TOWARDS A NEW GLOBAL TRADE ORDER

Towards a new global Trade order

of

Foreword byDr. MohaMMeD alzarooni

HH SHeikH MoHaMMed Bin RaSHid al MaktouMVice-President and Prime Minister of the UAE and Ruler of Dubai

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I am delighted to present to you this book, a compact compilation of over two dozen articles penned by authors who are renowned experts in the domain of free zones. The content is drawn from erudite discourse in the form of papers presented and panel discussions that took place during the first annual conference and exhibition of the World Free Zones Organization (World FZO) in May 2015.

Needless to add, the fresh insights many presenters brought and unique experiences they shared were not just stimulating but indeed thought provoking. Without doubt, discussions at the World FZO annual meeting have enriched our knowledge base.

This book is the culmination of World FZO’s desire to disseminate this wealth of knowledge among present and potential stakeholders including policymakers, entrepreneurs, service providers and investors. It may serve as a good reference book for academicians.

The Knowledge Management Unit of World FZO has put together this compilation. For ease of reference, the 30 articles this book contains are classified into six different sections covering Definition and Typology; Customs Facilitation; SMEs and Entrepreneurship; Customer Perspective; Regional Perspectives; and Future Focused – The Way Forward.

I am beholden to the authors for their perceptive delineation of issues of interest and recommendations. I have no doubt that several issues flagged in the following pages will intellectually engage all those interested and in the course of time, result in more clarity.

Free Zones around the world have to equip themselves to manage the potent socio-economic dynamics of the world. You be the disruptor; or else you will be disrupted.

Welcome

Dr Mohammed AlzarooniChairperson, World FZO

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Section i 08

ConCept; definition; typology; faCtoRS Related to attRaCting inveStMentS

o Free Zones: A State of the Art Francois Bost 10-15o Free Zones: Attraction and Consolidation of Investment Flows

Jorge Mario Martinez 16-21

Section ii 22

Role of fZs in CuStoMS faCilitation o Free Zones and Custom Policy Gaozhang Zhu 24-29o Free Zones and Customs Security and Facilitation Initiatives:

Dominican Republic Jose Manuel Torres 30-32o The Role of Free Trade Zones in Customs Facilitation

and Promotion of International Trade Lewis Leibowitz 33-36o The Role of Free Trade Zones in Customs Facilitation

and Promotion of International Trade Martin Ibarra 37-43o Customs and Free Trade Zones Narmin Issa 44-45

Section iii 46

SMes and entRepReneuRSHip o Development of SMEs and Entrepreneurship in Free Zones:

Advantages and Callenges Christin Pfeiffer 48-52o A New Model for Free Trade Zones Success:

Building Long-term Business Relationships with an Incubator Officing Strategy Frank Cottle 53-59

o UNIDO: Arab International Center for Entrpreneurship & Investment Enterprise Development & Investment Promotion Program Hashim Hussein 60-67

Section iV 68

CuStoMeR peRSpeCtive

o Real Economic Partners: Free Zones and their Customers Together Develop, Drive and Diversify Economies Habib Fekih 70-73

Contents

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Section V 74

Regional peRSpeCtiveS

o Free Trade Zones as an Instrument of Growth in Africa Chris Ndibe 77-83o State of the Art: ‘Free Zones of the Americas’ Juan Pablo Rivera 85-91o Global vs Regional: Future for Brazilian Free Zones Gustavo Fontenele 93-98o Benchmarking International Practices and

Building China’s Most Open Free Trade Zone Jing Wang 100-103o China: Accelerating Reform Through New Free Zones Program Pan Li 104-105o Arab Perspectives: An Overview of the Free Zone

Landscape in the Middle East Nasser Shraideh 107-111o Global vs Regional? Better Networking Juma Al Kait 112-115o Fostering Global Links through a Unique

Financial Free Zone Experience in Dubai Rajesh Pareek 119-125o Towards a New Trade Order: Successful Examples

of European Free Zones Dragan Kostic 127-133o Special Economic Zones: An Indian Perspective P.C. Nambiar 135-141o Iskandar Malaysia: The Catalyst of Economic Growth Ismail Ibrahim 143-151

Section Vi 152

StRategieS foR tHe futuRe

o Free Zones and Global Value Chains Hernando José Goméz 154-158o Free Zones, Global Value Chains:

A Case Study for the MENA Region Klaus Hachmeier 159-161o The Future of Free Zone:

Towards a New Model for Economic Diversification Isidoro Hodara 162-166o Free Trade Zones and Logistics Liliana Rivera 167-175o Update on the Global Trade Agenda from a WTO Perspective

Robert Koopman 176-178o FreeZones, State of the Art: The U.S. Foreign Trade Zones Program

Daniel Griswold 179-185o Quo Vadis Free Zones: The Future of U.S. Foreign-Trade Zones

Jan Frantz 186-189o Export Performance and FDI inflows of Foreign Direct Investment

Ashish Shah 190-194

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t h e w o r l d o f f r e e z o n e s

ConCept; definition; typology;

faCtoRS Related to attRaCting

inveStMentSo An article by FRANCOIS BOST, Professor of Economic Geography,

University of Reims, France makes an academic approach to broadly define a Free Zone and enumerate various commercial activities carried out therein. Additionally, the author explores the geographical spread of FZs.

o JORGE MARIO MARTINEZ, Head of the International Trade and Industry Unit UN-Economic Commission for Latin America and the Caribbean, Sub-regional Headquarters in Mexico, in his article highlights investment as an engine of growth and discusses strategies for attraction and consolidation of investments flows.

S E C T I O N : I

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FREE ZONES hAVE expanded apace throughout the world with the trend of trade liberalization and with the openness of virtually all countries to the market economy. They have also contributed to the surge in international trade and FDI, particularly in the developing world (West & East Asia, Latin America, Africa, and Middle East) and in Eastern Europe since 1990. On this score, free zones are readily claimed as important – indeed decisive – tools and mechanisms for gaining entry to the spiral of development because of the spill over effect they may have, at different scales, on local and national economies. But the extent of these effects varies greatly, depending on the country and the geographic area in question.

an aCadeMiC appRoaCH to fRee ZoneS A “free zone” can be defined as a perimeter of varying size, in which authorized businesses are exempt from the normal regime applicable in the host country, in particular with respect to the customs and taxation fields (Bost, 2010). In return for this concession, governments expect these businesses to create jobs, to boost national exports and to help diversify the economy by bringing in new branches of activities.

a State of the art

Dubai Airport Free Zone

F r e e Z o n e s :

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t h e w o r l d o f f r e e z o n e s t h e w o r l d o f f r e e z o n e s

The free zone is a generic term. As the zones are in fact a variety of types of different areas, but which refer to the same reality: Customs Free Zone (South Korea); Special Economic Zone (China, India, Jordan, etc.); Zona Procesadoras para la Exportación or Export Processing Zone (Panama); Zona de Processamento de Exportação or Export Processing Zone (Brazil); Qualifying Industrial Zone (Egypt, Jordan); Zona Económica Especial de Exportación or Special Economic Export Zone (Colombia); Software Technology Park (Taiwan); Foreign Trade Zone (United States); and General Industrial Zone (Thailand) etc.

Having made their first appearance after World War II, free zones then began to multiply in the 1980s, to the point where it is now no longer a question of identifying the countries that have them but rather of seeking out those that have still not established such zones.

With tangible signs of interest towards them, free zones policies have been promoted in the developing countries by several multilateral agencies (United Nations Industrial Development Organization, World Bank, Organization for Economic Cooperation and Development etc.) or bilateral agencies (Overseas Private Investment Corporation etc). The World Trade Organization (WTO) has also learned to deal with them – despite the departure from the principle of free competition – because they are one of the few ways for many poor countries to industrialize and to enter in international trade.

However, all zones are not intended to become hubs of the global economy. The indisputable success of many zones must not make us

Copyright © Free Vector Maps.com

T Y P e s o F F r e e Z o n e s :

Customs Free Zone (south Korea)

Software Technology Park (Taiwan)

Special Economic Zone (China)

Special Economic Zone (India)

General Industrial Zone (Thailand)

Special Economic Zone (Jordan)

Qualifying Industrial Zone (Jordan)

Special Economic Export Zone (Colombia)

Foreign Trade Zone

(United states)

Qualifying Industrial

Zone (egypt)

Export Processing Zone (Panama)

Export Processing Zone (Brazil)

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forget the successes in halftone and even the failures of some of them. It is a sign that a model that has been proven in a country is not necessarily transposable to the same in another country and in another socio-economic context. But all zones have the same vocation: a better integration of local economies in the mechanisms of the world economy.

fRee ZoneS CategoRieSThere are two major types of zones:Free Trade Zones were, on an historic plan, the first type of free trade area to be established. Hubs of international trade by the very nature of their activities (transhipment, goods distribution, re-export, international business, etc.), these zones are typically located at seaports (‘free ports’) and airports, along major communication routes (maritime, rail and road) and along development corridors and/or in border regions.

Export Processing Zones (EPZ) constitute the second type of free zone. They are specialized in manufacturing production (textiles and clothing, footwear, sporting goods, consumer electronics, industrial components, etc.) and increasingly, the provision of services that can be delivered remotely through digital networks (processing of digital data, call centres etc.). Among the best-known and oldest EPZs are Ireland’s Shannon (1959), Taiwan’s Kaohsiung (1966), Brazil’s Manaus (1967), Dominican Republic’s La Romana (1968), South Korea’s Masan (1970), Malaysia’s Bayan Lepas (1972), Indonesia’s Batam (1978) and China’s Shenzhen Special Economic Zone (1978). These well-known EPZs were a huge success and attracted many investors. Their model of development has played a major role in the dissemination of the EPZs worldwide.

Shannon Free Zone

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In addition to the physically delimited export processing zones, some countries have developed a second possible mode of operation for businesses called “free points”. These do not refer to any specific physical space but rather to a legal status that is accorded to businesses using the same criteria as the other free zones (and benefitting from the same advantages). These industrial and service businesses are free to locate wherever they wish within the host country. But they generally position themselves near sources of raw materials, labour supply or specific infrastructure, or in border regions (Bost, 2010). This is the Mexico that, in 1965, showed the way through the famous maquiladoras, (6,127 that employ 2.5 million people as of 2015). They are mainly located along the border with the United States. Mauritius and Madagascar have also opted for the formula of free points since all of their island territory has the status of free economic zone, respectively since 1970 and 1990.

To take advantage of the benefits of the different systems proposed, several countries have adopted legislation that promotes both free zones like delimited areas (Free Trade Zones and Export Processing Zones) as well as the “free points”: Mauritius, United States (177 Foreign Trade Zones & hundreds of Subzones, or Free Points in 2014), India, Namibia, Nigeria, Ghana, Jordan, etc.

fRee ZoneS: oaSiS effeCt oR enClave effeCtThe laws governing free zones throughout the world are fairly similar, reflecting the influence of the international consulting firms that have drafted most of them. To be eligible for the advantages offered, industrial and service firms must meet a number of conditions and they must export virtually all of their output. They must also work in specific sectors of activity intended to diversify the country’s economic structure.

Customs advantages are common to both free trade zones and export processing zones. The free points also benefit from the same customs advantages. Goods in transit, as well as those inputs needed for production (raw materials, intermediate goods and capital goods) are exempt from host country Customs duties when they enter the free zone. Similarly, goods stored or subjected to minor transformation (known as “inward processing”), as well as products manufactured on site, may leave the zone free of Customs duties.

Customs duties are payable by importers, however, as soon as the goods cross the border of the destination country, unless that country has eliminated them under preferential bilateral or multilateral agreements. Customs duties (as well as local taxes, such as VAT, and other import levies provided for under ordinary law) are payable when the products and goods from the free zones are sold in the national territory (as authorized by law and after validation by the oversight agencies). The objective is to avoid the distortion of competition with similar goods imported under the ordinary regime. In some countries there is a strong temptation for unscrupulous

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firms to place imported goods on domestic markets without paying Customs duties. While these practices remain the exception, they threaten to discredit the very purpose of the free zones if they are not met with strong opposition.

When it comes to tax advantages, authorized firms in the export processing zones are exempt from corporation tax (also known as corporate income or profit tax) for a length of time that varies by country (10 years in the case of Morocco, Ghana and Togo, for example). After that time limit, firms fall back under the ordinary regime and become taxable, either at the level stipulated by the ordinary legislation or at a reduced and still-attractive level for a transitional period, so as not to incite a move to another country that offers investment incentives. In any case, some countries would do well to maintain an attractive tax regime in their free zones for a long time yet.

Given their low level of development, they are not affected by World Trade Organization demands for revisions to their taxation systems (which are aimed only at emerging countries). In addition to their exemption from corporation tax, companies also generally enjoy other types of tax exemptions, which vary greatly among countries, such as exemption from taxes on dividends paid to shareholders, tax exemptions for expatriates etc.

There are other advantages offered to authorized firms in free zones that, according to investor surveys, are just as important in convincing these firms to settle in a country. These advantages serve to create a more favorable and smoother-functioning business climate (known as the “oasis effect” or the “enclave effect”), especially in countries where activities under the ordinary regime suffer from burdensome red tape.

They also vary sharply from country to country, including: simplification of administrative procedures via a “one-stop window” (or one-stop-shop) where all formalities can be handled at once; proximity to major infrastructure

China has 213 zones, which comply with nine different legal regimes.

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FRANçOIS BOST, Professor of Economic Geography at the University of Reims Champagne-Ardenne (URCA), France and a member of the World Free Zones Organization board.

facilities (international airport, deep water port, etc.); reduced factor costs (water, electricity, telecommunications, etc.); relaxation of foreign exchange regulations, often amounting to total freedom for movement of funds; free repatriation of earnings in foreign currency; preferential interest rates offered by local banks; preferential freight rates etc.

a geogRapHiCal appRoaCH to fRee ZoneSWithout citing their sources, various publications often cite 3,500 as the number of free zones around the world. This figure is highly exaggerated and inaccurate. In 2010, the World Atlas of Free Zones (François Bost ed.) was able to prove that there were 1,735 EPZs across 133 countries. In the context of the World Free Zones Organization, a new survey is underway to enumerate active free zones in the world in 2015. This investigation will result in a new atlas online. The first estimates for 2015 are about 2,000 zones in about 140 countries. All of the emerging markets are included in that list. China has 213 zones, which comply with nine different legal regimes and in 2010 the zones accounted for around 47% of the country’s total exports.

In 2010, according to the World Atlas of Free Zones the breakdown of zones by geographical location was: East Asia (24%), South Asia (19.6%), America North (15%), South America (7%), sub-Saharan Africa (6.2%), the countries of the South and Eastern Mediterranean (5.2%). Other regions are poorly represented.


B r e a K d o w n o F Z o n e s B Y g e o g r a P h I C a l l o C a T I o n

24% east asia

7% south america

19.6% south asia

6.2% sub-saharan africa

5.2% south and east Mediterranean

15% north america

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POLICy MAkERS hAVE found an important tool for increasing investments and facilitating production chains through the establishment of free zones. These zones offer a set of factors that facilitate businesses, including factors that increase firms’ competitiveness, reduce operation costs, and increase mobility and connectivity among many others.

Free zones have different names as they vary from country to country – export processing zones, free industrial zones, free trade zones, etc. – but in general, they relate to special regimes that promote investment and facilitate businesses in a geographically defined area, commonly considered

attraction and Consolidation of investments flows

F r e e Z o n e s :

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outside the Customs territory of a country where special regulations apply. Firms located in these areas often receive tax benefits such as duty-free imports and tax exemptions as well as specialized public services – expedited Customs procedures, special security measures etc.

For developing countries, the creation of the free zones invites exporting companies to relocate by offering a set of advantages. The conditions offered in the free zone for exporters offset the anti-export bias that may exist in some of these countries – poor infrastructure, high tariffs on imported inputs, difficult access to products and components at international prices, export taxes, among others. For developed countries, free zones facilitate the import and management of inputs that are part of complex supply chains. With increasing globalization, free zones became an important instrument to promote foreign direct investment (FDI) and subsequently, integration into global value chains.

Free zones are actually a complex set of instruments that seek multiple goals simultaneously: to create the enabling environment for attracting FDI and to facilitate businesses and create global value chains, while the development of industries and services that complement domestic investment are encouraged. Given this complexity, it is important to identify the most important factors for success in attracting investments into free zones.

The most important factors related to attracting investment in free zones start include: investment for growth; financial and fiscal incentives to increase investment; creating unique factors that conform to the needs of firms; and stressing the importance of reaching public-private agreements to facilitate productive investment.

inveStMent aS an engine foR gRoWtH Investment flows are crucial for economic growth, and therefore increasing investments is a development policy pillar in all countries. For poor or emerging economies, closing the gaps that separates them from developed countries is necessary in their quest for development. The catching-up process inevitably requires high investment rates and countries must explore any feasible policy to boost investments. According to estimates by the United Nations Conference on Trade and Development (2003), middle-income developing countries seeking to grow at rates that allow them to reduce the gap that separates them from the developed countries, require stable investment rates of 25% of GDP. However, historically investment rates in many developing countries have been low. For instance, the gross fixed capital formation accounted 21% of GDP in Latin America in the last 15 years, an insufficient rate that prevents countries to start a virtuous catching-up process (see Chart 1). For the above reason foreign direct investment (FDI) is of great importance for developing countries, since it complements domestic investment increasing the gross fixed capital formation rate.

Although FDI is positive for growth, for the modernization of the local business sector and for its international insertion, it is an exogenous factor,

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which should be considered as a complement of local investment policy. Free zones play the important role of matching FDI and local investments, serving national efforts to increase foreign and local investment. For better performance free zones have to explore, in a very creative manner, all existing incentives and determinant factors for attracting investments.

tWo Main StRategieS foR inCReaSing inveStMent RateSIn order to promote investments, countries have primarily developed two strategies. The first is to offer generous tax incentives – tax exemption to imports – value added tax and tariffs – exemption from income tax, sales tax or VAT exemption, exemption on municipal taxes, permits etc. This first strategy is usually followed by a number of facilities for hiring labor – local and foreign – for importing capital goods etc., which could be summarized as a strategy focused on reducing production costs. The second strategy is to promote investments through the provision of public goods such as access to specialized infrastructure, to highly skilled labor, to new technologies, ease trade procedures – Customs procedures, import permits, operating permits etc.

Source: IMF, World Economic Outlook Database, April 2015.

Emerging and developing Asia USA Latin America and the Caribbean

Middle East and North Africa European Union Sub-Saharan Africa

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 201415

20

25

30

35

40

g r o s s F I X e d C a P I T a l F o r M a T I o n2000-2013 (in percentage of gdP)

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The first strategy, focused on reducing production costs, has been widely used in many developing countries and for many of them it has been the only way to mobilize foreign capital into its territory. However, this strategy exerts strong pressure on tax revenues and public resources by the process of tariffs reductions and increased tax exemptions. This raises two fundamental paradoxes: on the one hand, the tax waiver prevents the state from having sufficient resources for investment in public goods needed to improve their competitiveness condemning the country to a low competitive equilibrium trap. On the other, the most dynamic and high-income sectors located in free zones do not contribute to the treasury, thus generating a regressive tax system.

It is also important to underline that the cost reduction strategy based on the reduction of taxes is the easiest to imitate, leading a race to the bottom competition among countries by reducing regulatory and tax requirements. The main challenge for countries implementing this strategy is designing ‘new generation incentives’ to promote investment, moving from a strategy based on cost reduction, to one in which companies find further benefits by relocating into those countries. These new incentives can target investments in services, productive activities with higher value added, firms with intensive R&D activities, new environment oriented sectors and the creation of productive linkages between companies operating in the free zone and local businesses. In this new strategy, free zones play an important role by offering specialized services and attraction factors that may be unique, facilitating the arrival of new firms. In other words, free zones can help to overcome the low competitive equilibrium trap.

The second strategy stems from the provision of special or unique investment factors. Location decisions are driven by at least three main determinants: market seeking – being as close as possible to consumers; efficiency seeking – reduction of costs, timely delivery, energy access etc.; and special resources seeking – access to unique natural resources or highly skilled labor. In the real world, most location decisions are based on a mix of the aforementioned three reasons and that is why the competition for attracting and anchoring investments are increasingly complex, overcoming the sole idea of tariffs and tax exemptions.

