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What is a Free Trade Zone?

Free Trade Zone (FTZ) can be described as a product of globalization. It is an area where goods are manufactured, handled, landed, re-exported or re-configured without having the custom authorities to interfere. Free Trade Zone is an area especially designated for export oriented foreign direct investment. These zones are generally formed around major international airports, national frontiers and seaports or any other area which offers geographic benefit for trading. The result of this is that many non-tariffs and tariff hurdles are removed through agreements among states as well as the investments are incentivized which includes waiving of tariffs and customs, providing facilities for licensing processes for foreign investors who are interested in creating a local setup and the suspension or curtailment or suspension of laws in particular areas such as labor rights and environmental protection. In addition to this, host companies also have the opportunity to develop infrastructural support in different areas such as telecommunication and transportation which will support Free Trade Zones.

Benefits of Free Trade Zones

  • Federal tax excise on imports and deferring custom duties
  • No duties to be paid on waste
  • The merchandise exported is free from quota and duties
  • Storage of goods for an indefinite period without having to pay any duty
  • Delaying of taxes and duties until all the goods and merchandise is transferred to the exporting country
Free Trade Zones can be developed to support a single industry in case natural resources are limited to a certain type. For example, FTZ’s can be created for oil and gas producing companies. In addition to this, other benefits associated with Free Trade Zones include sector-specific and industry-specific skills which are tailored as per the requirements of the zone.

Under generic terms, Free Trade Zones are described as exporting zones developed within nations that are less industrialized. Their feature is to seek to divert the attention of multinational investments and corporations within that respective zone thereby demonstrating the advantages of free trade.

Free Trade Zones also have the feature of offering companies with favorable trading conditions along with providing developing countries with capital in addition to the ability to export products and items, provision of employment which would not exist otherwise or would have been somewhere else. Moreover, transferring of technological methods and processes from multinational corporations to that of the local industry setup. FTZ’s provide a comparative advantage to developing nations which would not normally the case otherwise.

Although Free Trade Zones are considered to be very beneficial for developing nations although, criticism refers that multinationals exploit developing nations which are offering most incentives. Furthermore, FTZ’s are also exploiting local communities by means on unfair labor practices, adverse trading relationships, lacking of technological transfer, environmental degradation as well as lack of longer commitment by the hosting country. Also the outsourcing by Free Trade Zones has eventually led the manufacturing capabilities to drain out in developed industrialized nations. All in all, Free Trade Zones are a good way for nations to increase their business and maintain their trade level by cutting down tariffs and customs.

Posted by: Amit on Feb 10 2014

Tags: Free Trade Zone Foreign Trade Zone Free Trade Zone Benefits International Trade Zone

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