Free trade zones (FTZs) are areas in a country where imported goods can be stored, assembled and processed while bypassing customs duties. Duties and taxes are only due once goods are moved into local consumer markets.
Generally, FTZs allow companies to remain competitive by reducing the cost of importing materials for production and exporting manufactured goods.
Free Trade Zone Regulations
Foreign and domestic goods within FTZs are generally considered to be outside of a country’s customs territory. However, they are still subject to local laws, regulations and inspections.
What Can Be Done in Free Trade Zones
Within FTZs, items are generally permitted to be:
- Stored
Companies may store their items in FTZs if they wish to re-export the goods at a later date. They may also store goods to delay processing fees for imports.
- Tested and sampled
Companies may sample imported goods from potential business partners or test their own products before letting them go out to market.
- Manipulated
Items may be repaired and repackaged within FTZs. This allows businesses to do quality checks and restorations before bringing them into the consumer market.
Businesses may also request permission from local authorities to destroy damaged items without incurring customs duties.
- Manufactured
Items may be processed, assembled or mixed within FTZs. In some cases, the newly fabricated products may have a different tariff classification from the original imported materials. This may result in reduced duty rates.
What Cannot Be Done in Free Trade Zones
Activities prohibited in FTZs may differ in each country. Generally, this may include:
- Importing, exporting or handling:
- Illegal goods and materials (e.g. illicit drugs, items that infringe copyright laws)
- Products subject to internal revenue taxes (e.g. alcohol, tobacco products)
- Unauthorized construction or alterations to facilities within the premises
- Manipulating or manufacturing items classified as “zone restricted”
- Retail trade
Companies are usually required to maintain full and proper records of all operations within FTZs. Local authorities may conduct regular on-site checks and documentation reviews to ensure that no illicit activities are taking place.
Benefits of Free Trade Zones
Reduced Costs
The various activities permitted within FTZs allow manufacturers, importers and distributors to save money due to duty exemptions, deferrals and reductions.
Companies Remain Competitive
Manufacturers get to tap into globally-sourced products and materials at lowered costs. This allows companies worldwide to produce better quality products, selling them at competitive rates in local and international markets.
Indefinite Storage
Many FTZs allow for warehousing without time limits, allowing businesses to move their products into markets more strategically. They may store their products to:
- Avoid yearly quota limitations
- Keep goods readily available for distribution while awaiting licensing from local authorities (e.g. government approval for new medicine or food products)
Conveniently Located
As many FTZs are located near or in ports, they act as convenient sites for distribution centers to set up operations. These locations are also strategic for manufacturers that import materials from overseas, then re-export them elsewhere for assembly.
Drawbacks of Free Trade Zones
Risk of Intellectual Property Infringements
With greater ease of imports and exports, it becomes easier for certain manufacturers to produce knockoffs while evading intellectual property laws.
Potential for Labor Exploitation
The presence of FTZs may encourage businesses to cut costs by outsourcing jobs to countries with weaker labor protection laws. Workers may be forced to work for low wages and under dangerous conditions.
Potential for Environmental Pollution
Similarly, the presence of FTZs may encourage businesses to carry out operations in a way that may harm the environment. For example, manufacturers may be less mindful about air and water pollution in countries with less stringent regulations.
Free Trade Zone Warehouses
An FTZ warehouse is a facility geographically located within a country, but is classified to be outside the country’s customs territory. It is where many FTZ activities take place, bypassing formal customs clearance procedures.
FTZ Warehouses vs Bonded Warehouses
A bonded warehouse is a site where imported goods are stored prior to the payment of taxes and duties. Items stored here fall under a country’s customs regulations.
Both FTZ and bonded warehousing services allow for the extended storage of imported goods, during which customs duties are not payable. In both cases, duties are only due once goods are moved into the country’s consumer market.
However, they differ in the following ways:
- Movement of goods between warehouses
Products may be moved between different bonded warehouses without the need for duties payments. Conversely, goods cannot be moved between FTZ warehouses and transportation outside of the zone will incur customs charges.
- Time limit for storage
Items can only be stored in bonded warehouses for a limited period of time, while storage in FTZ warehouses may often occur indefinitely.
- Processing of goods
Products and materials can only be manipulated or manufactured in certain bonded warehouses, whereas these activities are allowed in all FTZ warehouses.
Examples of Prominent Free Trade Zones Globally
FTZs are also known as free zones, free ports and foreign trade zones in some countries. Here is a list of some popular FTZs around the world.
| Country | Free Trade Zone |
|---|---|
| China | ◦ Zhangjiang Hi-Tech Park ◦ Tianjin Airport Economic Area ◦ Hainan Free Trade Port |
| Costa Rica | |
| Mexico | ◦ Mexico Free Trade Zone |
| Nigeria | |
| Panama | |
| Thailand | |
| United Arab Emirates (UAE) | ◦ Dubai Internet City ◦ Jebel Ali Free Zone ◦ Dubai Silicon Oasis |
| United States of America (USA) | ◦ New York City, FTZ 1 ◦ City of Los Angeles, FTZ 202 |
There are also prominent free trade zones located in Hong Kong, Singapore, Copenhagen and Stockholm.