The creation of factors to attract unique investments are comprised in a long list of endowments, most of them depending on public policies – education, quality infrastructure and IT services, access to energy, business facilitation, Customs procedures etc. Private services are increasingly providing many of the above-mentioned factors and becoming a part of the solution for developing countries.

Free zones offer a mix of factors to attract, anchor and facilitate the flourishing of investments. The bottom line in this strategy is that the bigger the market that can be accessed from a free zone and the more sophisticated services the free zone can offer, the less relevant the tax exemptions for attracting investments.

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puBliC-pRivate allianCeSSince a combination of factors is critical for attracting and anchoring investment flows, how can countries identify the relevant set of factors to boost investments? How can countries improve on this set of factors? Though there is no universal formula to respond to these questions, according to a vast study of successful cases two factors are crucial: the development and implementation of a medium- and long-term strategy to achieve economic growth and the support provided to this strategy by a public-private alliance (Devlin and Moguillansky, 2009).

A medium and long-term vision of development informs private investors on future areas of development and provides key information for investment planning. It also indicates the productive factors that will be created or strengthened by local authorities, facilitating private investments decisions.

The success of this medium and long-term vision is greatly based on the capacity of organizing public-private alliances. These alliances require an open dialogue between policy makers and private sectors that facilitates the identification of bottlenecks and their solutions, as well as the creation

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of medium- to long-term arrangements. These alliances reinforce the mode of countries’ international insertion, bring timely responses to productive and investments constraints and create mechanisms for private and public sectors to remove them (Devlin and Moguillansky, 2009).

The most successful cases of public-private alliances are the ones with more stable dialogue and medium- to long-term agreements that provide a basis for consensus or public understanding to underpin investments strategies and the ones that are oriented towards the successful internationalization of the economy.

Whether public-private alliances are formally structured, ad hoc, tacit or informal, or a hybrid of the above, has not proven to be decisive. What is important is to have a serious public-private dialogue in order to facilitate the solution of problems, create commitments from the public and the private sectors and to evaluate and amend the agreements if necessary.

Free zones may play a key role inducing public-private alliances on productive investments matters and offer an ideal platform for public-private dialogue. In addition, free zones can offer an increasing set of factors that are relevant for attracting and anchoring investments, along with facilitating the provision of relevant public services – Customs, security, clustering etc. To this end, the public-private relationship has proven to be a fruitful alliance towards business development.

REFERENCES

• Devlin, R. and Graciela Moguillansky (2009), Public-private alliances for long-term national development strategies, in CEPAL Review 97, April, pp. 95-113, Santiago, Chile.

• IMF (International Monetary Fund) (2015), World Economic Outlook Database, April.• Martínez-Piva, Jorge Mario (2015), Incentivos públicos de nueva generación para la atracción

de inversión extranjera directa (IED) en Centroamérica, en Serie Estudios y Perspectivas 134, Sede Subregional de la CEPAL en México.

• OECD (Organization for Economic Co-operation and Development) (2002), Foreign Direct Invest-ment for Development. Maximising Benefits, Minimising Costs, OECD, Paris, Publications Service.

• Paunovic, Igor, (2009) Competencia para atraer la IED en América Central: Cómo evitar la car-rera hacia el fondo?, CEPAL, XXI Seminario Regional de Política Fiscal, Santiago de Chile, 28 de enero, http://www.eclac.cl/ilpes/noticias/paginas/5/35065/04_Igor_Paunovic.pdf

• UNCTAD (United Nations Conference on Trade and Development) (2003), Trade and Develop-ment Report 2003. Capital Accumulation, growth and structural change, (UNCTAD/TDR/2003), United Nations Publication, Nueva York and Geneva.

• UNCTAD (2000), Tax incentives and foreign direct investment: A global survey, ASIT Advisory Studies No. 16, Document UNCTAD/ITE/IPC/Misc.

JORGE MARIO MARTINEZ-PIVA, Head of the International Trade and Industry Unit, UN-Economic Commission for Latin America and the Caribbean, Subregional Headquarters in Mexico.

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Customs or border control agencies play a crucial role in protecting a nation’s sovereign interests. Although FZs by their nature are enclaves

of free trade, they will still have to work in close association with Customs authorities of the country they are located in and comply with specified rules and regulations. Friction between FZ units and

Customs can potentially put the whole idea of FZ at risk.

o Writing about Free Zones and Customs Policy, author GaozhanG zhu, World Customs Organization highlights the importance of finding the right balance between trade facilitation on the one hand and compliance and enforcement on the other.

o Jose Manuel Torres of Dominican Free Zones Association (ADOZONA) highlights customs security and facilitation initiatives in Dominican Republic and argues in favour of adopting a certification system he calls as ‘Authorized Economic Operator’ (AEO). The AEO certification benefits companies in fast-track handling of their cargoes, privileged port entry and exit, assigned customs account manager and so on.

o The role of FTZs in customs facilitation and promotion of international trade is dealt with by lewis leibowiTz, Law Office of Lewis E. Leibowitz, Washington, D.C. Law enforcement, global competitiveness and modern efficiency should complement each other, he asserts.

o MarTin GusTavo ibarra Pardo, Vice Chairman, Word Free Zones Organization, in his presentation raises some vital issues including safe FTZs and FTZs as foreign trade one-stop shops. He argues in favor of FTZs becoming true assistants in customs function and the necessity to modernize the legislation of every country in order to have conceptual uniformity as regards FTZs.

o In her paper, narMin issa, Dubai Customs, discusses the role of Customs in the FTZ environment and enumerates the respective responsibilities of Customs and units operating in the FTZ.

Role of fzs in Customs

faCilitation

s e C T i o n : i i

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Trade has always been one of the manifestations of freedom and power. The idea of the free port can be traced back to 167 BC (Zarmakoupi, 2013), when the Roman Senate made a decision to turn the then Roman island Delos into a free port. City-states in the early Middle Ages, such as Venice, operated in a way that nowadays would be defined as free ports or free zones. The cities of Hamburg and Bremen, being the key players in the Hanseatic League in the North and Baltic seas in the 13th century were another manifestation of this phenomenon.

However, it is commonly agreed that the oldest free zone in its modern sense dates back to Shannon, Ireland, where the first Free Trade Zone (FTZ) was established in 1959. Today there are over 3,000 active Free Trade Zones (in one form or another) in 135 countries (Akinci and Crittle 2008, p.7), thus turning them into a global phenomenon within a timespan of only over 50 years.

free zones and Customs Policy

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Over the last five decades, free zones have served at the forefront of government policies as ‘growth poles’ for national and regional economies through the stimulation of foreign direct investments (FDI), creation of economic value added and generation of employment. The rapid adoption of the free zone concept around the globe shows that it remains very relevant for both countries and the business community. Free zones are also an integral part of the global supply and value chains. However, free zones attract not only legitimate businesses, but also criminals wishing to use the governmental incentives to their advantage. Thus, free zones might be exposed to numerous risks, such as revenue fraud, e.g. false tariff classification, repackaging, change of certificates of origin, replacement of consignments; public health and safety as well as security risks, for example, smuggling of arms and ammunition, drugs and counterfeit products; and money laundering (FATF/OECD, 2010).

Since free zone operators benefit from a special Customs treatment, a need to develop a commonly agreed Customs approach to free zones emerged. In this vein, the World Customs Organization (WCO) and its Members developed a Specific Annex D, Chapter 2, addressing the issue of free zones, in the International Convention on the Simplification and Harmonization of Customs Procedures (as amended), more commonly referred to as the Revised Kyoto Convention (RKC).

Overall, the RKC, which is a blueprint for modern Customs procedures, is aimed at developing predictable and transparent Customs procedures, the optimum use of information technologies, risk management, coordinated approach to controls along with other governmental agencies, development of partnerships with trade etc. As of today, there are 102 Contracting Parties to this legally binding instrument (WCO, 2015) and there are a number of observers that include members of the WCO, United Nations, World Trade Organization, other international organizations and trade community.

The RKC consists of three main parts including the Body, the General Annex and Specific Annexes that include 600 legal provisions, known as standards, transitional standards and recommended practices. The General Annex comprises 10 Chapters and contains the core provisions and definitions of general application to all Customs procedures. Specific Annexes contain 25 chapters related to specific procedures. When acceding to the RKC, the acceptance of the Body and the General Annex is mandatory while the acceptance of Specific Annexes or Chapters therein is optional. The implementation period for standards and recommended practices is three years, and it is extended to five years for transitional standards.

In order to assist Members in implementation of the RKC provisions, the WCO developed detailed guidelines containing information for the interpretation of the provisions, including their implementation and methods of application and best practices. These guidelines are not part of the legal text.

As mentioned earlier, Customs policy in relation to free zones is covered by the Specific Annex D, Chapter 2. This chapter contains 21 standards

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covering different aspects of control of free zones. The importance of the Specific Annex lies particularly in bringing more clarity to the role of Customs in the free zones. Its role stems from the definition of a free zone as ‘a part of the territory of a Contracting Party where any goods introduced are generally regarded, insofar as import duties and taxes are concerned, as being outside the Customs territory’. Some countries interpret it as ‘being outside the Customs territory’ in general. However, for Customs purposes, the free zone denomination pertains exclusively to the status of goods, i.e. tax or duty exemption. A wider implication of this definition is that all non-tariff Customs activities, such as border control functions, including inspections and seizures, should be preserved and enforced.

Depending on the setup of the free zone, the scope and degree of Customs control over the goods introduced, and the economic operations carried out in the free zones, vary considerably from one country to another. From this perspective, Standard 4 of the Specific Annex D is important as well, because it stipulates that Customs ‘shall have the right to carry out checks at any time on the goods stored in a free zone.’ Its Recommended Practice stipulates Customs controls over the free zone goods and operations on grounds of public morality, public security, public hygiene or health, veterinary or phytosanitary considerations. If these controls are

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exercised by another agency on behalf of Customs, the control functions should not be neglected.

This Standard is to be interpreted together with Standard 3 stating, “The Customs shall lay down the arrangements for Customs control including appropriate requirements as regards the suitability, construction and layout of free zones”. The engagement of Customs authorities in the early stages of developing the free zone concept is necessary to ensure safety and security within the free zone during its operational phase.

Customs controls in free zones are more flexible than those exercised under for example Customs warehousing procedures and are principally concerned with the relevant documentation in order to check that persons introducing goods into the free zone keep proper accounts of the goods (by using either special registers, relevant declarations or electronic systems), so that the circulation of goods in and outside the free zone could be controlled. Nevertheless, Customs has the right to carry out spot checks on goods at any time to ensure that goods are being accounted for satisfactorily, are being subjected to only authorized operations and that no unauthorized goods have been introduced or removed. For efficient and effective Customs controls, the extent of these checks should be based on a risk management system as provided in the RKC.

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There is another important issue that needs to be tackled: origin of goods and Customs regimes, such as transit and transshipment, which are frequently used by smugglers and criminal organizations to their advantage. Origin (RKC’s Specific Annex K) is used not only to calculate the duty rates and quotas, but also as a risk indicator for Customs authorities. Thus, origin shift caused particularly due to the proliferation of bilateral and regional trade agreements and their relation to free zone regimes, become another challenge for Customs authorities. In-transit and transshipment regimes (addressed in the RKC’s Specific Annex E) pose a high risk particularly because these procedures can be used to disguise the country of origin or to enter goods into Customs territories where border enforcement for transshipped or transit goods might be feeble.

The adoption and implementation of the Specific Annex D is the first step to ensure adequate levels of Customs controls and supervision in the free zones. Nevertheless, it is important to point out that some countries follow the provisions of the Specific Annex D even without adopting the RKC or the Annex. However, there are also countries that deny Customs jurisdiction over goods in free zones, leading to the erosion of Customs control functions and opening ways for illegal trade.

Lately the role of Customs has evolved and includes an objective to facilitate trade by ensuring safety and security and preventing the movement of illegal goods. This balance between facilitation on the one side and

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GaozhanG zhu, Director of Compliance and Facilitation, World Customs Organization

• Akinci, Gokhan and James Crittle (2008), Special economic zones: performance, lessons learned, and implication for zone development. Foreign Investment Advisory Service (FIAS) occasional paper. Washington, DC: World Bank, available at <http://documents.worldbank.org/curated/en/2008/04/9915888/special-economic-zone-performance-lessons-learned-implication-zone-development>

• FATF/OECD (2010), Money Laundering vulnerabilities of Free Trade Zones, FATF Report, March 2010, Paris: FATF/GAFI.

• International Labour Office (2003), Employment and social policy in respect of export processing zones (EPZs), GB 286/ESP/3, March 2003, Geneva.

• OECD (2009), “Free Zones: Benefits and Costs”, OECD Observer No. 275, November 2009, available at <http://www.oecdobserver.org/news/archivestory.php/aid/3101/Free_zones:_Ben-efits_and_costs.html >

• WCO (2006), International Convention on the Simplification and Harmonization of Customs Procedures (as amended), available at < http://www3.wcoomd.org/Kyoto_New/Content/con-tent.html>

• WCO (2015), “Argentina becomes 102nd Contracting Party to the WCO Revised Kyoto Conven-tion”, 19 June, available at <http://www.wcoomd.org/en/media/newsroom/2015/june/argenti-na-becomes-102nd-contracting-party-to-the-wco-revised-kyoto-convention.aspx>

• Zarmakoupi, Mantha (2013), “The City of Late Hellenistic Delos and the Integration of Economic Activities in the Domestic Sphere”, CHS Research Bulletin 1, no. 2, available at <http://nrs.harvard.edu/urn-3:hlnc.essay:ZarmakoupiM.The_City_of_Late_Hellenistic_Delos.2013>

enforcement and compliance on the other side is difficult to reach. However, trade facilitation and enforcement go hand in hand. If the ultimate goal is to make goods move seamlessly through the borders, criminal ‘opportunists’ could use the momentum and do a lot of harm by moving illegal goods along with legal trade. Thus, trade facilitation measures should be viewed as an outcome of the properly applied compliance and enforcement mechanisms. Free zones should not be an exclusion, which may turn them in a gateway for criminals who will abuse the weaknesses of the system. Today, the reputation of industries and countries depends on the way their free zones are managed. Whole supply chain security and safety are equally at stake. In times of increasing transparency and civil responsibility, there is a critical need to ensure that the operational environment of the free zones is safe and secure, procedures are transparent, operators are law abiding, and commodities going through the free zones further in the supply chains are legal. These objectives can be achieved through the adoption and implementation of RKC in its entirety, which is the first step to make the global trading environment safer and more secure.

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The Global eConoMy has dramatically flattened. Increasing global trade, the development of infrastructure and advancing technology are driving the proliferation of Free Trade Zones (FTZs) like never before. Innovation, manufacturing and distribution of products and services can be accomplished just about anywhere in the world. With more than 4,000 FTZs1 in various formats now present across the globe, these specialized production enclaves are responsible for about 70 million jobs and the generation of $500 billion in annual trade.

fRee zones in the DominiCan RePubliCThe Dominican Republic, recognized more and more for its world class products and services is not foreign to all these process improvements that are re-shaping today’s global trade. Last year, for example, the Dominican Republic exported more than 3,000 different product lines to more than 150 countries worldwide2. The Dominican Free Trade Zones (FTZs), accounted for 52% of the total value exported from the country in 2014³.

The Industrial Free Zones first appeared in the Dominican Republic in 1969 in the city of La Romana, with the support of the Dominican government and the ingenuity of the Gulf & Western Americas Corporation (today Central Romana Corporation). The collaboration of the private and public sector provided the initial concept and capital, while the Dominican government provided the necessary permits and incentives for its successful implementation.

Beginning in 1990, an important growth stage was initiated for the FTZs with the enactment of Law 8-90. This law created the legal framework and incentive structure for operating under this regime. An important aspect of this legislation was the establishment of a sub-director level authority within the Customs organization to deal exclusively with the FTZs. Another important entity, the National Free Zone Council was established to enforce the regulations and promote the economic model, overseen by a private sector- government board of directors. Through the years, these two institutions have been pivotal in the growth and stability of the free zones in the Dominican Republic.

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At present, the model of the Dominican FTZs represents one of the most successful manufacturing schemes in the region while taking a leadership role in the nation’s economy. The free zones have over 620 registered companies, in 60 industrial free zone parks and have created over 160,000 private jobs in the country3.

Customs seCuRity anD faCilitation initiativesAs part of the evolution and growth of the free zones, the Dominican Customs authorities in their efforts of facilitating and securing global trade, have been working closely with the US Customs administrations to shift their focus towards securing the international trade flow and expand their role beyond the traditional task of collecting Customs duties. In 2005, the World Customs Organization (WCO), adopted the WCO Framework of Standards to Secure and Facilitate Global Trade. Within this framework, several standards are included to assist Customs administrations in meeting these new challenges.

Such initiatives include the Customs Trade Partnership Against Terrorism (C-TPAT). The US Customs and Border Protection program now embraces 10 Customs to Customs mutual recognition agreements with their primary trading partners.

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Another initiative is the Business Alliance for Secure Commerce (BASC), which is a Hemispheric initiative created in 1996 with the purpose to implement mechanisms and procedures to safeguard against the illicit use of the goods in transportation. Currently, there are over 3,200 BASC certified companies in 12 countries in the Americas.

Additionally, the Dominican Republic is part of the Container Security Initiative (CSI), a non-intrusive technology for container inspection, now in 58 operational ports, out of which 12 are in the Americas.

Another relevant program initiative is the Authorized Economic Operator (AEO), a Customs to Company initiative with 63 countries as members, 9 of whom are in the Americas. This initiative of ‘certification’ has been authorized by the Dominican authorities and is well into this process. Today, many of the FTZs have certified as ‘AEO’ in partnership with the Dominican Customs authorities. These companies will now benefit from the fast-track handling of their cargos, privileged port entries and exits and an assigned Customs account manager among others. These benefits are reciprocated when the country has a “mutual recognition agreement” (Customs to Customs).

The Dominican Republic is the second Latin American country to have a ‘mutual recognition agreement’ under the AEO program with South Korea and soon with the USA Customs authorities.

ConClusionThe FTZs of the world should embrace the AEO certification program and work together with their local Customs authorities in promoting and adhering to these standards. Furthermore, the FTZs should be the catalyst for achieving the “mutual recognition agreement” among the 135 countries where these special regimes are present. We consider that the World Free Zones Organization should promote the WCO Framework of Standards to Secure and Facilitate Global Trade and adopt and expand the AEO initiative.

Jose Manuel Torres, Executive Vice President, Associacion Dominicana de Zonas Francas, Dominican Republic.

1. The Economist http://www.economist.com/news/finance-and-economics/21647630-free-trade-zones-are-more-popular-everwith-politicians-if-not?frsc=dg%7Ca2.Boletin Estadisticas 2014 – Consejo Nacional de Zonas Francas www.cnzfe.gob.do3.Banco Central de La República Dominicana (BCRD) www.bancentral.gob.doLey 8-90 sobre Fomento de Zonas Francas, República Dominicana http://www.dgii.gov.do/legislacion/leyesTributarias/Documents/8-90.pdfUS Customs and Border Protection (CBP) www.cbp.govRevised Kyoto Convention – Annex http://www.wcoomd.org/en/topics/facilitation/instrument-and-tools/conventions/pf_revised_kyoto_conv/kyoto_new.aspx

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in May 2015 a new organization took flight. The World Free Zones Organization (WFZO) was established to spread knowledge about free zones as tools of economic development and economic freedom. A major element of this freedom is to streamline government regulation, in particular Customs regulation of imported and exported goods to permit greater commercial flexibility.

Acknowledging the important effects that streamlined and modernized regulation can have on the development of free zones, world Customs organizations have been paying increasing attention to the impact that zones may have on the obligations of Customs authorities to enforce local and international rules.

