, the incentives afforded by FTZs will increasingly be the new standard for international business and investment.
Although they are not exclusive to being located at international airports, they can serve as anchors for FTZ activities and therefore are fast becoming part of the multi-faceted airport city. For in the new global economy, products being imported and exported will not only be durable but will increasingly become information, service and technology-based.
If the Internet is the information highway of the world and airports are the gateways for global economic development, FTZs are fast becoming the world’s economic engines for adding value and prosperity.
