A free trade zone (FTZ) is a special area outside the United States that provides a number of economic benefits. A FTZ is a specially designated area that has different procedures, laws, regulations, and taxes than those of the rest of the host country. These zones are designed to simplify trade and attract foreign investment. According to Post (2015), FTZs are areas, “in which quotas for goods or taxes on goods imported into foreign nations are eliminated or relaxed due to less regulation by those state governments” (p. 38).
The individual rules, regulations, taxes, duties, and fees of each FTZ are the prerogative of the government of the country where the zone exists. In FTZs in many countries, goods that enter or exit the zone are not subject to usual customs regulations. Goods used in manufacturing can often be imported and re-exported without taxation. This can be useful for companies that want to base a portion of their manufacturing operations and processes in a foreign country, without being subject to certain fees. For example, Global Finance magazine lists zero taxes on imported goods and a lower corporate tax rate (compared to the rest of the country) as some of the benefits provided to corporations operating in Colombia’s Rionegro Free Trade Zone, (“Special Economic Zones,” 2015, p. 15). In some cases, relaxed regulations and additional benefits are provided to companies operating within FTZs. According to Haacke (2016), China has recently made many alterations to its free trade zone policies, including changes that “liberalize foreign ownership restrictions” (para. 2).
Imports and exports are two of the main factors associated with FTZs. In most cases, a company operating within a foreign country’s FTZ can import goods without paying taxes on them. These goods can be used to complete manufacturing of a finished product, which can then be exported duty-free. If the product ultimately enters into the country that hosts the FTZ, normal import and export regulations and duties will likely apply. Although, some governments provide incentives to FTZ companies that end up “exporting” products into parts of the host country that are under the normal jurisdiction of customs.
After my research, I now have a more complete understanding of why FTZs exists and the benefits they can offer a corporation or economy. For companies that source goods from various places and have interconnected operations all over the world, free trade zones are very important.
- Haacke, O. (2016). Movement in the Free Trade Zones Signal Openings. China Business Review, 1.
- Post, T. (2015). extending foreign trade ZONE STATUS TO A SINGLE MANUFACTURER. Economic Development Journal, 14(3), 37-43.
- Special Economic Zones: Who Wins, Who Loses? (cover story). (2015). Global Finance, 29(8), 12-15.