In this article, I will discuss briefly a possible way forward to achieve sound, safe growth of free zones in cooperation with Customs authorities around the world. All free zone participants will welcome a new day where Customs needs will not inhibit the growth of zones dedicated to improved trade efficiency, facilitation of trade and adherence to the rule of law in trading of goods. Failure to take these important steps could reduce global prosperity and development when and where we need it most.

The World Customs Organization (WCO) is the international body that represents national Customs authorities. Composed of 179 member nations and Customs administrations, the WCO sets recommended global standards for law enforcement. The members of the WCO work closely together on such diverse issues as training of Customs personnel, capacity building and enforcement coordination. The WCO has expressed concerns about free zones, and these concerns should be addressed.

International standards concerning payment of lawful taxes, duties and fees must be enforced, as must important rules against smuggling, human trafficking, exports of sensitive goods and data and other imperatives of civilization as we know it in the modern world. Free zones must recognize these realities.

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By the same token, WCO member nations and Customs administrations must recognize the importance of constant improvement in economic conditions, especially in developing countries but also in the developed world. Improving conditions means improving competitiveness for jobs, international investment and modernization of infrastructure. Customs administrations must, and generally do, acknowledge that Customs cannot “hold back the tide” of modernization and efficiency. The size and scale of the global economy would rapidly outstrip the ability of Customs authorities to control it if the realities of modern commercial life were ignored. Free zones are and can be an increasingly important feature of balancing the need for enforcing the law with the commercial realities of the international marketplace.

The world is a single market now. Customs authorities know that they cannot focus solely on enforcement without regard to the effects and methods of law enforcement on the efficiency of moving goods to market. Businesses have largely acknowledged this linkage, and are constantly urging Customs administrations to adapt their enforcement methods to modern norms. If both business and law enforcement recognize each other’s needs, and resolve to co-exist, both enforcement and efficiency will benefit.

Free zones are a perfect way to achieve this balance. There can be no single way for law enforcement and business to strike the proper balance in every case. Experimentation and innovation are keys to moving forward. Free zones are the epitome and a shining example of innovation and experimentation. With the increased use of free zones as the model of innovation, business and enforcement, priorities are given the maximum flexibility to succeed without operating at cross-purposes.

With power comes responsibility. Customs authorities have recognized for many years that they cannot adequately police borders with human resources. Computers, location detection and myriad other methods have long since taken the place of Customs officials policing docks and airports. In free zones, Customs presence can be through surrogates and by data systems, recognizing the limits of physical presence in law enforcement. In many countries, physical presence has been replaced by a system of spot checks and audits based on the evaluation of risks. This very concept was adopted in US zones beginning in 1986 and has worked remarkably well – certainly not perfectly, but no system can possibly work perfectly.

I firmly believe that the innovative use of free zones can help the audit/spot check system of Customs enforcement work better. Customs authorities should embrace these innovations. If Customs agencies are concerned about violations of law, the business community should work with those authorities to increase confidence that the law will be enforced without the physical presence of Customs officials at every border crossing. However, if free zones inhibit innovative law enforcement methods without adequate justification, law enforcement can be expected to oppose free zones. The future of this relationship hangs in the balance.

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To me, therefore, the path forward is clear. Businesses, Customs and regulatory authorities and the free zones community must work together to create an enforcement/facilitation matrix where previously competing interests are mutually reinforcing. If the global business community recognizes this momentous opportunity, zones, international corporations and transportation and logistics providers can truly achieve great gains in trade facilitation and the credibility of zones as partners, rather than enemies of enforcement.

This ambitious goal also requires something from Customs authorities. First, the review and reform of existing Customs procedures, including law enforcement methods, must be undertaken. Long-standing rules, including country of origin rules must be reconsidered. Pascal Lamy, the former Director General of the World Trade Organization, has suggested a

Customs authorities have recognized for many years that they cannot adequately police borders with human resources.

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new set of rules recognizing that many products are products of the world, rather than a single country. The WTO rules on most-favored-nation make identifying particular countries as the single country of origin are becoming archaic. In this age of “free trade agreements,” eligibility is far more often a function of political pressure rather than sound policy. An entente between law enforcement and the international business community should look carefully at the basis for taxing trade based on an artificial and often unrealistic judgment on the country of origin.

Additionally, rules on Customs valuation and tariff classification should be reformed. In the 1970s, most of the world’s trading nations agreed to reform these rules to elevate “transaction value” as the global norm. World trade has benefited enormously from this change. Tariff classification decisions have improved dramatically with the advent of the WCO, with its global consideration of important classification rulings. However, the system is often still irrational, because global appeals are very rare and national classification decisions are often mistaken.

Of the three, the most urgent need for reform is rules of origin. The international community, including manufacturers, distributors and individual consumers would benefit if free zones were bastions of efficiency where processing could confer origin under free trade agreements. I join with Martin Ibarra in supporting this reform of free zone law globally. It would allow workers in free trade agreement countries to compete more effectively for jobs in the global marketplace.

Law enforcement, global competitiveness and modern efficiency can and should complement one another. This will require recognition that neither efficiency nor law enforcement is so important that it outweighs everything else. Both are vital to the future of global commerce.

Customs authorities throughout the world and business interests will need mutual recognition of their paramount concerns in trade compliance, law enforcement, business innovation and efficiency in the movement of goods. All stakeholders will need to evaluate their most important concerns.

Free zones are a vital part of giving meaning to this mutual recognition. Free zones are the best way to engage in innovation and experimentation in balancing trade efficiency and enforcement. The newly launched WFZO can, and I believe will, provide an important forum to move forward on important and complex initiatives. The WFZO must inaugurate a new chapter of global cooperation in enforcement and international competitiveness – and free zones will expand their already important place in the global economy.

lewis leibowiTz, Lawyer, Law Office of Lewis E. Leibowitz, USA.

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Free Trade zones were originated in order to facilitate trade. Three thousand years ago, when the Phoenicians created the world’s first free trade zone on the island of Delos in the Mediterranean Sea, it had the function of storing goods traded between enemy people, who therefore had declared a mutual economic embargo.

During the 17th and 18th centuries, free trade zones like the ones in Hong Kong, Singapore and Vladivostok were neutral spaces that allowed storage, packing and international redistribution inside a closed world.

In 1947, when the General Agreement on Trade and Tariffs (GATT) was created, a mere 20 free trade zones existed in the world, while in 1995 when the World Trade Organization (WTO) was established, their number had risen to around 500 in 73 countries. Today, there are around 3,500 free trade zones located in 130 countries.

Sixteen years after Annex D of the Revised Kyoto Convention regarding Free Trade Zones was issued, when international trade has fundamentally changed in terms of volume, value, transportation size and actors, the role of free trade zones has been redefined in an important way, as a key actor in trade facilitation and simplification.

It is worth considering that since 1999: Number of containers around the world has nearly tripled Maximum size of a container ship has doubled Average tariffs rate has been cut in half Maritime freight rates have reduced their cost by two and half times, with newer

and bigger vessels that can carry greater volumes of cargo to mega ports, for global redistributionThe reshaping of world trade, which has taken place over the last 15

years, has been largely supported by the implementation of the free trade zone regime to the largest international ports and airports, border zones or countries opening to international trade and that are in need of the theory of Customs extraterritoriality, in order to create neutral spaces free

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International freight merely represents between 6 and 11% of the value of a good.

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of procedures, paperwork, taxes and non-tariff requirements that drive the flow of world trade.

Besides this, new efficiency indices on conducting business in the world (such as doing business) have been created in recent years, within which international trade simplification has had high scores.

We must ask ourselves: What will be the role of free trade zones in the next 20 years, in a world that is

more open everyday? Is the existence of free trade zones justified in a world in which foreign trade is

growing exponentially? Are the provisions of the Kyoto Convention on Free Trade Zones, which were

drafted at the end of last century, suited in order to regulate the free trade zones of the new millennium?

Addressing the questions posed above, the board of the World Free Zones Organization (World FZO) has the following thoughts to propose: The only concrete progress that has resulted from the WTO negotiations in the

Doha round is on the subject of trade facilitation. In the current climate, tariffs are worth less than 4% of the value of goods, taking

into account the existence of countries like Singapore and Dubai, who have even abolished them.

International freight merely represents between 6 and 11% of the value of a good. Therefore, as we can see, the real obstacle in international trade is precisely non-tariff

barriers, formalities and procedures for crossing the Customs borders in order to ensure that goods subject to foreign trade are not directed to terrorism, smuggling and drug trafficking.

According to the United Nations Conference on Trade and Development, 40% of the costs of international trade in developing countries can be reduced by trade facilitation.

The International Trade Center based in Geneva believes that technical barriers to trade and the lack of simplification have costs, which are 4 times greater than tariffs and 2 times greater than international freight.

fRee tRaDe zones as faCilitatoRs in inteRnational tRaDeIn the development of the agreement on trade facilitation issued by the WTO multiple initiatives have emerged. Outlined below are a few proposals for free trade zones to play a role in the facilitation of Customs and international trade.

1. Safe Free Trade Zones:In order to have safe trade, we need safe zones. The concept of safe international trade is a new standard that seeks the certification of the whole international supply chain, verifying the good practices of logistics and the reliability of those who constitute this chain, like producers, transporters, ports or third party actors.

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The creation of the authorized economic operator and ISO certifications (ISO 28000) on Security Management System for Supply Chain, as well as other initiatives such as CT PAT, have made today’s foreign trade much safer. It is from here that the initiative of the World FZO has emerged in order to create the Safe Free Trade Zones certification system.

The fact that free trade zones have a special regime in terms of extraterritoriality on taxes, Customs clearances and other incentives, is not against allowing the traceability of the flow of goods, either in the case of raw materials, initial products or processed products in the zone, or simply goods that use free trade zones as international logistics centers.

The World FZO considers it essential to ensure that the members of our dynamic community, whether they are free trade zone promoters, free trade zone operators, free trade zone users or their customers, must all meet the minimum requirements of reliable people, reliable goods and reliable procedures.

For them, the World FZO is working tirelessly to develop mechanisms that allow this verification and the creation of a database in the service of its members, in order to detect users who have been sanctioned by different governments or in different free trade zones around the world, for breaking the law.

The World FZO extends this invitation to the World Customs Organization (WCO), in order to work together in developing this new concept of Safe Free Trade Zones.

2. Foreign trade one-stop shops in free trade zonesThe concept of one-stop shops is essential in order to centralize and harmonize procedures. If each of the 3,500 free trade zones around the world had a one-stop shop, international trade would be notably easier.

As a mechanism, it is very helpful when used in support of the simplification of procedures for goods that are directed from a free trade zone to the market of the country in which the zone is located. The World FZO will provide technical assistance to free trade zones that are members of the organization in the creation and systematization of the one-stop shops.

3. Free trade zones must become true assistants in the Customs functionIn international trade, we find many examples of instances in which mutual trust develops between the Customs authority and the operator of the free trade zones, to the point that several directors of Customs authorities find that goods are safer within the free trade zones.

Once a climate of mutual trust has been reached, in some instances functions such as inventory control, inspections and attention in extended hours are delegated and free trade zones truly become assistants in the Customs function.

4. The necessity to modernize the legislation of every country in order to have a more comprehensive concept of free trade zonesWhile we have experienced great development in world trade and simplification

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of Customs procedures through free trade zones, new proposals have emerged that complement the legislation of free trade zones of the past.

Some of them are:a. In the development of the principle of Customs extraterritoriality in free trade

zones, Customs taxes and VATs of goods produced or traded in free trade zones are not caused. In the future, this concept of extraterritoriality should be extended to municipal taxes and any other taxes, in order to allow true tax neutrality and benefits on these important centers of international trade.

b. The fact that goods pass through a free trade zone in the development of a logistics operation should not have any effect on the loss of the certificate from the country of origin, when the goods do not undergo any transformation process.

C. When a country has signed an international free trade agreement, goods produced in its free trade zones should be entitled to enjoy the benefits of this agreement, when they meet the rules of origin provided in such treaties.

d. It should be explicitly stated that free trade zones are assistants to the Customs function and therefore their work should be synchronized with that of the Customs authority.

5. Is the proposal of a new annex on free trade zones to the World Customs Organization convenient?The aspects discussed above invite us to consider whether some of the 135 countries using free trade zones in their territories, as powerful tools for attracting investment and generating international trade, should propose the implementation of a new and modern annex on free trade zones to the WCO, in order to complement that of 1999, taking into account the aspects and proposals mentioned above.

Tariffs are worth less than 4% of the value of goods, taking into account the existence of countries like Singapore and Dubai, who have even abolished them.

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The World FZO continues to stress on the fact that free trade zones will play an important role in making foreign trade safer and more dynamic during the first century of the new millennium, generating more employment and development for countries using this important and valuable mechanism.

In a historic first meeting, the World FZO and best free trade zones of the world met with the WCO in order to write a new chapter in the history of one of one the most important and powerful mechanisms for the generation of foreign trade, employment and development.

During the meeting, the World FZO presented Gaozhang Zhu of the WCO with a proposal to establish the certification of Safe Free Trade Zones, including the creation of a database for the verification of the suitability of the promoters, partners, managers and customers of the free trade zones that are, or aspire to be, members of the World FZO.

The following aspects of cooperation between the WCO and the World FZO were discussed:1.1. The possibility of including a presentation of the safe Free Trade Zones initiative

and of free trade zones as auxiliaries in the Customs function, during the next meeting of the Customs directors.

1.2. The promotion of workshops between the two entities, in which the Customs authorities are trained and free trade zones are instructed on how they can help in the facilitation of Customs procedures, allowing the traceability of goods.

1.3. The sharing of software with the World FZO, regarding the management and control of inventories of goods in free trade zones.

1.4. The promotion of one-stop shops within free trade zones, in order to facilitate not only the Customs services in extended hours, but also its relationship with other authorities that deal with procedures for import, export and re-export, including phytosanitary and health authorities.

1.5. The promotion of the qualification of free trade zones and their most representative users, as authorized economic operators.

1.6. The contribution in the writing of articles on free trade zones as auxiliaries in the Customs functions for the different magazines and publications of the WCO.

1.7. The maintenance of a permanent communication for the identification of strategies and programs in the development of a cooperation relationship between of both entities.

As we can see, channels of communication have opened and progress has been made. Free trade zones have an important role to play in the configuration and success of a new world trade order. However, there is still work to be done in order to make this mechanism a pillar in the transactions that are to be developed in the future.

MarTin ibarra, Vice Chairman of the World Free Zones Organization.

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FaCiliTaTion oF Trade is one of the main objectives of any free trade zone entity; this is an objective that the Customs authority shares with free zones. Dubai Customs summarized the main objective of any customs administration in its mission “to protect society and enhance economic development through compliance and facilitation”.

Every Customs authority’s efforts are divided between protecting its country and the world from illicit trade and facilitating trade. When it comes to the protection from illicit trade and the facilitation of trade, we are presented with two conflicting concepts. Protection from illicit trade requires the Customs authority to stop and inspect while the facilitation of trade expects the Customs authority to interfere less in the trade flow.

Therefore, the Customs authority has to apply modern methodologies, technologies and cooperate with the private sector to be able to achieve its mission. At Dubai Customs, we believe that we are a local administration but with an international responsibility.

Facilitation of trade and securing supply chains is a hot topic because no one wants their product to be delayed at any destination, and yet, the international community needs an assurance that the supply chain is not compromised. Therefore, the Customs authority works very closely with the free trade zones to assure that the facilitation of trade is implemented with efficiency.

The Common Customs Law of the GCC regulates the free trade zone from article 77 to 88 by regulating the companies operating in a free zone from a Customs perspective. As per Common Customs Law, goods imported to a free trade zone are suspended from Customs Duty unless and until the goods are imported into the local market. As per the law, there is no limitation on the time wherein the goods are stored in the free zone. Furthermore, the restriction and prohibition of goods as per the local regulations are not applicable in the free zones; however, article 80 of the Common Customs Law stipulates certain restriction on goods imported into the free zone, for example:

As per the local regulations, free trade zone companies are operating outside the country and Customs territory. However, the Customs administration still maintains certain power to inspect the goods entering the free zone and shall have the right to carry out checks at any time on the goods stored in a free zone. As per article 81 of the Common Customs Law, the Customs authority shall have the right to audit all documents related to goods imported into or exported from free trade zone. Companies operating in a free trade zone are required by the law to maintain their records for

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not less than five years from the date of completing the transaction. The Customs authority will have the full authority to assure that all goods imported into the free zone are either still at the warehouse of the company or have left the company as per the laws and regulations of Customs. We can summaries the responsibility of the Customs authority when it comes to companies operating in a free zone, as follows:1. Assuring goods entering the free zone are not in violation of article 81 of the

Common Customs Law2. Assuring goods entering the free zone will be exported or be transferred within

the free zone as per Customs procedures. 3. Assuring collection of Customs Duty and application of required regulations

on goods exported from the free zone and imported into the local market.4. Auditing the records of the companies operating in free trade zone to assure

that all their records are compliant with the laws and regulations of Customs.

We can briefly assign the responsibility of companies operating in a free trade zone from the Customs perspective as follows: 1. Maintain up-to-date records of the goods imported, exported or transferred by

the company. 2. Assure declaring every movement of the goods to the Customs authority. 3. Assure all companies transactions are compliant with Customs laws and regulations.

In order for the Customs authority to achieve its vision and mission it will require the collaboration between all concerned parties and this cannot be achieved without the cooperation of the private sector.

narMin issa, Director of Legal Affairs Department, Dubai Customs.

Customs authority has to apply modern methodologies, technologies and cooperate with the private sector to be able to achieve its mission.

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o Christin Pfeiffer, Secretary General INSME – International Network for Small and Medium Enterprises Rome/Italy, in her article highlights the importance of SMEs in terms of economic activity and job creation, and goes on to make a strong pitch for skill development so that they can integrate with FZ system.

o Suggesting a new model for FTZs, frank Cottle, Founder, CEO and Chairman Alliance Business Centers Network and Alliance Virtual Offices in his article argues that Business Lifecycle Incubation provides a great new real growth opportunity.

o hashim hussein representing UNIDO-Arab International Center for Entrepreneurship & Investment provides a step by step approach to micro, small and medium enterprise creation including pre-incubation and post-incubation

Small and Medium Enterprises have become significant contributors to the economic growth of many countries. Through rapid proliferation,

geographical diversity, employment generation and functional nimbleness, SMEs drive economic growth, help generate incomes for

people and revenues for the exchequer.

SMEs AND ENTREPRENEURSHIP

s e C t i o n : i i i

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small and medium Enterprises (SMEs) are the backbone of mostly all economies generating a huge part (typically around 66%) of the GDP of a country. Upon examining the European economy, this percentage rises incredibly: 99% of the companies are small- and medium-sized, while it is particularly relevant to keep in mind that from those 99% the vast majority (nine out of ten) are micro-entrepreneurs, being able to count on less than ten employees.

SMEs have often shown to be more flexible than large enterprises and might therefore adapt more easily to new conditions – a fundamental asset in times of worldwide economic crisis and uncertainty. As a further advantage, satellite companies to big multinationals are often able to react immediately and guarantee timely delivery to locally based industry compared to larger corporations.

SMEs are not only the economic backbone, but also the most important employment generators of the 21st Century – an aspect that is of paramount importance, given the social impact of this phenomenon.

Free zones today are creating a huge number of new jobs as such and linking both would create a win-win situation. By taking the trend on clustering

Development of SMEs and Entrepreneurship in Free Zones: Advantages and Challenges

“ Q u a l i t y i s n o t a n a C t . i t i s a h a b i t . ”

- A r i s t o t l e

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into account, the employment generation aspect has to be considered even stronger, as very often the outcome is a creation of innovation hubs that also collaborate fruitfully with local universities and scientific knowledge providers and have a positive impact on local infrastructure and the tertiary.

Involving SMEs more actively in free zones would offer a variety of advantages. But there are also challenges to cope with for the actors involved in designing the future policies, rules and procedures in managing a free zone.

Finding a common policy and supporting small companies to successfully comply with today’s conditions in a global competitive environment is a major challenge. SMEs are an indisputable part of value chains, going beyond the traditional understanding of ‘supply chains’. The free zones might be a perfect place to cluster small companies and bring the value chain members together.

