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A free-trade zone (FTZ) is a specific class of special economic zone. They are a geographic area where goods may be landed, handled, manufactured or reconfigured, and reexported without the intervention of the customs authorities. Only when the goods are moved to consumers within the country in which the zone is located do they become subject to the prevailing customs duties. Free trade zones are organized around major seaports, international airports, and national frontiers—areas with many geographic advantages for trade. It is a region where a group of countries has agreed to reduce or eliminate trade barriers.
The World Bank defines free trade zones as "small, fenced-in, duty-free areas, offering warehousing, storage, and distribution facilities for trade, transshipment, and re-export operations." Free-trade zones can also be defined as labor-intensive manufacturing centers that involve the import of raw materials or components and the export of factory products.
Free-trade zones are referred to as "foreign-trade zones" in the United States (Foreign Trade Zones Act of 1934). In the United States, FTZs provide Customs-related advantages as well as exemptions from state and local inventory taxes. In other countries, they have been called "duty free export processing zones," "export free zones," "export processing zones," "free export zones," "free zones," "industrial free zones," "investment promotion zones," "maquiladores," and "special economic zones." Some were previously called "free ports". Free zones range from specific-purpose manufacturing facilities to areas where legal systems and economic regulation vary from the normal provisions of the country concerned. Free zones may reduce taxes, Customs duties, and regulatory requirements for registration of business. Zones around the world often provide special exemptions from normal immigration procedures and foreign investment restrictions as well as other features. Free zones are intended to foster economic activity and employment that could occur elsewhere.
An export-processing zone (EPZ) is a specific type of FTZ, set up generally in developing countries by their governments to promote industrial and commercial exports. According to the World Bank, "an export processing zone is an industrial estate, usually a fenced-in area of 10 to 300 hectares, that specializes in manufacturing for export. It offers firms free trade conditions and a liberal regulatory environment. Its objectives are to attract foreign investors, collaborators, and buyers who can facilitate entry into the world market for some of the economy's industrial goods, thus generating employment and foreign exchange." Most FTZs located in developing countries: Brazil, Colombia, India, Indonesia, El Salvador, China, the Philippines, Malaysia, Bangladesh, Pakistan, Mexico, Costa Rica, Honduras, Guatemala, Kenya, Sri Lanka, Mauritius and Madagascar have EPZ programs. In 1997, 93 countries had set up export processing zones employing 22.5 million people, and five years later, in 2003, EPZs in 116 countries employed 43 million people.
China has specific rules differentiating an EPZ from a FTZ. For example, 70% of goods in EPZs must be exported, but there is no such quota for FTZs.
The world's first free-trade zone was established in Shannon, Ireland (Shannon Free Zone). This was an attempt by the Irish Government to promote employment within a rural area, make use of a small regional airport and generate revenue for the Irish economy. It was hugely successful, and is still in operation today. The number of worldwide free-trade zones proliferated in the late 20th century. In the United States free-trade zones were first authorized in 1934.
Corporations setting up in a zone may be given tax breaks as an incentive. Usually, these zones are set up in underdeveloped parts of the host country; the rationale is that the zones will attract employers and thus reduce poverty and unemployment, and stimulate the area's economy. These zones are often used by multinational corporations to set up factories to produce goods (such as clothing or shoes).
Free-trade zones in Latin America date back to the early decades of the 20th century. The first free-trade regulations in this region were enacted in Argentina and Uruguay in the 1920s. The Latin American Free Trade Association (LAFTA) was created in the 1960 Treaty of Montevideo by Argentina, Brazil, Chile, Mexico, Paraguay, Peru, and Uruguay. However, the rapid development of free-trade zones across the region dates from the late 1960s and the early 1970s. Latin American Integration Association is a Latin American trade integration association, based in Montevideo.
Free-trade zones are also known as special economic zones in some countries. Special economic zones (SEZs) have been established in many countries as testing grounds for the implementation of liberal market economy principles. SEZs are viewed as instruments to enhance the acceptability and the credibility of the transformation policies and to attract domestic and foreign investment.
In 1999, there were 43 million people working in about 3000 FTZs spanning 116 countries producing clothes, shoes, sneakers, electronics, and toys. The basic objectives of EPZs are to enhance foreign exchange earnings, develop export-oriented industries and to generate employment opportunities.
US Foreign-Trade Zone Board and ASF
In the US, the Foreign Trade Zone Board is led by the Secretary of Commerce and the Secretary of the Treasury. In January 2009, the Foreign-Trade Zones Board adopted a FTZ Board staff proposal to make what it called the Alternative Site Framework (ASF) as a means of designating and managing general-purpose FTZ sites through reorganization. The ASF provides Foreign-Trade Zone Grantees with greater flexibility to meet specific requests for zone status by utilizing the minor boundary modification process. The theory of the ASF is that by more closely linking the amount of FTZ designated space to the amount of space activated with Customs and Border Protection, Zone users would have better and quicker access to benefits. When a FTZ Grantee evaluates whether or not to expand its FTZ project in order to improve the ease in which the Zone may be utilized by existing companies, as well as how it attracts new prospective companies, the Alternative Site Framework (ASF) should be considered. The ASF may be an appropriate option for certain Foreign-Trade Zone projects, but the decision of whether to adopt the new framework and what the configuration of the sites should be will require careful analysis and planning. Regardless of the choice to expand the FTZ project, the sites should be selected and the application should be drafted in such a manner as to receive swift approval, while maximizing benefit to those that locate in the Zone. Successful zone projects are generally the result of a plan developed and implemented by individuals that understand all aspects of the FTZ program.
The Foreign Trade Zone Board (FTZB) approves the reorganization of Foreign Trade Zone (FTZ) 32 under the alternative site framework. The application submitted by its grantee, The Greater Miami Foreign Trade Zone was approved and officially ordered by the FTZB on January 8, 2013. From California, to Oklahoma to North Carolina to New York State, FTZs all across the nation have recently been making use of the flexible opportunities offered by the Alternative Site Framework (ASF) program. The ASF program is designed to serve zone projects that want the flexibility to both attract users/operators to certain fixed sites but also want the ability to serve companies at other locations where the demand for FTZ services arises in the future. FTZ 32 was founded in 1979 and processes over $1 billion in goods with products from more than 65 countries and exported to more than 75 countries worldwide, with speed and efficiency. According to the official order from the FTZB, FTZ 32 existing site 1, Miami Free Zone will be classified as a magnet site.
Sometimes the domestic government pays part of the initial cost of factory setup, loosens environmental protections and rules regarding negligence and the treatment of workers, and promises not to ask payment of taxes for the next few years. When the taxation-free years are over, the corporation that set up the factory without fully assuming its costs is often able to set up operations elsewhere for less expense than the taxes to be paid, giving it leverage to take the host government to the bargaining table with more demands, but parent companies in the United States are rarely held accountable.
Political writer Naomi Klein has also criticized the transient nature of FTZs, noting the factory closures connected to the 1997 Asian financial crisis. She criticized the low wages and long hours, citing work days of twelve or more hours in Indonesia, Philippines, Southern China and Sri Lanka circa 2000.
List of free-trade zones
- Bonded logistics park
- Foreign trade zones of the United States
- Free economic zone
- Free trade area
- Free trade debate
- Index of international trade topics
- Special economic zone
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- Media related to Special economic zones at Wikimedia Commons