Introduction
Over the past three decades, the number of free trade zones (FTZ), also known as foreign trade zones in the United States and export processing zones in developing nations, has drastically expanded. While some academics distinguish between free trade and export processing zones because manufactured goods in the former are given full access to the domestic market while those in the latter are only given limited access and are primarily for exports, other academics do not. However, it has been observed that the many terminologies employed over time and space frequently reflect the particular activities that took place in that zone. To draw in new business and international investors, FTZs typically do away with typical trade obstacles like tariffs and quotas and reduce their regulatory requirements.
Discussion
Although FTZs may have been developed for various purposes, and as a result, the traits that characterize the concept have been described in numerous ways, it appears that a few traits are universal to all contemporary FTZs. According to Balaski, free trade zones were established to ensure international trading and US employment (2014). Available incentives may include fiscal ones such as exemptions from some or all export taxes, duties on imports of raw materials and intermediate goods, profit taxes, VAT, and free profit repatriation; direct subsidies like lower water and electricity rates; indirect subsidies like grants for training and education; and free provision of physical infrastructures such as transportation, telecommunication, and production space.
Free trade zones are created for a variety of reasons. First, to assist in lowering unemployment and generating foreign currency. Second, by luring in foreign direct investments, they serve as catalysts for industrialization and economic expansion. Many FTZs in the Middle East are created to attract foreign direct investors. Third, as test beds for innovative policy improvements that will eventually be implemented in the larger national economy. Before being implemented across the economy, China’s financial, labor, legal, and pricing policies were tested in their FTZs. Fourth, as an economic doorway to the rest of the world while retaining protective barriers, as in the cases of Taiwan and the Republic of Korea, and as a balance between liberal and defensive economic strategies. Lastly, it enables the transfer of technology and information by building forward and backward links.
FTZ policies adopted by governments of developing nations primarily aim to promote economic and social development by luring foreign direct investments, which boost exports, increase foreign exchange earnings, and create job opportunities for the local labor force, which can also gain from management expertise and technology advancement. Despite the positive impact of FDIs, the predicted percentage of these investments is occasionally overestimated. Sometimes the expenses of creating sustainable FTZs—including infrastructure development, public services, and other administrative costs—are more than the foreign investments made there, diverting resources away from other promising options for industrialization. Therefore, before running such zones, governments of developing nations should do a comprehensive cost-benefit analysis.
Creating zones necessitates significant public funds, which impacts government budgets, particularly in public-managed zones. Governments running FTZs lose money in several ways, including infrastructure investments, administrative expenses, lost taxes, subsidies, and service fees. This revenue loss becomes more serious when the zones don’t accomplish their intended goal. For instance, Senegal was unsuccessful in luring FDI, whereas Namibian zones struggled to create jobs. In such circumstances, resources that could have been used to advance the nation’s industrialization would have been wasted on zone creation.
Conclusion
In conclusion, linkages with the remainder of the economy must be established for industrialization to take place effectively. Doing so will benefit domestic enterprises and maintain interest in the zones. How links are formed relies on the economic and political climate of the nation. Because successful zones heavily rely on unpredictable external factors like private investment and the global market, governments should weigh all available policy alternatives in the context of cost-benefit analysis and make every effort to minimize up-front costs.
Reference
Port of Seattle. (2014). Foreign Trade Zones [Video]. YouTube. Web.