To clarify the understanding of ‘value chain, it is necessary to recall a proper definition: A value chain is a chain of activities that a firm performs in order to deliver a valuable product or service for the market. This concept was analyzed, first described and then popularized by Michael Porter in 1985.

The idea of value chains is based on seeing a manufacturing (or service) organization as a system, made up of sub-systems each with inputs, transformation processes and outputs. “Inputs, transformation processes, and outputs involve the acquisition and consumption of resources –money, labor, materials, equipment, buildings, land, administration and management. How value chain activities are carried out determines costs and affects profits”.

In a global supply chain many partnering firms are normally small- and medium-sized enterprises supporting a focal firm in the process of supplying raw materials to the delivery of final products and services to end customers. In context to the supply chain of the focal firm, SMEs play “a very crucial role in attaining cost efficiencies in procurement and production processes, and the accurate and timely delivery of products and services to the end customers. But this requires a close and trustworthy relationship between the focal firm and associated SMEs”. Therefore the concept of value chain goes beyond the traditional understanding of a mere supply chain.

As UNCTAD (United Nations Conference on Trade and Development) points out: “there are obstacles that affect SMEs’ ability to enter global value chains (GVCs) both in developed and developing countries.” These include: (a) The need to upgrade technology and innovation capacity(b) The lack of adequate finance and human capital for this process(c) The inability to meet standards and certification requirements(d) The necessity to better manage intellectual assets, including the protection of

intellectual property rights (IPRs) when appropriate(e) The difficult bargaining position SMEs face with large contractors; and(f) The need for diversification to reduce dependence on one or a few customers

Value chains today that are not necessarily limited geographically and micro entrepreneurs (91% of European enterprises) already play a role of paramount importance. As nearly all products and services are “born global”

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and could serve a variety of markets, international partnerships, exchanges of opinions, market analysis and feasibility studies require global expertise, experience and knowledge. Other players of the free zones might have collected proper experiences and best practices and could therefore assist the small companies with precious advice.

A further challenge in this regard results from the fact that the SME community is a very heterogeneous one; SMEs are not the same and not all are suitable and mature to act as added value for free zones.

Growth ambition, innovation opportunities’ awareness and loyal leadership

Not all SMEs are suitable and mature to act as added value for free zones.

Awareness of Opportunities

Inherent Entrepreneurial

Skills

Risk Taking Culture

Entrepreneurial Connections

The latest Global Entrepreneurship Monitor Report (GEM), issued in January 2015 mentioned four important entrepreneurial preconditions:

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skills to afford internationalization challenges are characteristics of a successful entrepreneur in a globalized competitive environment.

This implicates that if there is intent to integrate SMEs successfully in free zones, a clear focus on skills development needs to be set to make sure the benefits can be achieved and managed properly.

All actors of the free zone ecosystem have to play their specific role and need to be involved to develop the free `one further, respond to the demands of internationalization and innovation attitudes. Therefore, in addition to the industry and SME managers, the financial actors also have to be involved (public and private ones including venture capitalists etc.), as well as policy makers, public and private intermediaries and finally the knowledge providers (as universities and research centers). There has to be a strategic planning that takes into account the differences in the short/medium/long-term visions of each actor.

In addition, new ways of collaboration and exploitation of technology have taken over the traditional ones: the virtual opportunities of engaging with each other might often be exploited better by small companies. SMEs need to learn more about user-driven innovation and take advantage of crowd-thinking or crowd-sourcing linked to the available open innovation tools. Collaboration in this “2.0 manner” leads to new ideas as well as to services, processes and business models innovation that might reduce costs and time and improve quality of products delivery.

Internationalization is a must today and skills and knowledge of how to market the proper value proposition globally require access to platforms, toolkits and a portfolio of services often already available and freely accessible to SMEs, who might just not be aware on how to benefit from them.

As an outcome, free zones might attract more talent by way of SMEs and the start-up community (that has to be strengthened especially in and around the Middle East) could notably benefit. Increased interactions among academic and industrial players is auspicious, as the investment in research with a user-driven approach might help to be able to finally commercialize the results of academic studies.

As we know, SMEs can attract talent and give space to young people to realize their dreams and work on a more sustainable future by fostering inclusive growth. Free zones might be their perfect home and the proper management of a free zone (like an innovation ecosystem) becomes a key priority. Especially if free zones act like clusters, it is of added value to upgrade and enrich the skills of the “free zone manager” (leader) and create a homogeneous profile in this regard.

The mentioned benefits seem exactly in the interest of the whole innovation ecosystem and bring together all actors of the cycle. The role of human capital becomes particularly important. According to Deloitte’s Annual Research on ‘Global Human Capital Trends’. people need to be managed in a different way and learn how to innovate and transform human capital. Twelve trends are described that can be split into three key areas of strategic focus:

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(1) lead and develoP(2) attraCt and engage (3) transform and reinvent International expert organizations such as International Network for Small

and Medium Enterprises offer tailor-made trainings on actual trends of strategic networking, innovation management and innovation performance impact assessment for multipliers and intermediaries, creativity and pitching that can be extended to upgrade skills for free zone managers.

Similar to cluster managers, it might be worth to brainstorm about a certification system or a quality label for free zone managers focusing on and strongly working with SMEs.

There are diverse benchmarking facilities available to cluster managers that can be easily adapted to free zone managers. An investment in this regard would also help to discuss certain issues on a government level, as the investment in entrepreneurship is currently part of most political agendas around the world. The same applies to competitiveness, innovation and R&D as it results in employment and inclusive growth.

As free zones are generating a massive and impressive number of work places, they shall definitely play a greater role and be an integral part of the related discussions in the future.

Christin Pfeiffer, Secretary General, INSME – International Network for Small and Medium Enterprises.

SMEs can attract talent and give space to young people to realize their dreams and work on a more sustainable future by fostering inclusive growth.

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you’re no stranger to free zones. You know the business and the issues. The question is, where are the opportunities? The answer possibly lies in incubation.

The challenges getting in the way of business growth today are different from the issues companies faced more than 10 years ago, Free zones recognize the need to implement programs to support industrial development, but that means having to work out a different strategy from past decades. Something that was once cutting edge may have lost its edge. But that’s the opportunity.

In this essay, we will look at the following: What’s the inCubation oPPortunity and What’s driving it? hoW big is the inCubation marketPlaCe? hoW Can you take advantage of it? hoW Can a serviCed offiCe Partner helP?

A New Model for Free Trade Zone Success:Build Long-term Business Relationships with an Incubator Officing Strategy

“ W h a t ’ s t h e b i g o P P o r t u n i t y

f o r f r e e t r a d e z o n e s ? “

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Many traditional companies still exist and thrive, but more and more business growth today is in new ways. It comes from a different business mindset and operates in a different economy. That change is reflected in these numbers:

By creating scalable, sustainable environ-ments that combine people, place and technology, your Free Zone (FZ) can take advantage of modern growth patterns and workplace transformation. But one more piece is needed – business lifecycle incubation.

INCUBATION ACROSS THE BUSINESS LIFECyCLEFor the most part, FZs have provided limited institutional support for entrepreneurs in training, technology, finance and incubation. Dr. Hashim Hussein, Head, UNIDO-ITPO AICE in Bahrain, has noted that Free Zones should consider “The establishment of business incubators as they play a key role in the development and growth of Micro, Small and Medium Enterprises through a range of services offered.”

If the definition of incubation is to provide a fertile, sheltered environment for positive development, why stop? Who doesn’t want to stay on a positive trajectory? Establishing a business center facility inside a larger free zone structure presents an opportunity to support the entire life cycle of client companies in the zone. Not just in the beginning, but across the entire business life cycle, from infancy to adolescence to maturity. There would be no reason for clients to leave as they become more successful.

ARE yOU CONTROLLINg gROwTH OR IS IT CONTROLLINg yOU? To better understand the concept of lifecycle incubation, consider what happens when it’s absent.

A classic business center in the serviced office industry incubates space equal to its

Mobile Workers by 2016

Employed and Entreprenuers

Contractors (fastest growing group)

New companies per year in US alone

Globally Employed

1 . 5 b i l l i o n

9 0 0 m i l l i o n

6 0 0 m i l l i o n

6 m i l l i o n

2 7 m i l l i o n

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own size. So picture a business center 33,000 square feet (about 3,000 square meters.) You start it, fill it, and every year you prepare to lose about one third of your clients. Where does that third go? They evaporate, shape shift, the project ends, they lose funding or sadly, they go broke.

What about the rest of your business center clients? The other half of the space outgrows you. They come in on one day and need five workstations, then six months later, 10 more, and then 20. Eventually you don’t offer enough room to accommodate their growth. This successful client moves out and maybe takes conventional space.

Free zones go through similar experiences. Companies often come in at the entrepreneurial stage and grow to become that business that needs 10, 20 or 30 workstations. They still need the benefits of a free zone. They’ve just outgrown their operational shell, but you still can’t help. They have no choice but to take conventional space. So instead of retaining a mature company, your free zone community loses a member.

Conventional space may not be the first choice of the client either. That move may require them to take on ownership and management of services they would prefer to continue outsourcing, services that could have been offered by a business center in your free zone.

THE BUSINESS INCUBATION OPPORTUNITyWhat if your free zone could manage the full customer life cycle? The right business center model can handle the needs of many clients for a long time. It gives you the time and resources to focus on running overall zone growth and keeping it aligned to all your customers’ needs.That’s incubation, and it’s not limited to start-ups. It represents a progressive opportunity to accelerate free zone growth.

EvERy COMPANy IS INTERNATIONALBut managing capacity for growth isn’t the only challenge facing free zones. Companies are navigating a perfect storm of cultural and economic shifts caused by market movements plus lifestyle and “work-style” shifts enabled by technology. Widely separated co-workers can now function productively and comfortably as if they were in the office together. They may never even meet face to face. Contractors, freelancers and even full-time employees don’t have to leave their country for a job anymore. Workers can live where they want, without disrupting families for job moves.

The digital world has made borders irrelevant. Every company, whether in a free zone or elsewhere, must adapt to the mobile, global economy. Digitized communications and connectivity have paved the way for smaller companies to build out and compete in a more stable, stronger economy.

Whether it’s a remote office around the world, an expansion into a new market, a start up with promise, or a one-man consulting operation with global clients – these people want to work in ways that don’t always lead to corporate or commercial space. The business center provides the versatility,

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reliability and simplicity that businesses appreciate and want to hold on to. Business centers in general provide solutions to meet the needs of shifting employment trends and help mature and develop economic expansion on a global basis.

Trend shifts in employment are causing huge shifts in the way trade is managed. The “New Global Trade Order” reflects a changing landscape of traditional and diversified trade partners and global players operating in domestic and international markets. Continuous shifts in trade order and rapid growth in emerging economies demand agility. A business center helps companies enter new markets faster and with less risk. Free zones can leverage this value and help clients expand by partnering with free zones around the world that provide professional business centers.

To get an idea of how game-changing these connections can be, imagine that a company can call a business network like Alliance in Los Angeles, and within hours, open 50 offices in 50 countries - completely staffed, services and technology provided. Even better, you can pay for it in single contract. It’s a whole new world of opportunity – and it actually exists today.

THE gLOBAL INDIvIDUALEverything is global. We’re experiencing huge trend shifts in cultures and technology. Both large companies and individual contractors can have international clients, offshore suppliers and a virtual employment base.

One of the most dramatic areas of change is at the level of the individual worker. The free zone that provides goods and shipping should also look at the free flow of employment as part of new trade order. Your free zone must accommodate the changing employee model to stay relevant. That is most easily and cost-effectively done through a business center agreement.

THE vALUE OF BUSINESS CENTERS IN FREE ZONE COMMUNITIESA fertile incubating environment means you may have clients growing faster than the space you currently have. That’s a problem. To turn it into an opportunity, what do you need? How do you react when your customers are growing faster than the space you currently have? How can you create added value?

The serviced office industry plays a role in accommodating these shifts across the globe and contributing to the success of new business models. The serviced office industry is actually an enhancer and catalyst for our new ways of working. It’s often the perfect solution for the mobile-friendly, entrepreneur-friendly, risk-friendly mindset. Through firms like Alliance and others, tens of thousands of co-working centers have become available with good digital bandwidth and timesaving technology. Through adoption of business centers, free zones can stay relevant and turn change into an advantage for the zone and its clients.

The diversification of businesses and tenants is a wise strategy for free

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zone health. This could mean going after more entrepreneurial companies such as those at earlier stages of development. Free zone thought leaders recognize the value of cultivating the spirit of entrepreneurship, especially by supporting Micro, Small and Medium Enterprises (MSMEs). The serviced office model has been meeting the needs of MSMEs for years, and can help you quickly get them established in your community.

INCUBATOR MODELS CAN USE BUSINESS CENTERS AND DRIvE FREE ZONE gROwTHPeople, place and technology come together into a single product – the business center. Office space in this category is growing three times faster than conventional space, and conventional space is outpacing many free zones. The combination of incubator mindset and business center can reverse the trend for free zones and give them a fallback for continued growth at any stage.

DEFINITIONS OF DIFFERENT OFFICE MODELS The iBusiness center brand – Offers promise of a professional image and

abundant services Co-working sector – Provides promise to members of business growth through a

collaborative community Incubators – A business or co-working center that offers mentors Accelerator – An incubator with access to capital Logistics – “Horizontal building” locations like R&D or industrial parks, but within

the center there is a service location with the people, place and technology to serve logistics clients and enable global supply chain integration

THE vALUE OF ExPERIENCED, ESTABLISHED SERvICED OFFICE OPERATORSChoosing the right serviced office partner and related offerings on the first try is important for the health of a free zone. A mistake can set you back. The right serviced office partner brings the following benefits: Saves time in bringing services and technology to customers Optimizes costs through economies of scale Center and location experience always on board

PEOPLE AND PLACEThe economics of communityAs humans, we know it creates a stronger sense of community when people grow up together. The same goes for business. You create a stronger bond when companies stay together, than when they come and go. That sense of belonging means something. It promotes loyalty and that fosters the best kind of growth, with references and referrals from your own customers. A free zone offers a natural environment for a community. If you isolate companies from each other, you lack community, and you’re missing something important.

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Customers first, makes relationships lastSome companies shape their strategies by thinking of shareholders first. Others put stakeholders first. And still others grow by putting customers or members first. It’s easy to spot the corporation that really values clients and does all it can to grow through client loyalty, instead of by raising capital and making acquisitions. Companies following the latter approach spend more energy integrating acquisitions, and employees who fear for their jobs spend their energy maneuvering for position. These are the companies that eventually struggle to drive healthy growth.

Ethos and communityAny place of business, including free zones, prospers better when it’s community-driven at heart and has a high ethos of philosophy and principles. The Alliance network strives for a customer-focused community, and strongly believes in the power of this model. The people side of trade and business can’t be ignored, and in fact, should be recognized as something valuable. It creates a sense of place that makes your free zone a community. It also makes sense to align with a serviced office company that demonstrates the same respect for clients and partners – for people.

It’s easy to spot the corporation that really values clients and does all it can to grow through client loyalty.

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Technology delivered at the demand edge, not the leading edgeThe free zone business center combines the facility – the place – you have with the people and technology you’ve got to make a product. Look at the facilities in your FZ. Are they are adequately structured to provide services that are technology-driven?

You could push cutting-edge, whiz-bang technology, or you could have offerings at the demand edge. Operating at the demand edge means being able to fulfill demand with high quality technology at low cost. You provide services that are elemental to business growth, without being on the leading edge, which isn’t necessary.

Technology at the “leading edge” is often perceived as more interesting, but in reality no one may understand what you’re doing. In fact, they may not even need or trust the “edgy,” advanced technology you offer.

A better goal is to deliver at the “demand edge” of technology and consistently provide cost-effective services. The business technology available today is well within the scope of what companies at all stages need to grow. You don’t have to invest in leading edge, unfamiliar technology when standard choices will do.

FREE ZONES + INCUBATOR BUSINESS MODEL: wHAT BENEFITS CAN yOU ExPECT?The world has changed, and free zones are evolving, too, as they participate in the new economy. Partnership with a business center network gives you immediate resources to incubate companies and keep them healthy through long-term growth. The benefits are attractive: You earn a reputation for a good work environment You keep customers for life; happy and on-site for the long-term Your facility and service model support each client accurately at each lifecycle stage You nurture sense of community and accomplishment on behalf of the entire zone

TAkE ADvANTAgE OF THE NEw MODEL FOR FREE ZONE gROwTHA good business environment boosts trade. When you provide the best-in-class services, efficiently delivered, you and your clients benefit from increased competitiveness and loyalty. You keep your tenants for the life of their business, and the continued growth, value and loyalty to the zone becomes exponentially greater. It’s an opportunity that benefits everyone.

frank Cottle, Founder, CEO and Chairman Alliance Business Centers Network and Alliance Virtual Offices.

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INTRODUCTIONFree zones by definition are geographical regions that are designed to export goods and provide employment. Hence, countries around the world embarked on free zone development in order to create economic activity and job creation namely through foreign direct investments. Accordingly, for free zones to be effective in attracting investors it is essential to have a

U N i D oArab International Center for Entrepreneurship & Investment Enterprise Development & Investment Promotion Program

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range of services that are tailormade to the needs of the investors. Having said that, one can’t neglect the importance of the location of the free zones.

It was previously believed that developing state-of-the-art infrastructure along with fiscal incentives was essential to promoting investment. However, due to the fierce competition among free zones around the world and the overwhelming youth bulge, it is essential for free zones to adapt to the changing market conditions and challenges, while continuing to offer innovative added value services.

Governments started to realize the urgent need to create more productive jobs for its people, whereby companies utilizing the free zones can contribute to economic activity within a country by creating local value chains and feeding industries to the free zone.

Hence, many governments have embarked on promoting both types of investments: domestic and foreign. In this regard, it is crucial to indicate that studies have shown that the stronger the domestic investors the better is the ability to attract foreign investors who will provide cash investments, market access and/or technology and know-how. Moreover, promoting domestic investment will inevitably lead to the mobilization of foreign direct investment on the condition that a set of added value services targeting “entrepreneurs development” are well in place.

These include the development and grooming of potential entrepreneurs through best practices for the start-up and more importantly for the growth of enterprises. This calls for the urgent need to adopt incubation systems,

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accelerators, science and technology parks and innovation hubs within free zones for entrepreneurs to start and expand their business ideas and lead the way for innovation and creativity.

Hence, it is inevitable that free zones should provide added value services and tools that would develop a conducive ecosystem that would promote, facilitate and unleash entrepreneurs on the level of start-ups as well as growth, thus facilitating the migration from a micro- to small- and eventually, a medium-enterprise.

BACkgROUNDThe development of Micro, Small and Medium Enterprises (MSMEs) has been recognized the world over as an effective mechanism to facilitate economic development. For, it is the MSME sector, which has the highest capital-employment ratio and it is this sector, which provides opportunities for the youth and unemployed people to exhibit their entrepreneurial potential, by being job creators rather than job seekers. This assumes paramount importance in a situation when the unemployment levels are rising. It requires entrepreneurs who perceive opportunities, organize resources to set up and successfully run enterprises. One could argue in favor of supply driven support like availability of finance on favorable terms, consultancy support, policy support, concessions and subsidies and tax breaks etc. However, experiences have shown that finance, facilities and incentives could be necessary but not sufficient to ensure entrepreneurial response. For, entrepreneurial growth requires focus on human resources in addition to inducements by finance, subsidies and infrastructure etc.

Considering that the promotion of entrepreneurship is a key to economic growth and a primary engine for creating a country’s wealth, many governments of developing countries and economies in transition have renewed their focus on this vital factor of production.

The Investment & Technology Promotion Office (ITPO) Bahrain in cooperation with the Ministry of Industry (MoI) and various entities in Bahrain concerned with the development of MSMEs were trying to stimulate domestic as well as foreign investment into the country in order to boost the manufacturing sector. It has been concluded that the unavailability of qualified entrepreneurs as well as a cohesive set of support services posed as the major bottlenecks in Bahrain. Accordingly, the issues were studied and discussed thoroughly, including an analysis of the experiences of other countries worldwide, with the United Nations Industrial Development Organization (UNIDO).

