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Free economic zones (FEZ), which are sometimes referred to as free trade zones, are territories mapped out by governments to designate areas that have little or no taxation. Designed to stimulate economic activity, FEZs effectively exist outside the borders and customs controls of their home country.
Many FEZs are situated near big shipping ports, known as free ports, which offer organizations easy access to international shipping and other domestic transport links such as railroads and highways.
A Brief History of FEZs
Far from being a novel concept, FEZs have a rich history, dating back as far as Ancient Greece and Rome, where certain traders were given exemption from import and export taxes.
In medieval times, ports in southern England were awarded tax exemptions and in the 19th century, tax breaks were given to alcohol and tobacco imports in bonded warehouses.
It wasn't until the twentieth century that FEZs were employed as a conscious means for driving economic growth, timed with the rise of globalization. During the Great Depression, for example, the U.S. deployed “foreign trade zones” to relieve exporters from the high tariffs imposed by the Smoot-Hawley Act in 1930.
Today there are more than 700 free ports and FEZs scattered around the world, including more than 230 foreign trade zone projects across the U.S., which handles $756 billion worth of imports and exports each year.
Why Do Free Ports or FEZs Exist?
FEZs exist to stimulate economic productivity by making import and export trade more attractive through the afore-mentioned tax breaks and other incentives. From a practical standpoint, suppliers and retailers use FEZs to store surplus or safety stock, with the option to defer payment of customs duty or tariffs.
FEZs can also be a catalyst for boosting technical skills and driving innovation, especially in highly competitive industries such as automobile components and aerospace.
What Are the Main Types of FEZ?
In general, FEZs can be placed in one of four categories:
- Free trade zones – Typically located near shipping ports or airports (sometimes known as free ports) and are known for eliminating duties and tariffs on imports and re-exports.
- Export processing zones – Known for facilitating exports as well as re-exports.
- Special economic zones (SEZs) – Focus on both domestic and international development and financial success. SEZs offer a wide variety of incentives including tax exemptions, speedier administrative procedures, and access to infrastructure.
- Industrial zones – Used for certain industries, such as textiles or food and beverages, with the infrastructure in the zone adapted for their specific requirements.
The Pros and Cons of Free Ports and FEZs
FEZs have several advantages and disadvantages.
Advantages
- FEZs can help to stimulate economic activity. In the UK for instance, construction group Mace predicted that establishing post-Brexit free ports could boost the economy by about $10.2 billion per annum.
- Governments often include additional incentives to FEZ users, including reduced regulation, lower administrative burden, and direct financial incentives. This speeds up the flow of international trade by cutting down on bureaucracy.
- FEZs give organizations more control over the production and distribution of their products.
Disadvantages
- The main disadvantage is that by adopting light regulation, FEZs could provide lucrative opportunities for criminals engaged with the trading of counterfeit goods, money laundering, or smuggling of illicit substances.
- A recent OECD report suggested that each additional FEZ within a country increases the number of fake exports by 6.9%.
- The supposed economic benefits of FEZs are hotly disputed by academics and government agencies who argue that there is simply not enough evidence available to know for certain whether FEZs have a net positive or negative effect on a country’s economy.
The coronavirus pandemic has left economies around the world in tatters. As governments look for ways to quickly drive economic recovery it’s predicted that SEZs could be the answer to stimulating trade and generating new investment in the United States.
Image Credit: chuttersnap / Unsplash
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