When internationalizing your business exports, you’ll have to deal with a vast amount of paperwork (permits, applications, certificates, etc.) and immerse yourself in concepts like free trade zones.
Understanding free trade zones can involve an overwhelming amount of information at once. However, if you want to take your business to the next level, it’s necessary. Hopefully, this article makes the process easier.
I’m Daren. I’ve worked as a business consultant for over a decade and have helped multiple companies take their exports overseas during that time. As such, I’m closely familiar with the concept of free trade zones.
Transporting goods by air, land, or shipping container trading can be advantageous, regardless of whether you run a large enterprise or a startup.
So without further ado, let’s jump into all the basics around free trade zones.
Key Takeaways
- Free trade zones are areas with few-to-zero trade barriers and encourage trade between member countries
- These zones can also promote cultural and technological exchange
- Free trade zones can be a great way to increase profits and economic opportunities, but
- Without solid regulations, free trade zones create more opportunities for exploitation and loss of control over resources
What are Free Trade Zones?
Free trade zones, also known as free trade areas, are geographic areas where countries mutually agree to limit trade barriers.
In a duty-free zone, countries have signed a free trade agreement to maintain little or no barriers to trade in the form of tariffs or quotas among one another.
The purpose of these zones is to:
- Encourage trade between member countries.
- Promote economic growth and job creation.
- Improve competitiveness in international markets.
Free trade zones can also facilitate knowledge and technology transfer between member countries.
It is important to emphasize that these can be bilateral, i.e., between two countries, or multilateral when participation involves a group of countries.
Free trade areas include the European Union, the North American Free Trade Agreement (NAFTA), and the Association of Southeast Asian Nations (ASEAN).
What are the Advantages and Disadvantages of Free Trade Zones?
Now that you have a basic definition of free trade zones let’s help you understand them further by looking at some advantages and disadvantages.
What are the Benefits of a Free Trade Zone?
Some of the most significant benefits of free trade zones include the following:
- Encouraging trade and business opportunities
- Lower logistics costs
- Minimizing red tape and bureaucratic formalities
- Increasing profits from foreign investment
- Generating employment opportunities
- Attracting new investments
What are the Disadvantages of Free Trade Zones?
Despite the many advantages of free trade zones, there are also some potential disadvantages. Most of these disadvantages occur if free trade zones aren’t constructed with a sensible policy framework. These disadvantages include the following:
- Potential loss of control over national resources
- Potential exploitation by foreign companies
- Increased competition in local markets
- Potential environmental degradation due to lack of regulations
- More opportunities for tax evasion and money laundering activities
Free Trade Zone Examples
Among the various free trade areas worldwide, five stand out above the rest regarding the volume of their collective trade. These include NAFTA, the European Single Market, AfCFTA, AFTA, and China’s special economic zones.
If you don’t know what all of these acronyms mean, don’t worry. I’m about to give you an overview of each.
The North American Free Trade Agreement, or NAFTA, has three member countries: the United States, Canada, and Mexico. This agreement was established on January 1, 1994, and now has a population of 450 million+ people. The total GDP currently is $25 billion USD, but its total trade figures exceed $1 billion USD.
The European Single Market includes the European Union, Iceland, Liechtenstein, Norway, and Switzerland. This 1993 free trade zone contains 500 million people and a total GDP of 14 billion USD.
AfCFTA, or the African Continental Free Trade Area, was recently founded in 2019. it includes 55 African states and encompasses 1.2 billion people. It’s the most numerous of the popular free trade zones, with a GDP of over 2.5 billion USD.
The next primary free trade zone is the Association of Southeast Asian Nations Free Trade Area, abbreviated as AFTA. This association was formed in 1992 with Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, Vietnam, Laos, Myanmar, and Cambodia. The total population here is around 600 million, with a GDP of 1.5 billion.
Finally, we have to mention China’s Special Economic Zones. China has 12 special economic zones, the first established in Shanghai in 2013. Since then, the Chinese government has added 11 more:
- Shanghai: 121 km²
- Fujian: 118 km²
- Tianjin: 120 km²
- Guangdong: 116 km²
- Chongqing: 120 km²
- Henan: 120 km²
- Hubei: 120 km²
- Liaoning: 12 km²
- Shaanxi: 120 km²
- Sichuan: 120 km²
- Zhejiang: 120 km²
- Hainan: 35,400 km²
Free Trade Zone Vs. Foreign Trade Zone
You may have heard of foreign trade zones and think they’re interchangeable with free trade zones. There are actually some primary differences between the two that are good to know for business purposes.