Taking the above into consideration, the Enterprise Development (ED) process had been initiated giving due considerations to the operational environment in Bahrain and the special needs of the Bahraini entrepreneurs. The process calls for: Availability of trained human resources to act as trainers and counselors, helping

and guiding potential entrepreneurs Networking with relevant institutions involved in developing MSMEs

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ENTERPRISE DEvELOPMENT & INvESTMENT PROMOTION PROgRAM (EDIP)The Enterprise Development & Investment Promotion Program is a package approach aimed at developing the capacities of potential entrepreneurs in order to boost their capabilities and assist them in developing their own private businesses. The process is based on an approach that deals with building entrepreneurial capabilities in addition to enterprise planning, implementation and management.

The EDIP is multifaceted as it not only assists in developing start-up entrepreneurs (Enterprise Creation Program) but also represents a major mechanism for upgrading and expanding existing enterprises (Enterprise Growth Program), through the provision of value added services, tools and programs to potential entrepreneurs. Moreover, it facilitates and promotes domestic investment, which undoubtedly leads to the attraction of foreign direct investments mainly through its linkage with the UNIDO ITPO network, thus leading to job creation and a diversified economy.

The EDIP has also evolved into a practical well-structured Incubation System, as it also encompasses non-financial and financial services.

The EDIP consists of five steps:

Preparation & Empowerment

Counseling/Technology Tie-up & JV

Financial Linkages

In-wall or Virtual Incubation

Post Incubation & Growth

enterPrisedeveloPment & investment Promotion Program modality

Pre IncubationIncubationPost Incubation

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A. Pre-Incubation1. Preparation & Empowerment 2. Business counseling & Technology tie-up leading to full-fledged joint ventures3. Financial linkagesB. Incubation (In-Wall and Virtual)C. Post-Incubation and Growth programs

A. ENTERPRISE CREATION PROgRAMThe Entrepreneurship Development process is based on a theory or belief, well-grounded on historical experience that entrepreneurs are not only born, but can also be trained and developed.

It is of course recognized that all individuals do not possess entrepreneurial traits – i.e. “the desire to do something new and unconventional in a specific context, to be on one’s own by starting one’s own business and thus to climb the social ladder” – but that such traits are not determined to socio-economic backgrounds.

Hence, the program is aimed at helping potential entrepreneurs/investors translate their ideas into commercial ventures in the manufacturing and service sectors.

PRE-INCUBATION1st STEP – Preparation & Empowerment The ultimate objective of assisting the potential entrepreneurs/investors is for them to set up their own enterprises. The business skills development has been designed to cover the following: Setting up an enterprise: Rules, procedures and formalities, organizations

to contact and the nature and extent of assistance available from various institutions

Business Opportunity Identification: Identifying business opportunities, feasibility studies, screening and firming up business ideas for further study

Market Assessment: Assessing market potential and assisting in carrying out field work for market assessment for the proposed product/service

Entrepreneurial Competencies Business Plan: Preparing a business plan and assisting in finalizing Essentials of managing an enterprise Inputs on how to implement a project/enterprise

The organization of a business plan competition has been added to step one, which represents a major component for assessing the effectiveness of the program and whether the potential entrepreneurs/investors were able to acquire the required skills and competencies.

2nd STEP - Counseling & Technology Tie-up possibly leading to a full-fledged Joint Venture The second step is a vigorous follow-up mechanism to provide business counseling with the ultimate objective of facilitating project implementation.

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Developed entrepreneurs/investors are assisted in finalizing their business ideas and in obtaining the necessary information and preparing their business plans/investment profiles as per UNIDO methodology. A crucial component is provided to entrepreneurs, enabling them with sourcing technology tie-ups, which could also lead to the development of full-fledged partnerships that is carried out through the UNIDO-ITPO/IPU network. Administrative support on legal and licensing issues are facilitated through the respective government entities.

It may be noted that the nature and extent of business counseling services depend on the needs of the entrepreneurs. The counseling and technology tie-up step is a lengthy relationship between the counselor and the entrepreneur/investor. It may generally include the following activities: Business opportunity identification, analysis and finalization Market research i.e. collection, analysis and compilation of relevant data Identification and sourcing information on appropriate technology, machinery/

equipment and raw materials etc. Facilitating technology tie-ups that could lead to the establishment of joint

venture collaborations Business plan preparation Completing legal documentation and seeking necessary registrations/licenses/

clearances Finalizing project implementation plan

3rd STEP - Financial Linkages The final step within the pre-incubation phase is facilitating project linkage to the financial scheme. Appropriate financial linkages are identified based on the projects’ requirements and entrepreneurs’ investment capacity.

Entrepreneurs/Investors are advised and guided to completing the required formalities for seeking loan support from the relevant financial institutions. At this stage, financial counselors provide need-based advice and support. The business counselor acts as a link between the entrepreneur, the financial counselor and the financial institution in order to facilitate the process and ensure the project’s linkage with the financial scheme.

INCUBATION4th STEP – Virtual & In-wall Incubation Incubation takes two forms as it is either virtual or in-wall. During virtual incubation, there is no specific incubator set-up as businesses can be established in any location and the project owners connect with the program as and when required. As for in-wall incubated entrepreneurs, these are directed towards the businesses that require constant follow-up and longer periods to break even.

With all the essential resources for the project tied up, the entrepreneur is guided through the project implementation plan, formulated during the counseling phase (Step 2). Essential linkages are facilitated with institutions

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dealing in services related to entrepreneurs’ needs. A lot of capacity building is provided throughout the program in terms of technical, marketing access and linkage and continuous follow-up with institutions delivering administrative services. Daily follow-ups with entrepreneurs on different issues is provided to sustain their smooth growth. Need-based guidance and support is extended for procurement, installation and commissioning of the project machinery and equipment as well as for procuring the raw materials and other utilities. Business counselors in association with the financial counselors closely monitor the project implementation process and guide the project to become operational.

Tailormade business advisors as well as training interventions are brought in to ensure project survival at crucial stages of initial operation and to facilitate growth in the subsequent period of project operation.

POST-INCUBATIONB. Enterprise Growth Program The Enterprise Growth program through EDIP is intended to bring about tangible results in the quickest possible time frame to enterprises, which have growth potential, but are faced with problems related to competitiveness and productivity. The program focuses on assessing the problems faced by the existing enterprises and finding solutions to enhance their competitiveness through enterprise upgrades.

The program aims to: Develop a common understanding among all the parties involved (cluster actors/

enterprises) and identify the challenges faced by the enterprise Carry out diagnostic studies for the selected enterprises with a view to

identifying the critical problems and proposing remedial actions. The diagnosis covers each aspect of the operation of the enterprise, including management, energy utilization, environment, market, quality, technology and equipment. This in turn should lead to the preparation of a preliminary enterprise-upgrade plan.

Provide direct assistance and support to implement the upgrade plans for the selected enterprises. (In some cases, the plans are implemented with local inputs alone).

Upgrade plans that require foreign inputs in terms of technology, strategic alliances, joint venture and market access etc. are promoted through the UNIDO ITPO network in order to identify foreign partners and technology suppliers

Services offered can be but not limited to the following: technical support/administrative: Access to information and data/Develop

growth business plans; Business Counseling, Co-entrepreneurship & Angels Program; Technology upgrades: Raw materials sourcing, Technology sourcing; Quality management and upgrades to ensure adherence to international markets; Legal support

access to new markets: Franchising; Clusters; Export consortia; Subcontracting exchanges

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financial support: Medium to large financing; Seed capital; Equity and Venture Capital Funds

infrastructure: Sector specific incubators; Technology parks; R&D facilities

ANNEx 1Establishment of the Arab Regional Center for Entrepreneurship & Investment Training (ARCEIT)-BahrainUnder the banner of South–South cooperation, Bahrain was identified as the Regional Focal Point Country for the Arab region by IRC, jointly sponsored by UNIDO and the Government of India with the objective of strengthening indigenous capacities of selected countries in Arab, Asian and African regions in the areas of investment promotion and entrepreneurship development.

The cooperation and support extended by the government and the local institutions and the excellent response from the community in the Arab region, led to the establishment of “Arab Regional Centre for Entrepreneurship and Investment Training (ARCEIT)” in Bahrain, to effectively organize and support the Investment & Technology Promotion and Entrepreneurship Development Initiatives – the core elements of the Enterprise Development program - in the Arab region.

ARCEIT operates with the objective to develop and strengthen indigenous capabilities of developing countries in the Arab region for Investment and Technology Promotion (ITP) and Entrepreneurship Development (ED). The activities of ARCEIT are closely coordinated by the UNIDO Investment and Technology Promotion Office in Bahrain and UNIDO HQ, in order to ensure maximum synergy among the institutional participants.

hashim hussein, Head, UNIDO-ITPO AICE, Bahrain.

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Customers of FZs – that is the units operating within the declared area – are perhaps the most important stakeholders of the FZs. Global aircraft major, Airbus, brings its perspective and

suggests that speed is becoming increasingly crucial for society’s development. Habib Fekih, President, Airbus Group (Africa and

Middle East) asserts that as businesses expand and the economy continues to flourish in the coming years, free zones will need to think strategically and anticipate their customers’ needs to stay

ahead of the competition. Strategic partnerships that create long term value in logistics and services such as harnessing latest

technology to digitise day-to-day operations to reduce operating cost and time, ensuring staff training and flexible regulatory laws

to cover off-site operations may be the way forward.

CUSTOMER PERSPECTIvE

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FREE ZONES – AN INDISPENSABLE PARTNER IN PROgRESSNever before in the history of mankind has speed been crucial to a society’s development as it is today. From high bandwidth Internet connectivity to supersonic aircrafts, we live in a world dictated by the need for speed. Today, businesses are required to be more rapid and efficient than ever before and aviation is one industry that has been setting new benchmarks and riding the wave over the last 60 years. The industry can rightly be called the harbinger of growth and development, as it plays a significant role in providing a seamless transportation system both for commercial and leisure travel.

In the Middle East, in the last five decades, the aviation sector has not only contributed to economic and social progress through local tourism but has also opened the gates to global markets, which once was deemed impossible to access. As businesses expand and the movement of people and goods across continents continue to grow, it is only natural that the demand for faster transport will drive economies to open up and forge stronger trade links between developed and developing economies.

According to industry reports, the aviation industry’s impact on the global economy is estimated at $2.4 trillion, equivalent to 3.4% of the world’s GDP. It directly supports more than 58 million jobs and is also responsible for 35% of world trade by value.

This mammoth figure demonstrates many positive aspects of the sector’s worldwide growth. The industry has helped improve standards of living in various countries through facilitating tourism, commerce and job creation. In the future, these impressive figures will only continue to grow and the aviation industry will need the support of infrastructure platforms such as free zones to encourage more business through local and foreign expansions in their respective countries.

Real Economic Partners:Free Zones and their Customers Together Develop, Drive and Diversify Economies

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FREE ZONES: A BUSINESS NECESSITy Free zones today have become a business necessity in a nation’s economic development as they make destinations an attractive place for commercial activity, especially for large international firms who bring in great value to the domestic economy. Significantly, it forges links between developed and developing nations through travel and trade that results in better access to global markets.

According to the International Monetary Fund (IMF), the outlook for growth in the UAE remains positive at 4.5 per cent in 2015, with Dubai’s growth for 2016 predicted at 5 percent. It has largely been made possible due to the state-of-the-art infrastructure that is a conducive platform for connecting business that supports the unrestricted flow of people, capital, goods and services across the region. With its tremendous growth, development and market potential, Dubai has become a significant destination for global multinationals from around the world in which to have a presence. One of the most alluring characteristics of free zones in Dubai is the chance to be a part of and maximize its rapidly growing economy. Allowing a company to function within a business environment that has progressive regulatory framework, automatically opens up avenues and regulations enabling them to realize their full potential for growth.

A vital step to diversifying the economy, it encourages companies from various industries, and also competitors from the same industry, to launch operations in the free zones. This openness helps create opportunities that widen the market and increase the number of firms one can work together with both for commercial and collaborative purposes, in one pragmatic location. Being in close proximity to infrastructure and facilities such as research and development institutions, access to a highly skilled workforce and trade entities aid possible synergic measures.

AIRBUS MIDDLE EAST AND DAFZAThe UAE is growing at a very strong rate reinforced by a positive business outlook and investor confidence in the economy. The steps taken by the UAE’s leaders to build an innovation-based economy and to transition away from energy production into complementary sectors such as hospitality, aviation and infrastructure over the last 15 years have resulted in a diversified economy, boosting the country’s presence on the global map.

Taking these growth opportunities into consideration, Airbus Middle East opened its regional headquarters in the Dubai Airport Free Zone (DAFZA) in 2006.

The UAE is an important market for Airbus as it houses some of its top customers and the company’s current footprint in the country is a core element of worldwide operations. The share of passenger aircrafts operated by the region’s carriers has doubled in the past 10 years.

Airbus expects that new aircraft deliveries to the Middle East will total 2,242 by 2033 and the expansion of business opportunities is driven by a sustainable growth of the travel market. The company will continue to invest

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greatly in operations within its regional headquarters as it is based in one of the world’s most important and rapidly expanding aviation markets.

One can easily understand from this range of benefits why Airbus chose DAFZA as its base for regional operations. Not to forget that this prime location on the world map allows Airbus to access to over 1.5 billion customers and the ability to meet a rapidly increasing demand in the sector. DAFZA’s state-of-the-art infrastructure and world-class facilities on offer make the free zone the ideal base for companies in the aviation industry, with fast and efficient cargo services which are cleared within 24 hours.

DAFZA announced that they would open 36 new warehouses in the Al Qusais area of Dubai in 2015, as well as other facilities close to Dubai International Airport’s Terminal 3 because of the growing demand. This is testament to the success of free zone operations towards the companies that inhabit the zones. In addition to providing foreign firms with the platform to grow their presence in the country, the free zones help contribute to the strengthening of the sector and subsequently, the overall economy.

The vast array of opportunities Airbus has had to make a positive contribution to the UAE is due to the versatility of operations within the free zones.


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As businesses expand and the economy continues to flourish in the coming years, free zones will need to think strategically and anticipate their customers’ needs to stay ahead of the competition. One manner in which they could master this is by looking into strategic partnerships that create long term value in logistics and services such as harnessing the latest technology to digitize day-to-day operations to reduce operating cost and time, ensuring staff training and flexible regulatory laws to cover off-site operations such as access to Abu Dhabi or remote locations within the UAE. It will also be reassuring to see free zones improve their standard of incentives and make earnest efforts in getting to know their tenants and business partners better.

Free zones as a business model is here to stay and by taking the above factors into considerations, they will not only be in a stronger position to anticipate and react faster to issues and challenges at hand, but also continue to grow and remain globally competitive, innovative and ahead of the game.

habib fekih, President, Airbus Group Africa and Middle East.


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This section contains 11 articles that list the regional perspectives of countries located in four different continents, providing a kaleidoscopic picture of the individual perspectives. The regions / countries covered include

o Africa Chris Ndibe o Latin America JuaN Pablo rivera o Brazil Gustavo FoNteNele o China JiNG WaNG, PaN li o Arab Countries Nasser shraideh, Juma al Kait o Dubai raJesh PareeK o European Union draGaN KostiC o India P.C. Nambiar o Malaysia ismail ibrahim

FZs – or in whatever name they are called around the world – have proliferated in a large conceptual framework. FZ policies of

countries are not uniform across nations. Similarly, the experiences, opportunities and challenges encountered by FZs also vary from

country to country, region to region.

Regional PeRsPectives

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a F r i C a

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the hallmarKs oF the modern globalization process are trade, investment and capital inflows, facilitated by unprecedented developments in information and communications technologies.

Countries that have participated meaningfully and beneficially in the globali-zation process are those that have been able to promote large volumes of trade, particularly manufactured exports, stimulate capital inflows and investment, and in the process, boost growth rates significantly and reduce poverty.

In some economies, trade has been found to perform the role of an engine of growth, especially via the high real productivity export sector, which the Free Trade Zones scheme is set to propagate.

Ndibe et al (2008) characterized international trade as an engine of development and further affirmed that “a rule-based, open, non discriminatory and equitable multilateral trading system, as well as meaningful trade liberalization, can substantially stimulate development worldwide, benefiting countries at all stages of development”. In African economies, foreign trade has been of vital significance. The countries depend on exports to earn foreign exchange which finances machinery and spare parts as well as transport and other equipment for agricultural and industrial development.

One of the promotional instruments that they have used since the 1980s is the establishment of Free Trade Zones. The idea behind these zones is the need to stimulate exports of non-traditional manufactured goods, thereby contributing to growth and development of the host country. Free Trade Zones or Special Economic Zones are now widely accepted as a

means of increasing the ability of African countries to attract foreign direct investment into special locations.

Free zones are generally on the increase. The question is no longer “which countries have them?”, rather “which countries do not have them?”

Free zones are successful where governments have introduced effective policy and legislative measures to free up economic development within them.

Zone operators have successfully used these policy frameworks to promote strategic and locational advantages of investment.

vaRiants of fRee tRade zones in afRicaAlthough free zones have been in existence for decades and are popular in some other parts of the world, notably Asia and Central America, they

free trade zones as an instrument of growth in africa

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C O U N T R I E S A N D N U M B E R S O F Z O N E S

Ghana:192

South Africa: 10Swaziland: 1

Congo Democratic:

2

Cape Verde: 1

Lesotho:9

Togo: 18

Ivory Coast: 1

Nigeria:32

Zambia:7

Liberia:6

Kenya: 160

Namibia: 41

Ethiopia: 30

Djibouti: 2

Eritrea: 2

Egypt: 10

Libya: 3Seychelles: 3

Tunisia: 3

Cameroon: 1

Gambia: 1

Morocco: 1

Senegal: 1

Sudan: 7

Tanzania: 44

Gabon: 3

Guinea: 1

Burundi: 1

Zimbabwe: 4

Malawi: 2

Uganda: 4

Rwanda: 6

Mauritius: 20

Angola: 8

Sierra Leone: 1

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are a fairly recent phenomenon in Africa. Typically, Free Trade Zones range from large land areas with a wide range of economic activities to very small, geographically localized, industry or activity specific zones.

These zones are aimed at economic development, promoting free trade or export oriented manufacturing. Different countries in Africa have adopted different names or variants of free zone. Free Trade Zone (FTZ) – Nigeria, Kenya Export Processing Zone (EPZ) – Egypt, Nigeria, Kenya Industrial Development Zone (IDZ) – South Africa Multi-facility Zones (MFZ) – Zambia Free Points – Mali and Mauritania Single Factory Zone or Export Processing Factory (EPF) – Ghana, Kenya, others Free Port – Mauritius

Although these variants of the scheme are differently structured and operated, they share a similar objective in the promotion of trade integration and economic development. As of April 2015, the Africa Free Zone Association Secretariat identified 638 Free

Zones in 36 countries. Ghana leads with 192 Zones, followed by Kenya with 160 Zones and Tanzania with 44 Zones, (see table below).Data from the Arab countries in North Africa was unavailable at the time.

chaRacteRistics of afRican fRee zones The majority of the free zones in the continent are multi-activity with virtually no

(but for a few) sectorial specializations that would allow the zones to achieve economies of scale.

The workforce is generally unskilled with limited opportunities for training and career advancement.

Most of the zones are single factory zones i.e. they are small and confined to an export-oriented firm.

They are also troubled by poor management, other Government agencies’ interference in operations and minimal support.

common incentives The simplicity of administrative procedures via a “one-stop window” is commonly

applicable. The incentives and privileges are, however, subject to the conditions that almost all the output of the zones’ firms are exported and that all imported raw materials and intermediate goods are used fully within the zones or are re-exported.

Stamp Duty Exemption Perpetual Import duty and VAT Exemption on raw materials, machinery and other

business inputs (except for certain fuels, and motor vehicles) Repatriation of foreign capital investments at any time with capital appreciation

on the investment. Remittance of profits and dividends earned by the foreign investor. No import or export licenses required for business within the zone.

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A percentage of production is sold into the Customs territory against a valid permit and on payment of the appropriate duties.

Rent-free land at construction stage; thereafter, rent is determined 100 percent foreign ownership of business in the Zones allowed.

Employment of foreign managers and qualified personnel by companies operating in the Zones allowed.

In most African countries 10 years tax holiday is extended; thereafter, firms fall back and become taxable, though at a reduced and attractive level for a transitional period.

A wide range of support services including: Ease of access on competitive terms to utilities (power, water, communication) and to services (banking, security, medical, etc); on site Customs facilities; employee related services (recruitment, training, transport, counseling); and business support services.

Given most countries’ low level of development, they maintain longer and attractive incentives.

challengesThe problems of free zones, as identified, may not be common to the continent alone.

Some of the issues identified are:1) Apparent lack of knowledge/interest on the part of government officials and

country’s opinion leaders. 2) Other government agencies interference with the scheme’s operation.3) Heads of Free Zones Agency being far from the President of the host country,

thereby affecting decision-making, approvals and resolutions especially in Nigeria, which has adopted the Treasury Single Account.

4) Insufficient funding to help the scheme become self-sustaining.5) High employment of foreign managers and staff instead of locals; thereby limiting

growth among the locals. 6) The business climate does not favor FDI. Factors such as red tape, weak

infrastructure and political instability are holding back investment.7) Publicity of the zones is still low. Publicity in Africa has not been classified under

the capital budget because of the expenditure involved in international and local media (print and electronic).

8) In many countries, unscrupulous firms now place imported goods in the domestic market without paying Customs duties. It discredits the very purpose of the scheme if not met with strong opposition. Many free zones allow counterfeiters to evade the laws of the country, as the regulations are often lax in the zones.

9) Expectations about forward and backward linkages to the local economy are still beyond the expected. One of the anticipated benefits in establishing the zones was that the firms within the zones would gradually increase their purchase of local raw materials, components, semi-finished goods and machinery. This interaction with the local economy was expected to benefit domestic firms through technology transfer. But as reported by many surveys, the record has been disappointing. Local raw materials typically comprised not more than a third of the total raw materials used and often much less.

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10) Little contribution of free zone firms to tax revenue. This has been found to be true in countries that have granted company income tax holidays and those that have not. When the tax holiday is over, the corporation which set up a free zone factory without fully assuming its cost is often able to set up operations elsewhere for less expense than the tax to be paid, giving it leverage to take the host government to the bargaining table with more demands in order for it to continue operations in the country.

11) Free zones tend to become concentrated in a few industries – notably textiles and electronics – that seem to be particularly compatible with the zones concept from the investors’ point of view, in that they can be relocated easily and do not required highly skilled workers.

12) Encouragement of businesses to set up operations under the influence of often-corrupt governments and giving foreign firms more economic liberty than is given to indigenous employers, who face large and sometimes insurmountable “regulatory” hurdles.

13) The working conditions in the zones has attracted serious concerns.

The International Labour Organization (ILO) report on African Free Trade Zones describes the working conditions and hostility towards trade union activities in a number of African countries. Although free zones are now firmly established in many African countries, most

of them are union-free zones.

The working conditions in the zones has attracted serious concerns.

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Even in Mauritius, long cited as an example for the region, many employers intimidate workers wishing to join trade unions (according to surveys).

In Kenya, although labor legislation does apply to the zones in theory, many exemptions were granted and many violations of trade union rights were reported.

In Lesotho, police stations were set up at the entrance to the zones to prevent the access of trade union organizers.

In Namibia, Nigeria and other countries strikes are banned in the zones.

contRibution to local economyAs in other countries, foreign trade, historically, has been of vital significance to African economies. They have contributed to the recent surge in attracting FDI, though the extent of the rise in FDI and its effect on the host economy varies greatly from country to country.

Indeed many African countries have gained through: FDI thereby attracting foreign interest into host country development Backward linkages especially in areas of comparative advantage especially

in sourcing raw materials and other inputs produced locally. Regional development and technology transfer Development of export oriented industries Zones stimulate exports of non-traditional manufactured goods and earn

foreign exchange.

The free zone in Mauritius is credited with helping to diversify the primarily sugar–based economy into an export–oriented producer of manufactures.

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A key attractive aspect of zones is the possibility of absorbing a large proportion of unemployed labor. In Mauritius, the availability of surplus labour was originally a major enticement to the development of free zones in the country. Mauritius, an island off the Eastern coast of Africa is one of the known success stories in the continent. The free zone in Mauritius is credited with helping to diversify the primarily sugar–based economy into an export–oriented producer of manufactures. The scheme accounts for 60 percent total exports and more than 30 percent of FDI.

Stimulating and sustaining economic growth by providing an enabling environment whose features include developed infrastructure, best business practices and a stable policy environment; enhancing technological growth and promoting efficient agro-allied industries, creating wealth; providing consumers with high quality goods and services at competitive prices from the goods exported into the local market.

conclusion As a concept, free zones can be an important stimulus and a vehicle of economic

growth and development. Theoretically, it can contribute to the achievement of the developing country’s objectives of enhanced foreign exchange earnings, manufactured export development and economic diversification, greater inflow of FDI, more technology transfer and generation of employment opportunities.

As the strategy is not an end in itself, it should lead to the uplift of the social and economic well being of the citizens of the continent.

However, the benefits from free zones can be significantly enhanced if important lessons are learnt from the experiences of Asian Tigers.

With the abundant human and natural resources on the continent, return on investment is high for zones that are modeled according to the host country’s comparative advantages and manage effectively. Apart from modeling free zones in the production sector, services and tourism are areas of high potential in Africa.

Africa is the next frontier that will be hosting the most successful free zones.

Chris Ndibe, Executive Director, African Free Zone Association.

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l a t i N a m e r i C a

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Free zoNes iN Latin American countries have been used over more than 90 years as instruments to attract foreign direct investment (FDI), to promote the creation of new jobs and to contribute on national economic growth. These free zones usually give attractive incentives on duties and taxes to foreign investors for operating in the zone.

theRe aRe thRee tyPes of fRee zones in latin ameRica: 1.Export Free Zones: There are 3 different models identified within the Export Free Zones. industrial diversification: These are used to increase the value added of goods

and services produced in free zones. For example, Costa Rica and Dominican Republic had a strong textile/apparel industry, but today they also produce high-tech products such as electronics, medical devices and pharmaceuticals.

dependence in “maquilas”: These are generally implemented in the textile/apparel sector in order to take advantages of the Dominican Republic – Central America Free Trade Agreement. For example, in El Salvador, Honduras, Guatemala and Nicaragua.

logistics services: These are used exclusively for the distribution of goods and services. This model is used in countries such as Panama, Chile, Argentina and Uruguay.

2. Import Substitution Free Zones: These zones are located in Brazil and were implemented with the view to

supplying foreign goods in the domestic market.

3. Mixed Free Zones: This type of free zone operates in Colombia and Uruguay and comprises of three models. Permanent: These are specially designated by the government on geographical

delimited areas offering economic incentives on duties and taxes. special or single-company: These consist of special incentives that are exclusive

for companies operating in the geographical area designated by the government and to single companies that fulfill requirements in the place were they are operating.

transitory: A model wherein the area the government authorizes for holding international fairs, exhibitions, congresses and seminars.

‘free zones of the americas’

S T A T E O F T H E A R T :

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statistics of fRee zones in latin ameRican countRies The first country that established a free zone on its territory was Uruguay in 1923, followed by Panamá in 1948 and Colombia in 1958. It is interesting to note that a first wave of installation of the free zones model took place in the 1960s and 1970s in Mexico, Brazil, Chile and Dominican Republic, and a second wave took place in the 1990s in Guatemala, Costa Rica, Argentina, Paraguay and Nicaragua.

M A P O F F R E E Z O N E S I N T H E W O R L D


43.6% asia

2.8% middle east

6.2% africa

6.1% europe14.9% North america

6.9% south america

12.7% of the free zones in the world are located in Latin America and the Caribbean.

5.8% Central america

Countries such as Haiti and Paraguay have the lowest number of jobs created with 7,000 and 2,500 respectively.

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1923

1948

1958

1870 19

6519

6719

69 1973

1976

1990

1991 19

9419

95

Pana

ma

Colo

mbi

aM

exic

oBr

azil

Dom

Rep

ublic

Chile

Hond

uras

Guat

emal

aCo

sta

Rica

Nic

arag

uaAr

gent

ina

Para

guay

Y E A R O F E S T A B L I S H M E N T O F T H E F R E E Z O N E R E g I M E I N L A T I N A M E R I C A N C O U N T R I E S

With 102 free zones, Colombia has the most free zones in Latin America. It is followed by Central American countries Dominican Republic (55), Nicaragua (49) and Honduras (43). Countries such as Costa Rica, Guatemala, El Salvador and Panama account for a smaller proportion of free zones and Ecuador, Brazil, Paraguay and Chile have less than 3 free zones each.

The Latin American Free Zones play a significant role in their national territories as they have demonstrated an ability to generate employment. Dominican Republic with 55 free zones leads with the highest number of jobs created, specifically 153,300 in 2014. However, the average number of jobs generated for Colombia (102 free zones) is 69,000 and for Costa Rica (23 free zones) is 70,000. We can conclude that the creation of jobs does not only depend on the number of free zones but it it also depends on other factors such as the diversification of activities within the free zone or the domestic and international markets demand. And yet, countries such as Haiti and Paraguay have the lowest number of jobs created with 7,000 and 2,500 respectively.

The largest number of companies operating under a Free Zone Regime in Latin America is in Chile, where 2,850 companies operate in the free zones named “ZonAustral” and “ZOFRI” that are characterized for having a high volume of trade an exports, principally because of their geographic location and advantageous economic incentives. Uruguay and Colombia follow Chile, with 1,560 and 772 companies operating in their respective free zones. Finally, there are countries with a low number of

Source: Information Compiled by AZFA

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C O M P A N I E S O P E R A T I N g U N D E R F R E E Z O N E R E g I M E I N L A T I N A M E R I C A N C O U N T R I E S

10255

4943

2324

1717

1211

77

322

11

F R E E Z O N E S I N L A T I N A M E R I C A N C O U N T R I E S Colombia

Dom RepublicNicaraguaHonduras

Costa RicaGuatemalaEl Salvador

Panama

Puerto Rico

Uruguay

Chile

Argentina

Paraguay

Haiti

Brazil

Mexico

Ecuador

E M P L O Y M E N T g E N E R A T E D I N F R E E Z O N E S I N L A T I N A M E R I C A N C O U N T R I E S

153,000

2,8501,560

772731

602325

260216200

173143

146,000126,000

108,00081,000

70,73069,000

67,00048,000

17,00015,00015,000

7,0002,500


Dom Republic

Chile

Honduras

Uruguay

Brazil

Colombia

Nicaragua

Puerto Rico

El Salvador

Dom Republic

Colombia

Costa Rica

Costa Rica

Guatemala

Guatemala

Honduras

Haiti

Panama

El Salvador

Paraguay

Chile

Nicaragua

Uruguay

Paraguay

Puerto Rico

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companies operating that do not exceed 200 as is the case in El Salvador, Nicaragua and Paraguay.

With respect to the industrial diversification in the free zones in Latin American countries we see a high diversification in countries such as Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica, Dominican Republic and Colombia, because the companies operating in their free zones have economic activities in more than four different sectors. However, there are other countries with a low industrial diversification as a consequence of the lack of different economic activities in their free zones such as in Chile, Argentina, Paraguay, Brazil and Ecuador. It should be noted that the lack of industrial diversification is not bad per se because it may be caused by a specialization in a certain activity that generates the expected returns.


I N D U S T R I A L D I v E R S I F I C A T I O N I N F R E E Z O N E S I N L A T I N A M E R I C A N C O U N T R I E S

Guatemala ✓ ✓ ✓ ✓ ✓ el salvador ✓ ✓ ✓ ✓ ✓ honduras ✓ ✓ ✓ ✓ ✓

Nicaragua ✓ ✓ ✓ ✓ Costa rica ✓ ✓ ✓ ✓ ✓ Panama ✓

dom. rep. ✓ ✓ ✓ ✓ ✓ ✓ Puerto rico ✓ ✓ Colombia ✓ ✓ ✓ ✓ ✓ ✓ ✓

ecuador brazil ✓

Paraguay ✓ ✓ uruguay ✓ ✓ ✓ ✓

argentina ✓

Chile ✓

Log

isti

cs

Co

un

try

Ag

ri-i

nd

ust

ry

Text

iles

Ap

par

el

Med

ical

Dev

ices

Ph

arm

aceu

tica

ls

Ele

ctro

nic

s

Au

top

arts

Cal

l Cen

ters

BP

O

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conclusions Figures of free zones in Latin America Approximately 400 free zones A 900,000 direct employees More than 8,000 companies operating in the free zones Free zones are used for different activities: Industry, manufacturing, logistics,

commercial and services Industrial diversification into some of the free zones of Latin America

I N C E N T I v E S I N F R E E Z O N E S I N L A T I N A M E R I C A N C O U N T R I E S ; I N C O M E T A X I N F R E E Z O N E S v S N A T I O N A L T E R R I T O R Y I N L A T I N A M E R I C A N C O U N T R I E SSource: Information Compiled by AZFA. Colombia applies an equity tax of 13% in addition to the income tax, FZs are exempted from such tax

The following table lists the different economic incentives given by the free zones in Latin American countries, specifically regarding income tax comparing the free zone with the national territory. Chile has the most beneficial regime for companies operating in a free zone because they give a preferential tax of 0% compared with the 35% that a normal Chilean entrepreneur must pay in national territory. Nicaragua, Guatemala, El Salvador, Honduras and Dominican Republic also have a 0% income tax for companies operating in a free zone, which makes Latin America a very attractive place for foreign investors. Colombia and Costa Rica have income tax of 15% in their Free Zones vs. a 25% and 30% in national territory.

Chile 0% 35%

Nicaragua 0% 30%

Guatemala 0% 25%

el salvador 0% 25%

honduras 0% 25%

dom republic 0% 25%

Colombia 15% 25% + 13%*

Costa rica 15% 30%

mexico 28% 30%

Country Income Tax FZ Income Tax NT

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Countries and/or regions have established selective strategies differentiated in terms of: types of companies, legal frameworks and incentives to attract investment into free zones

Free zones are present all over the Latin American countries despite the different economic situations and political parties

Free zones have helped incorporate and transfer technology to production processes and operations in the diversification of products

Due to the importance of free zones in the economic performance of the countries, Labors have been created at a national and regional level: ANDI (Colombia), CNZFE (Dominican Republic), ADOZONA (Dominican Republic), CNZF (Nicaragua), CNZF (Paraguay), AZOFRAP (Panamá), AZOFRAS (Costa Rica), AGEXPORT (Guatemala), CZFU (Uruguay), AZAFRANCAH (Honduras), CAMTEX (El Salvador) and AZFA (LATAM);

fRee tRade zones association of the ameRicas (azfa)AZFA is a non-profit organization that promotes and defends the free zones regime through integrations, research and partnerships among the public and private sector in Latin America. Its purpose is the correct development and understanding of the advantages of free zones.

The main objectives of the organization are: To promote the free zone regime in different Latin American countries Associate and motivate cooperation and business relations among free zones,

associations, governmental agencies and other organizations of the sector To provide a platform to channel information that is both relevant and of value for the

free zones

AZFA includes affiliates from 14 countries from Latin America, the Caribbean and Spain and is the most important free zone association in the region.

JuaN Pablo rivera, Chairman, Free Trade Zones Association of the Americas.

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b r a z i l

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at the “Global vs. Regional? Better Networking” panel, on which I was a participant, during the World Free Zones Organization’s 1st Annual International Conference & Exhibition in Dubai, we examined the regional and global scope and scale of foreign trade, by addressing the following questions:

1. Are there patterns in both regional integration and globalization?2. What is the proper role of free zones in regional development?3. Considered an exception in the past, companies trading among themselves is more

the norm in today’s international trade climate. Does internal trade protect companies from market risks and uncertainties? Can we expect this trend to continue?

4. Can free zones around the world develop affinities to foster predictability in trade and let companies act in a more integrated way?

5. What issues are raised by the idea of global or regional integration of free zones?

In summary, my contribution to the panel focused on: (i) an outlook of Brazil’s foreign trade of goods; (ii) a comment on two Brazilian models of free zones – the Manaus Free Zone and the Export Processing Zones model; and (iii) a forecast of the future of free zones in Brazil.

These topics encompassed facts that were not limited to Brazil’s trade landscape, but also extended to greater themes of development, investment attraction, sustainability and socio-economic development that could be adopted by any free zones to add value to primary goods prior to export and engage countries in global value chains.

The forces of globalization and regionalization have reshaped the world’s economic landscape (Hirata, Kose and Otrok, 2013). However, the changes in global and regional trade patterns were first driven by trade liberalization followed by vertical specialization and income convergence (International Monetary Fund, 2011). Nowadays, there is a common interest in both regional integration and globalization for countries and companies to achieve a broader agenda that pursues environmental sustainability and jobs as a result of long-term feasible investments. Free zones play a key role in promoting and, in many cases, ensuring these factors.

g L O B A L v S . R E g I O N A L :

future for brazilian free zones

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outlook of bRazil’s foReign tRade of goodsBrazil has the 7th largest gross domestic product (GDP) in the world (World Bank, 2015). Nonetheless, in 2013 it accounted for less than 3% of global trade in goods. The evolution of Brazil’s participation in exports and imports (Graphic 1) depicts a significant reduction despite the diversification of products traded.

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Although, Brazil still benefits from important elements such as a large market size and a sophisticated business community (World Economic Forum, 2014), there is also an urgent need to increase its exports and imports. This fact concerns not only Brazil, but also most developing countries.

manaus fRee zone and the exPoRt PRocessing zones modelsManaus Free Zone is a 58-year-old successful model located in the Brazilian Amazon. It hosts over 500 multi-sector companies and 110,000 jobs. It is a strategic free zone as it promotes regional development as well as it preserves the environment.

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The Export Processing Zones (EPZ) model is in the first stages of implementation. The most advanced EPZs are located in relatively less developed areas such as in the north-eastern states Ceará and Piauí and in the north-western state Acre. Each Zone has its own characteristic that could be leveraged by viable projects.

Although delayed in their development, the EPZs in Brazil have the potential to attract domestic and foreign investments to increase the competitiveness of companies around the country, thus adding value to exports and engaging the country in global value chains.

Manaus Free Zone

The EPZ operations began in August 2013 in the EPZ of Ceará.

EPZ of Acre EPZ of Parnaíba (PI)

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The EPZs target a change in productivity gains to foster socio-economic development and environmental sustainability with equality. Nevertheless, structural changes require value chain upgrading (Hernández, Martínez-Piva and Mudler, 2014).

For instance, the challenge that Latin America and the Caribbean countries face is not merely limited to joining regional or global value chains. They need to increase the value added that is generated locally and to move up value chain hierarchies from simple to more complex activities. The process depends critically on public policies that engage different actors to achieve this objective. (ECLAC/UN, 2014).

In Brazil, the Export Processing Zones are an example and are part of the National Export Program (PNE, 2015) as a regional dimension to the country’s export policy. For this purpose, the EPZs have the remit to attract and cluster industrial investments in relatively less developed areas of the country by way of placing companies, such as small and medium-sized enterprises - SMEs, which are responsible for creating large number of jobs – a critical step towards regional development and social inclusion.

However, for this purpose, the EPZs in Brazil must first be integrated within the rest of the economy to become a bridge between regionalization and globalization.

Table 1 depicts figures from a study on selected supply chains in 2014. The first project under construction in the EPZ of Ceará, the Pecém Steel Mill (CSP), will gain a price variation of 576.99% by selling steel slabs abroad instead of iron ore. A similar calculation is presented for other supply chains (Table 1 and Table 2).

The first project is a US$ 5 Billion steel mill – Pecém Steel Company.

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Gustavo FoNteNele, Executive Secretary, National Council of the Export Processing Zones in the Brazilian Ministry of Development, Industry and Foreign Trade (MDIC), Government of Brazil.

conclusionBrazil needs to increase its role in international trade. The free zones could be an important driver of change. To that end, the government should fully develop and expand the existing and intended free zones as well as improve the regulatory framework. The free zones should partner worldwide with their counterpart organizations and institutions and strengthen production integration both regional and globally. In conclusion, the future of free zones in Brazil can profit from the best practices of international experience.