The main difference is that a free trade zone has preferential taxes, while foreign trade zones don’t. In other words, companies in a free trade zone enjoy tax incentives such as lower tariffs and duties on imported goods. In contrast, businesses operating in foreign trade zones must pay normal import/export tariffs and duties.
Beyond taxes, though, foreign trade zones provide many more benefits than free trade zones. Companies can set up in-house manufacturing operations under special customs procedures, enjoy reduced storage costs due to the low land rents inside an FTZ, and benefit from duty deferral programs.
Despite varying benefits, one thing remains the same. In both types of zones, businesses can import goods without paying duty until the merchandise is ready to be transported outside the zone. This could save a great deal on importing costs, depending on your business type.
Is Free Trade Good or Bad?
This is a difficult question to answer definitively, as are most “good vs. bad” questions. The classification of free trade on the spectrum of good and bad is a philosophical question and one of economics, ethics, and logistics.
Many factors come into play when assessing this question. On the one hand, free trade can provide global businesses with:
- Access to new markets and opportunities
- Greater profits
- The creation of new jobs
- Cultural exchange
- Technological advancements
On the other hand, and paradoxically, free trade can have some severe negative impacts. For example, it frequently leads to job losses in certain nations due to competition from lower-cost producers. Don’t forget the other disadvantages I mentioned earlier, such as tax evasion, exploitation, and potential economic disasters.
At the end of the day, it’s up to you to decide whether free trade is good or bad for your business and our world. Weighing the pros and cons carefully should help you make an informed decision.
What Country Is Known for the Most Free Trade Zones?
China’s Special Economic Zones comprise the area with the most free trade zones globally.
What Do Free Trade Zones Eliminate?
To answer this question simply, free trade zones eliminate trade barriers.
Free trade zones are designed to help businesses lower costs. As a result, companies operating in these areas often enjoy certain benefits and incentives, such as tax exemptions, reduced tariffs and duties on imports, special customs procedures for manufacturing operations, and duty deferral programs.
In addition to cost-saving measures, free trade zones also work to eliminate restrictions placed by governments and other authorities regarding the movement of goods across international borders. This allows goods to flow freely between countries without any limits or barriers, ideally creating more significant economic growth. The elimination of these types of restrictions can be beneficial not only to businesses but also to consumers, who benefit from increased access to goods from around the world.
What Kinds of Free Trade Zones Does the United States Have?
The USA has 298 free trade zones spread across all 50 states. These free trade zones are of two types – general-purpose zones and subzones.
General purpose zones consist mainly of industrial parks and port complexes offering public facilities. Renting space in these zones can help minimize costs and reduce a company’s liability.
Subzones, on the other hand, consist of single-purpose locations for operations that can’t be accommodated in a general-purpose zone. The “sub” in their name comes from the fact that they’re a subset of general-purpose zones. These are typically private plant sites.
What is the Largest Free Trade Zone in the World?
China’s Special Economic Zones make up the largest free trade zone in the world.
What are the Two Main Purposes of Free Trade Zones?
Two primary purposes of free trade zones are attracting investment and increasing employment. Ultimately, free trade zones are set in place to improve and boost the economy of the nations involved in the zone.
How Do Free Trade Zones Save Money?
The main way the nations can save money with free trade zones is through reduced, deferred, or eliminated customs duties on their products. The customs duty process is lengthy and complicated, so this avoidance can also save time.
What Activities Are Allowed in Free Trade Zones?
In an FTZ, you can do activities such as:
- Assembly
- Cleaning
- Processing and mixing
- Relabeling and repackaging
- Salvage and repair
- Sampling and testing
- Storage
- Merchandise display and exhibition
However, the production activity (which can mean making significant changes that affect customs classification or eligibility to enter another country) needs authorization from the nation’s FTZ Board. It’s important to note that retail trade is not allowed in Foreign-Trade Zones.
Conclusion
Free trade zones are a way to save money and increase efficiency in international business. With the right planning, they can be used to benefit both businesses and consumers alike.
However, it’s important to remember that free trade zones come with rules and regulations—research thoroughly before committing to an FTZ or engaging in any foreign trade activities. Ultimately, if used effectively, free trade zones can provide a boost to global economic growth, create jobs, and promote international cooperation.
If you’re interested in taking your company’s organizations across borders but aren’t sure where to begin, I highly recommend this article about management tips for international business expansion.
If you have any questions or think I missed any critical information, please leave a comment. Otherwise, thanks for reading, and until next time!