• Comisión Económica para América Latina y el Caribe - Naciones Unidas – CEPAL/UN (2014), Panorama de la Gestión Pública en América Latina y el Caribe.

• ___(2014), Latin America and the Caribbean in the World Economy: Regional integration and value chains in a challenging external environment.

• Fontenele, G. (2014), Export Processing Zones of Brazil. Revista Brasileira de Comércio Exterior – RBCE n. 120. Fundação Centro de Estudos do Comércio Exterior – FUNCEX. (in Portuguese)

• ___(2015), Global x Regional – Future for Brazilian Free Zones. Speech at the World Free Zone Organization – World FZO’s 1st Annual International Conference & Exhibition, held in Dubai on May 12th 2015.

• Hernández, R. A. Martínez-Piva, J. M. and Mudler (2014), N. Global value chains and world trade: Prospects and challenges for Latin America. Economic Commission for Latin America and the Caribbean – United Nations (ECLAC/UN). German Cooperation – Deutsche Zusammenarbeit.

• Hirata, H. Kose, M.A. and Otrok, C (2013), Regionalization vs. Globalization. International Monetary Fund – IMF Working Paper. WP/13/19.

• International Monetary Fund – IMF (2011). Changing Patterns of Global Trade. Strategy, Policy, and Review Department.

• Ministry of Development, Industry and Foreign Trade – MDIC (2015), National Export Plan – PNE. Brazilian Government [on line] (in Portuguese) http://pt.slideshare.net/mdicgovbr/apresentao-pne-49797374?related=1.

• World Bank (2015), Gross Domestic Ranking Table. [on line] http://data.worldbank.org/data-catalog/GDP-ranking-table.

• World Economic Forum (2014), The Global Competitiveness Report 2014-2015. [on line] http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2014-15.pdf

biblioGraPhy

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C h i N a

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oPeNiNG uP to the outside world is China’s long-term basic state policy. Over the past 30 years, the policy has been pursued in a gradual and holistic way. China first introduced the opening up policy in its Special Economic Zones on a trial basis, which could be described as China’s “Free Zone 1.0”, and its main function was to promote China’s export-oriented economy through tariff reduction and exemption. Today there are seven zones of its kind in Mainland China. Following their success, we proceeded to implement this policy in costal cities and areas. In 1990, we launched the Pudong Development and Opening-up Strategy, leading to the establishment of China’s first state-level new area, Pudong New Area, as well as China’s first free trade zone, Waigaoqiao Free Trade Zone, a bonded area supervised by Customs. Today there are 12 state-level new areas and 120 Customs supervised areas in Mainland China. The Special Economic Zones, costal cities and areas, state-level new areas and Customs supervised areas compose the forefront of China’s opening up policy.

To follow the new trend of economic globalization, China developed a strategic plan to deepen reform and opening up, of which the China (Shanghai) Pilot Free Trade Zone forms a crucial part. The China (Shanghai) Pilot Free Trade Zone, which could be described as China’s “Free Zone 2.0”, shoulders two major responsibilities. The first is to expand the scope of opening- up, which means to follow the development trend of international trade and investment, through the negative list management system and opening up measures in the service sector, build itself into a test bed for more proactive opening up programs. The second is to intensify all-round reform, which means to innovate government administrative approaches, establish a basic institutional framework aligned with international practices, and explore successful experiences that can be rolled out nationwide.

Since its official launch on 29 September 2013, the China (Shanghai) Pilot Free Trade Zone has been strengthening its opening up efforts by exploring institutional innovations in fields of investment, trade, finance

benchmarking international Practices and building china’s most open free trade zone

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The Shanghai Pilot Free Trade Zone

and regulation, which have yielded remarkable initial results in trade and investment liberalization and facilitation.

An investment management system built on pre-establishment national treatment and a negative list has been established. Over the past 18 months, Shanghai unveiled the first negative list in 2013 and reviewed it in 2014, giving equal treatment to domestic and foreign-invested enterprises. Last month, the State Council updated the list, reducing the number of restricted industries to 122 for greater openness and transparency. For industries outside the list, the approval system for foreign investment projects is replaced with a filing system. Today, out of the more than 3,000 foreign enterprises that have set up since the official launch of the zone, 90% are established through filing procedures. At the same time, 54 opening up measures in service and manufacturing have been in effect, leading to the establishment of 1,000 projects. A new round of opening-up measures will roll out and some industries will be chosen to test a unified market entry system.

A trade supervision system based on trade facilitation has been running smoothly. Drawing lessons from international practices, the General Administration of Customs (GAC), General Administration of Quality Supervision, Inspection and Quarantine (GAQSIQ) and China Maritime Safety Administration (China MSA) jointly adopted the “hierarchical management” approach, which ensures frontier opening, second-tier effective and efficient control and minimum supervision within the Zone and implemented more than 60 innovative measures to facilitate free flow of goods and services within the Zone. As a result, the Zone managed to save 41.3% and 36.8% of the time for import and export Customs clearance, as well as 10% of the

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logistics cost for enterprises. Last year the Zone witnessed an 8.3% growth in import and export, 6 percentage points higher than the national average, accounting for 26.6% of Shanghai’s two-way trade. Meanwhile, we began to take the “single-window” approach in international trade, initiating a pilot program called “categorized supervision system based on import status” to enhance shipping and trade capacity.

A financial innovation system aimed at capital account convertibility and opening-up in the financial service sector has been in place in the Zone. To better serve the real economy, we have established a macro-prudent and risk-controlled Free Trade Account (FTA) Unit, and made a series of innovative moves in facilitating cross-border investment, financing and exchange, cross-border use of renminbi, interest rate liberalization as well as foreign exchange reform. As a result, the environment for financial services has been greatly improved. For example, the launch of the two-way cross-border renminbi capital pool business last March led to a 70% monthly growth in total settlement; both domestic and foreign companies can raise funds in the overseas market through the FTA, saving corporate financing cost by 10%. In the meantime, the financial services sector has been opening up in an orderly way. A group of domestic and foreign financial institutions have been running in the zone, 20 of which are sub-branches of foreign banks; the Shanghai International Energy Exchange and the Shanghai International Gold Exchange are in operation, and exchange markets for gold, foreign exchange, securities, oil and commodities will be set up in the near future, in an effort to facilitate domestic and foreign investment in China’s and overseas capital market.

A mid-event and ex-post regulatory system focused on transforming government functions has taken shape. With modern IT tools in our hand such as big data, we have established 6 basic regulatory systems, featuring social credit rating, annual report publication and list of abnormal operation, information sharing and comprehensive law enforcement, involvement of social organizations and market supervision, security review as well as anti-monopoly review, while working with industrial regulatory authorities to improve the professional regulatory system, so as to synchronize opening-up with regulation.

We will also take the initiative to develop new pilot programs that live up to international investment and trade rules in the fields of industrial risk-warning, technological innovation, rights protection, information disclosure and international talent flow, in order to foster a business environment in line with international practices.

In the course of institutional innovation, we push forward reform while adhering to the rule of law. To accommodate the development of the Zone, temporary adjustments have been made on the national level to 4 laws, 17 administrative regulations, 3 State Council documents and 3 ministerial rules, in order to provide legal guarantees for innovative explorations. On the local level, the Standing Committee of Shanghai

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Municipal People’s Congress approved the Regulation on China (Shanghai) Pilot Free Trade Zone, providing institutional framework and legal guarantee for the zone.

After 18 months of exploration and experiment, the reform and opening-up measures of China (Shanghai) Pilot Free Trade Zone have begun to yield results, promoting healthy economic development of the region while encouraging entrepreneurship and employment. Today, the Zone is home to over 300,000 employees and more than 26,000 enterprises, among which 17,000 are newly established ones. In 2014, the zone witnessed double-digit growth in leading economic indicators and growth in import and export exceeded the national average by 6 percentage points. At the same time, a series of pilot results have been rolled out nationwide.

In December 2014, the State Council decided to establish three new free trade zones in Guangdong, Tianjin and Fujian, and expand China (Shanghai) Pilot Free Trade Zone from 28.78 km2 to 120.72 km2 by incorporating Lujiazui Financial Zone, Jinqiao Development Zone and Zhangjiang High-tech Zone, three functional zones in Pudong New Area. In April 2015, the State Council approved Shanghai’s plan for deepening reform, allowing Shanghai to carry out reform and opening up on a higher level. This marked the beginning of a new phase for China (Shanghai) Pilot Free Trade Zone.

In the next phase of development, we will seize this great opportunity to deepen institutional innovation, make breakthroughs in reform and opening-up, foster an international, market-oriented and legalized business environment, and spare no effort to build “China’s most open free trade zone” as urged by President Xi Jinping, so as to play a leading role in reform and innovation.

WaNG JiNG, Vice Chairman, China (Shanghai) Pilot Free Trade Zone.

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the lauNCh oF China’s new free zone program is set to open up a new chapter in the country’s reform. The country’s new phase of growth will particularly depend on the successful demonstration of selected pilot free trade zones and the experience replicated and scaled by existing free zones.

Since September 2013, China has been initiating a new form of free zone – pilot free trade zone. The first one is China (Shanghai) Pilot Free Trade Zone (SPFTZ). One year later, three pilot zones in Guangdong and Fujian provinces in the south and the big northern municipality of Tianjin were approved, modeled on Shanghai›s. It will advance a new round of the country’s reforms, based on their different economic and geographic locations. We believe it will allow the zones to give full play to the advantages and to test reform on a larger scale. It shows the pilot zones are not special privileged enclave arrangements for those four major cities, but the testing of concepts and practices that can be applied to the whole of China, if found to be successful.

Ever since the Reform and Opening policy in 1978, China has maintained an evolutionary policy stance in special economic zones and free zone development. It has been 25 years since China established its first free zone – Shanghai Waigaoqiao Free Trade Zone in 1990, based on international common policy and practice from Kyoto Convention.

Today, there are more than 120 free zones throughout the whole country. The free zones include free trade zones, export processing zones, free ports, bonded logistics parks and cross-border industrial parks.

In the year 2014, the 120 free zones generated $700 billion of import and export and occupied 17% of the total import and export volume of the country. Additionally, 80% of iPhones and 90% of the world’s laptops were manufactured in China’s free zones. There are about four million people working in China’s free zones.

The 120 free zones under the common regime from the Revised Kyoto Convention focus on cargo trade and have played an important role to attract foreign direct investments, introduce global industrial transfer, realize regional economic cluster, boost national exports and of course, create jobs. The recent initiative of four pilot zones today in China, is also the best use of the common regime for investment and trade facilitation and

accelerating Reform Through new free zones Program

C H I N A :

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simplification, but furthermore, it will help promote economic diversification through a deepening reform of the government’s role and further opening up of service sectors from free investment entrance by negative list and free conversion of currencies.

The launching of three new pilot zones in Guangdong, Tianjin and Fujian, together with the expansion of the current SPFTZ reflects the increasing importance and strategic influence of the new form of free zone in China, especially in relation to the liberalization of trade in services. Following the SPFTZ, the service market such as shipping services, trading services financial services, cultural services, professional services and social services are also ready to be fully liberalized.

China is emulating Dubai’s experience as well, as it establishes free zones that target particular sectors. Qianhai Sub-zone in the Guangdong pilot zone is to play a big role in leading financial reforms through the Hong Kong-Shenzhen collaboration as efforts to bring greater convergence of cross-border business. It also takes up its intended role as an experimental laboratory for renminbi liberalization.

Through the new concepts and new standards that are expected to fulfill the special regime of free zones and make international investment and trade safer and more dynamic, a new and modern annex on free zones to the World Customs Organization can be addressed and discussed.

Shanghai Waigaoqiao Free Trade Zone

PaN li, Regional Representative, China, World FZO.

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a r a b C o u N t r i e s

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an overview of the free zone landscape in the middle eastthe idea oF adopting systems of free zones in the Arab region has gained momentum since the 1960s. While Bahrain, Syria, Egypt, and Jordan were among the first Arab countries to establish government-run free zones, the United Arab Emirates, particularly in Dubai has developed a reputation for international trade long before its first free trade zone was established in the 1980s.

In 2010, the Arab Union of Free Zones (AUFZ) was established as a non-government organization and is affiliated with the Arab League. It includes members from eight Arab countries (Jordan, Egypt, Syria, Lebanon, Iraq, Sudan, Oman and Libya), and acts as a catalyst for and advocate of promoting free zones in the Arab world. The Union also provides support and technical assistance to its members.

Over the last couple of decades, many Arab countries have progressively expanded the establishment of new free zones. This expansion was mainly driven by:1) The need to expande links with the global economy and improve market access.2) The need to encourage capital flows through boosting foreign inward investment

and technology transfer.3) The need to creating jobs. The Middle East and North Africa region has a growing

young population. The working-age population is increasing by 3-4% a year, twice as high as in all other developing regions. Therefore, the biggest challenge the Arab region faces is the high rate of unemployment.

4) The need to compensate for the gaps and short falls of the Global Trade System, particularly in light of the Doha round of trade negotiations, as it continues to be stalled since 2001, preventing most developing countries from taking full advantage of the opportunities offered by globalization and trade liberalization. Moreover, different systems and types of zones have been adopted by

different Arab countries including Export Processing Zones (EPZ), Free Trade Zones (FTZ), Free Ports, Enterprise Zones, Single Factory EPZ, and/or Special Economic Zones (SEZ). However, the key dominators for free zones are:1) Areas outside national Customs territory2) Have autonomous regulatory and management bodies3) Offer a wide range of fiscal and financial incentives

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4) Offer warehousing, storage, and distribution facilities.5) May include one or more economic activity

On other hand, and while very little is available on measuring the economic impact of free zones in the Arab region, it is safe to say that free zones have been producing significant direct and indirect contributions to our national economies’ growth and development. For example, and according to the 2008 study of the Multi-Donor Investment Climate Advisory Service of the World Bank Group, free zones in the MENA region were able to generate around 1.5 million jobs and accounted for over 36% of the region’s total exports.

fRee zones in JoRdanThe idea of establishing free zones in Jordan was launched in 1966 by the Government of Jordan in order to further promote free trade and develop transit exports with regional and international markets. This mandate was entrusted to the Jordanian Free Zones Company (the legal successor of the Free Zone Cooperation), which currently manages and operates six public free zones, as well as regulates and licenses private free zones, which stand right now at 30 operational zones.

Over the last couple of decades, Jordan has been progressive in developing the legal and institutional frameworks for free zones in order to provide investors with an attractive, streamlined, duty and tax free business environment; and no restrictions are imposed on business ownership as well as on foreign currency transaction. Moreover, it provides investors with the appropriate infrastructure needed to start their business operations.

In 2014, a new Investment Law was enacted in order to establish more

IFC & IJ Lists New Terminal at Queen Alia Airport, Amman

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F R E E Z O N E S I N T H E M E N A R E g I O NSource: FIAS, The World Bank Group, April 2008

1.6 million 1.6%

us$170 billion 36%

Direct Employment % of National Employment

Free Zone Exports % of Total Exports

business-friendly and effective structures with a strong emphasis on supporting entrepreneurial initiative and enhancing Jordan’s competitiveness in attracting foreign and domestic investment. The new law has also strengthened the regulatory framework for free zones in Jordan, and consolidated the establishment of a One-Stop-Shop for effectively processing all investors’ transactions and services in one place.

The free zones model in Jordan has proven to be a successful one, not only due to its direct contribution towards attracting new investments and generating new employment opportunities, but also as it has boosted trade with a wide network of regional and international markets.

To date, free zones in Jordan have attracted 3,790 investors with an investment volume of over $4.5 billion, 65% of which are foreign direct investments. There are over 2,600 registered companies operating in various economic activities in industrial, commercial, and services sectors, and have generated over 66,000 direct and indirect job opportunities. In 2014, the

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trade volume of free zones in Jordan reached over $12 billion, whereas export level to regional and international markets has been growing steadily reaching $6 billion, counting for about 40% of Jordan›s overall exports.

In acknowledging the ever-increasing importance of achieving world-class competitiveness and consolidating Jordan’s global position in the international economic arena, the Jordanian Free Zones Company is currently working on developing a new model of free zones in Jordan through the establishment of a new free zone at Amman Queen Alia International Airport – a competitive and market-driven model that establishes an export platform and a gateway for doing business in the region that provides unparalleled access to regional and international markets.

The new free economic zone will be established at a strategic location within the Queen Alia International Airport Compound over an area of 1,000 Dunums (1 Square Kilometer). It is under development and construction and will be operational in early 2017. It will offer top class infrastructure with a lucrative investment climate (roads, power station, water supply, ICT

K E Y P E R F O R M A N C E I N D I C A T O R S 2 0 1 4

Number of Free zones 6 30 36Number of investors 3,450 340 3,790Number of registered Companies 2,500 113 2,613volume of investment (billion us$) 2.7 1.8 4.5direct employment 16,000 6,000 22,000indirect employment 32,000 12,000 44,000imports (billion us$) 5 1 6exports (billion us$) 4.1 2.1 6.2to local market 1.7 0.5 2.2to external markets 2.4 1.6 4trade volume (billion us$) 9.1 3.1 12.2

Public Zone Private Zone Total

Queen Alia International Airport Expansion

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services, green zones, high safety measures etc.) It will also include a one-stop shop for effectively processingall investors’ transactions and services in one place, and willprovide e-services for all types of export-import transactions and Customs clearance.

Moreover, the new zone will offer the following services:1. A Business Services Centre including meeting rooms, a conference center, as

well as secretarial and communications services.2. Business Complex that makes office space available for leasing by companies

and investors.3. Logistical support services for exports and investments (warehousing, shipment

and handling services, banking services, insurance services, Expo etc.)4. Developed land units and warehouses available for lease for light industrial,

commercial, and services activities.

conclusions and RecommendationsIn spite of the new opportunities that globalization has generated, it has prompted a change in the development paradigms and has created many social and economic imbalances. The role of developing countries and their involvement in the global economy is very much a matter of concern. As a region, we have already embarked on a series of initiatives related to international, regional and bilateral free trade arrangements. But what matters the most and that are still lagging behind are the global systems of governance, trade and finance continue to face many shortfalls.

The global trade system needs to work better but also to adopt more innovative and proactive approaches. In this regard, free zones can correspond to the evolving global trends and challenges. Free zones’ track record of competitive performance should be encouraged and perceived more favorably by global actors.

Enhancing the role of free zones in our region requires us to aggressively address a number of elements for creating the necessary conditions for seamless and competitive trade. Such elements include:1) Adopting forward thinking policies for the creation of a conducive and healthy

environment for investment and investors2) Modernizing our laws and regulations3) Streamlining domestic regulatory standards with international standards4) Strengthening institutional capacity and investing in our human resources

development5) Improving infrastructure and business support services6) Shifting focus from traditional economic activities to new sectors with high

growth potential, high-value added to our local economy and strong links to the expanding global economy

Nasser shraideh, Chairman, Jordanian Free Zones Company and Chairman, Arab Union of Free Zones.

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bRief of the last decade of uae’s economic success focusing on the Role of economic diveRsificationThe UAE’s economic success with a focus on economic diversification is a remarkable achievement. In 2000, the UAE’s GDP was AED 383 billion and solely dependent on oil. It has progressively grown to AED 1.478 trillion as of 2013, registering a growth of 286% over the 2000 – 2013 period. The GDP is expected to sustain the level of growth for at least five years with a percentage of 4-5%.

Due to the strength of the structural component and the policy of economic diversification pursued and practiced by the country, a very strong growth was registered for the year 2013 to reach 5.2% from 4.2% in the year 2012. Development was due to the growth in the non-oil sectors whereas the oil sector’s participation was limited to around one-third of the GDP.

The economy has based itself on non-oil sectors to include the following dynamic sectors: real estate, business services, industry, construction, foreign trade, finance, tourism, storage, transport and communication. These sectors used to contribute meagerly in the past, but as a result of the wisdom of the leaders of the UAE, who had the vision to drive and implement a diversification policy the country is able to stand strong and absorb the consequences in oil price shifts.

Also, our development did not and does not stop at the UAE’s borders. It was a development with a soul and a human face that elevated the UAE to the top of the ladder of development assistance at the international level.

factoRs that have contRibuted to the uae’s gRowth: Well advanced and developed infrastructure Geographical location

global vs Regional? better networking

T H E U A E B U S I N E S S R A N K S AT T H E g L O B A L L E v E L S

FIRST GLOBALLy IN THE GOVERNMENT EFFICIENCy INDEX, yEAR 2014

16TH IN THE GLOBAL ENABLING TRADE REPORT, yEAR 2014

12TH IN THE GLOBAL COMPETITIVENESS REPORT, yEAR 2014

22ND IN DOING BUSINESS INDEX, yEAR 2014

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The economy has based itself on non-oil sectors to include the following dynamic sectors: real estate, business services, industry, construction, foreign trade, finance, tourism, storage, transport and communication.

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Gateway to regional and international markets including ports and air Economic and political stability Variety of investment opportunities The existence of favorable economic legislation No restriction on money transfer and no taxes Various types and large number of free zones These Free zones enjoy:

• Project ownership is 100% foreign • No restrictions on work permits • Allow the transfer of all profits outside the country • Exemption from business or companies tax according to the free zone where it can reach up to 50 years • Exemption from customs duty and other privileges can be tapped • Exemption from income tax • Availability of warehouses for storage in the free zones and other supplies needed to serve different investment projects including the industrial investments

inteRnational tRade, and uae fRee zonesGlobal export of merchandise trade has reached an amount of $18.8 trillion dollars in 2013 registering a growth of 2%. Out of this figure the percentage of the world free zones was high and needs to strengthen as a reflection of the ease and the facilitation of trade that they were established for. Considering there are more than 1000 free zones operating in more than 120 countries and the number is rapidly growing.

In the UAE, the ratio of the total value of foreign trade (non-oil exports, re-exports and imports reached $431 billion representing 175% of the GDP for non-oil sectors in 2013. According to the WTO’s 2014 report, the UAE was ranked 16 at the international level and topped the list in the MENA region, while it ranked 20th internationally in the import of goods.

Details of trade within the UAE’s Free Zones in UAE: The total free zones trade to the total UAE trade in 2013 reached 33% with a

value of AED 521 billion (287 imports + 23 exports + 211 re-exports ) for the same year and expected to increase to exceed AED 600 billion in 2014.

The total trade of the free zones witnessed a huge increase between 2009 and 2013 when it was only AED 287 billion in 2009 to reach as mentioned AED 521 billion.

The exports and re-exports represent around 45% in 2013.

Shouldn’t this be an incentive to establish more free trade zones? Isn’t this an investment-attracting hub?

Previously, the production pattern for goods and services was largely allocated, across all stages, in a single country, either for domestic markets or for export. Nowadays, the production of goods and services is located across different countries – within and outside of the customs territories – at different stages of the production process, depending on the availability of the necessary skills and materials and strategic location at a competitive

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g R O W T H O F T R A D E v O L U M E O F T H E U A E F O R T H E Y E A R S 2 0 0 9 - 2 0 1 3 I N B I L L I O N D I R H A M S

2009 2010 2011 2012 2013

Non-oil exports *118.7 *151.4 12.1 16.3 23.0

re Exports - - 134.1 181.1 211.2

Total Exports 118.7 151.4 146.2 197.4 234.2

Imports 167.9 201.3 221.5 252.4 286.1

Total Trade 286.6 352.8 367.7 449.8 520.3

Annual Growth 23% 4% 22% 16%

cost and quality. This is where free zones contribute to international trade as a key factor in global value chains.

Juma alKait, Assistant Undersecretary – Foreign Trade Affairs, Ministry of Economy, UAE.

uae investment PoliciesContinuing its plan to pursue its vision towards attracting FDIs, the UAE is reviewing a new Investment Law, which allows, among many other features, possibly up to 100% ownership to foreign investors outside the free zones for the purpose of enhancing the attraction of investments in different sectors, especially those related to innovation.

uae investment Policy tools :In this regard, the UAE government has worked steadily to build an attractive environment for FDIs and introduced various tools, among many others including the Free Zones and specialized ones as follows: The new Foreign Investment Law (under review) New companies law New SMEs law Anti-Commercial Fraud Law Different agreements in various forms of BITs Establishment of the Council of UAE Companies Investing Abroad Promote free zones and the establishment of a regional headquarters for

companies to cater to other markets, particularly Africa, Asia and Europe as well as GCC and MENA

Provide the traders and the investors with incentives, transparency and predictability and the rule of law

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The UAE was ranked 16 at the international level and topped the list in the MENA region, while it ranked 20th internationally in the import of goods.

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The UAE was ranked 16 at the international level and topped the list in the MENA region, while it ranked 20th internationally in the import of goods.

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d u b a i

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strateGiCally loCated iN the Middle East, Africa and South Asia (MEASA) region, the Dubai International Financial Centre (DIFC) is an onshore financial hub providing a secure and supportive platform for financial institutions to develop their business. As a key link in the global chain of leading financial centers, DIFC fills the time-zone gap between London and New York in the West and Hong Kong and Tokyo in the East. Guided by its core values of integrity, transparency and efficiency, DIFC today plays a pivotal role in integrating a growing region with the international financial marketplace.

dubai’s JouRney towaRds becoming a hub foR the RegionA city of constant evolution and development, Dubai is the second largest emirate by population and size after Abu Dhabi. In less than two decades, Dubai has emerged as a dynamic and open trading economy with peerless infrastructure and a diverse, cosmopolitan population.

Trade has remained the main driver of Dubai’s economic growth since the opening of Port Rashid in 1972. With its sizeable cargo handling capacity, the port has been a key factor in strengthening Dubai’s position as a major trading and re-export hub.

During the 1980s and 1990s, Dubai emerged as an aviation hub with the birth and growth of Emirates airline. The immediate success of the airline led to the emirate taking a strategic leap as a major tourist destination. In 2014, Dubai International Airport was ranked as the ‘World’s Busiest Airport’, with more than 70.4 million international passengers having used the airport during the year.

The emirate is located in the center of a region that is emerging as a major force in the global economy. Stretching from North Africa to South Asia and from the Caspian Sea to South Africa, the region encompasses 42 countries, among which are some of the world’s fastest growing markets.

Dubai’s open economic policy and light-touch private sector regulation have been instrumental in attracting significant foreign direct investment. Furthermore, by offering a business friendly environment with world-class infrastructure, Dubai has emerged as a leading commercial center and the world’s third largest re-export hub.

fostering global links Through a unique financial free zone experience in dubai

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Dubai is now the world’s largest center for Sukuk listings at $36.71 billion, with NASDAQ Dubai (previously known as the Dubai International Financial Exchange) the world’s largest single exchange at $33.96 billion. The exchange also plays a significant role in the development of regional capital markets, attracting both domestic and international investors while helping consolidate the region’s integration with world markets.

the beginnings of difcThe asset boom and exponential increase in the MEASA region’s private and institutional wealth witnessed in recent years resulted in a huge demand for specialist financial services.

As an organic progression, and in order to encourage financial activities and transactions, His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the United Arab Emirates and Ruler of Dubai, conceptualized the Dubai International Financial Centre in 2002. His Highness envisioned a world-class institution that could connect international markets around-the-clock, 365 days a year.

DIFC was born out of that vision. The Centre, established in accordance with United Arab Emirates (UAE) Federal Law and Dubai Law, has since grown to become a leading financial nexus connecting East and West and providing a gateway for capital and investment to and from the Arabian Gulf region.

Dubai Law No 12 of 2004 established the DIFC Judicial Authority and the DIFC Court System.

The President of DIFC is His Highness Sheikh Maktoum Bin Mohammed Bin Rashid Al Maktoum, Deputy Ruler of Dubai.

Dubai International Financial Centre

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Over the last decade, DIFC has undertaken significant enhancements within the 110-acre district that has led to the Centre’s growth in size and diversity. This has been complemented by an increase in the breadth and talent of professions and prestigious institutions that thrive in the unique business eco-system.

Furthermore, DIFC has witnessed exceptional growth in the number of registered companies from 19 firms in 2004 to over 1,300 firms in 2015, while over 18,000 professionals currently work in the Centre.

Since inception, DIFC has made continuous enhancements to the regulatory framework and judicial system that meets the highest global benchmarks. Such enhancements include the introduction of the Netting Law, DIFC Law No. 2 of 2014 that provides legal certainty in the Centre on the enforceability of closeout netting in case of insolvency. This made DIFC one of the 45 jurisdictions worldwide that have enacted specific netting legislation.

Reflecting the Centre’s support and commitment to Dubai’s vision of being a global financial hub, the DIFC successfully launched a $700 million Sukuk that was 4.3 times oversubscribed. This clearly demonstrated that DIFC’s planned expansion is based on sound and sustainable revenue streams.

an established ‘cRitical mass’ of institutionsSince its inception, DIFC has evolved into an international financial gateway that offers thriving connectivity with the MEASA markets, as well as the economies of Europe, Asia and the Americas. With more than 1,300 companies clustered together from similar and related industries, the Centre fosters the productive knowledge sharing needed to generate a critical mass for new thinking and best practice.

With a first class infrastructure in place, including an internationally recognized legal and regulatory framework, the Centre is home to a vibrant community of businesses, residences, retail outlets, cafes, restaurants and art galleries. This is further complemented by the new construction underway that will accommodate future growth, including the 11th Gate building.

Institutions based in the DIFC include many of the world’s top banks and credit providers, several of which have established their regional headquarters at the Centre. The Centre currently hosts 21 of the world’s top 25 banks, 11 of the top 20 money managers, 9 of the top 10 law firms and 7 of the largest 10 insurance companies.

the advantages of setting uP in the difc:DIFC offers a regulatory and judiciary environment benchmarked against international standards and comparable to other leading international financial centers such as New York and London.

Financial institutions can operate in this market with the assurance that the compliance and business conduct requirements meet the same

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standards as other financial jurisdictions. The clarity and transparency of the system is a major incentive for financial institutions wishing to use a secure base to operate in the region.

DIFC’s location in Dubai also gives it an unmatched range of advantages. The city’s unrivalled connectivity with the wider MEASA region, urban lifestyle, logistics, business and lifestyle infrastructure are among the best that the world’s leading cities can offer. The city’s strategic location as an international trading hub is complemented by some of the world’s best airports and seaports serving over 280 destinations. The city also provides access to a substantial pool of highly skilled talent that can be drawn on by financial services companies seeking to remain competitive in a constantly evolving economic environment. Such attributes make for a compelling value proposition.

a closeR look at difc’s legal and RegulatoRy PlatfoRmThere are several key entities within the DIFC, which enable it to function as a self-contained financial center based on international standards.

One of the primary factors behind the success of DIFC is the pre-sence of an independent risk-based regulatory system overseen by the Dubai Financial Services Authority (DFSA) and the DIFC Courts.

The DFSA has set rigorous high-standards in constructing a regulatory and legal framework that reflects the best practices of leading jurisdictions around the world.

A M O N g T H E B E N E F I T S T H AT D I F C O F F E R S A R E :

100 PERCENT FOREIGN OWNERSHIP

FREE FLOW OF CAPITAL AND PROFIT REPATRIATION

TRANSPARENT WORLD-CLASS LEGAL AND REGULATORy

FRAMEWORK

ULTRA-MODERN OFFICES AND FACILITIES AND EXCELLENT

SUPPORT SERVICES.

ZERO PERCENT TAX ON INCOME OR PROFITS (GUARANTEED FOR A

PERIOD OF 50 yEARS)

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In the past decade, the DFSA has established a jurisdiction with internationally recognized regulations offering a favorable system of taxation that facilitates the process of starting a business in Dubai. DFSA has expanded its international network of regulatory cooperation by signing over 90 bilateral and multi-lateral agreements with regulatory counterparts.

The DFSA plays a significant role in enhancing the financial architecture, reflecting its commitment to the changing needs of the companies and professionals in the financial industry. Recent examples of such initiatives are the launch of a Netting Law, DIFC Law No. 2, which has established DFSA as the world’s newest and the region’s most sophisticated netting jurisdiction. DFSA has also introduced a new funds regime comparable to international fund regimes found in Luxembourg and the Cayman Islands.

The security offered by the DIFC Courts provides the reassurance needed by international businesses seeking to invest in the Middle East. The Courts provide the protection of English Common law and judgments enforceable within the GCC and throughout the Arab world. DIFC Courts’ judgments and orders are also enforceable in France by virtue of the Paris Convention and in many other countries (including China and India), according to domestic laws governing the recognition and enforcement of foreign judgments.

With continuous refinement of the legal system in the DIFC, the Courts have become internationally integrated with the highest number of MoU’s signed with international organizations. A major initiative in 2015 was the introduction of a Wills and Probate Registry, which provides non-Muslim expatriates with a legal facility for smooth transfer of assets upon death. Reflecting the spirit of the UAE laws, this measure made DIFC the first jurisdiction in the Middle East region where a non-Muslim individual can register a will under internationally-recognized English common law principles.

Other administrative bodies of the DIFC include: difc authoRityThe Authority plays a key role in providing strategic guidance for and supervision of the Centre. The Authority is also responsible for the registration of companies and enactment of laws related to the DIFC’s non-financial services.

the RegistRaR of comPanies (Roc)The Registrar is responsible for all matters related to the incorporation and registration of companies based in DIFC; the ROC also administers the DIFC’s Companies Law and Regulations.

the RegistRaR of Real PRoPeRtiesThe Registrar administers laws, regulations and procedures designed to ensure the protection of the rights of buyers, sellers and leaseholders of all property in the financial district.

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commissioneR of data PRotectionThe Commissioner is an independent regulator empowered to uphold data privacy for individuals in or from DIFC, responsible for the administration of Data Protection Law and Regulations in DIFC. Furthermore, DIFC is the only jurisdiction in the region with an established Data Protection regime compliant with EU standards.

technological advancements in line with dubai’s ‘smaRt city’ initiativeRecent technological advances have empowered and connected people, creating a vibrant and diverse world. In line with the Dubai’s leadership’s ‘Smart City’ initiative, DIFC has taken steps to build a unique and advanced infrastructure. The launch of the DIFC Client Portal clearly demonstrates the Centre’s commitment to providing the highest quality client service. The Client Portal offers registered entities a range of administrative services, including employee services, registration and licensing, certification, and online payments.

In addition, DIFC has also facilitated Wi-Fi access in partnership with telecommunications providers Du and Etisalat for both residents and visitors, enabling access to government websites and facilitating online transactions within the premises. The fact that DIFC now constitutes one self-contained network offers considerable cost saving for the trading desks of financial firms.

a Rich lifestyle offeRingAside from business-focused activities, a distinctive characteristic of DIFC is that it can provide a ‘city within a city’ experience with a complete range of community-enhancing lifestyle activities and events. As part of its vision for strengthening the role of art in society, DIFC also seeks to support the development of Dubai as a regional and international centre for art and culture.

DIFC has hosted the ‘Art Nights’ exhibition at the Gate Village since its inception in 2009. Art Nights has gained a reputation for being Dubai’s leading fair dedicated to new and innovative art. During this event, DIFC is transformed into a vibrant and invigorating space filled with live art shows, live music and film screenings for the benefit of an enthralled audience. The event has grown in popularity and esteem over the last few years, attracting everyone art collectors and bankers, young artists and families.

difc’s 2024 stRategy - the Road aheadAnchored by The Gate, the iconic structure of the DIFC has come to symbolize the region’s financial development. Reflecting its role as a global financial hub, DIFC hosts a diverse range of financial firms from across the globe with 33% from Europe, 33% from the Middle East, 13% from North America, 11% from Asia and 10% from the rest of the world.

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On the strength of DIFC’s growth, Dubai has been ranked by global surveys as a serious challenger to the established global leaders in the financial industry such as London, New York and Hong Kong.

Looking ahead, the Centre’s pace of development and growth of the Centre is poised to accelerate. The recently announced DIFC 2024 strategy offers a blueprint for the next decade of growth of the financial hub in an environment of emerging challenges and opportunities.

With some of the fastest-growing emerging markets in the world, the MEASA region offers significant opportunities for DIFC to strengthen its position as a major financial hub and an entry point for leading regional and international business players. In broad terms, DIFC’s approach is to provide a platform for business to access the latent potential of this market and to stimulate trade and investment flows along the South-South economic corridor that links Africa, Southern Asia and Latin America.

Targeting specialized sectors such as family offices, developing a domicile for global fund management and, of course, serving as a hub for key sectors such as Islamic finance, will be among the key areas of focus for the DIFC over the coming decade. DIFC will seek to enable sector growth by closely working with the DFSA to ensure Dubai’s full integration into the ‘emerging new global financial architecture’ and responsiveness to the changing needs of financial services companies and professionals.

In order to capitalize on new opportunities, effective cooperation with other market players will be essential. Such cooperation will cover the key frameworks provided by government policy with the development of financial sectors, framing of regulations and nurturing of talent as critical industry growth drivers.

Dubai’s steady growth as a world city and the UAE’s ever increasing connectivity as a truly globalized economy will strengthen DIFC’s position as an essential platform for business to access opportunities across MEASA and beyond. Dubai’s successful bid to host Expo 2020 will be one of the next major milestones in this story of growth and progress. Expo 2020 is expected to create nearly 300,000 jobs (40% of them permanent) and attract 25 million visitors. The projected infrastructure requirements alone will be a boon for project finance, while the increasing population of Dubai and the wider UAE will generate organic growth opportunities across many sectors.

Over the coming years, DIFC will play a full part in Dubai’s success story by implementing new strategic initiatives, strengthening its enviable global reputation and realizing its long-term goal of becoming one of the world’s five most important financial centers.

raJesh PareeK, Chief Financial Officer, Dubai International Financial Centre.

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successful examples of european free zonesthe idea oF free zones is as old as civilization itself. It is known that the Phoenicians in the cities of Carthage and Tyre, and the ancient Greeks on the island of Delos had special trade incentives. Public storehouses are also mentioned in ancient Egypt and the Roman Empire had special storehouses for goods free of customs duties along the commercial and military roads (which were of little impact on the market).

Forerunners of free zones in the Middle Ages were free towns, and later, in the new century – the free ports, free port zones and finally, the customs free zones. To free cities were given various benefits: initially it was customs freedom, which through certain development, grew and had different benefits on imports, in storage, production and consumption of goods. The earliest written record of the free zones of the Middle Ages is from Spain, when, in the 13th century, King Alfonso X declared commercial privileges in the city of Cadiz. In the 17th century, the French government enabled customs incentives and abolished the sales tax in four cities: Marseilles, Bayonne, Lorient and Dunkirk. Other countries in Europe by the idea of Colbert (Decree of 1596), established the free cities and these included Hamburg in Germany; Livorno, Ancona and Messina in Italy; and Zadar, Split and Kotor in Southeast Europe.

In the daily struggle for investors in the European Union (EU) there are 95 free zones. Offering a variety of facilities and services, the free zones are struggling to retain existing and attract new customers. Free zones promote effective economic instruments, which provides the host country a quick influx of foreign direct investment, increases employment, improves access to new technologies, education, labor, industrialization and increases exports.

In addition to the free zones in the EU member states, free zones also exist in non-EU countries in Europe, which have not implemented the Union Custom Code that represents the legal basis for establishment and operation of free zones in the Union, which is in accordance to the principles of the 1973 Kyoto conventions. The use of tax incentives in free zones is a measure that can be limited in time in case the non-EU country aspires to be part of the Union.

T O W A R D S A N E W T R A D E O R D E R :

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F R E E Z O N E S I N T H E E U

fRee zones in euThe European Commission (EC) defines “Free Zones” under its Customs policy as special areas within the Customs territory of the European Union (EU). Goods placed in the zone are exempt from Customs duties. When goods are imported into the zone from outside EU territory (non-Community goods), VAT and excise duties are suspended until the goods are exported out of the “Free Zone” into the EU (where they become Community goods) or consumed within the zone, in production, for example.

Free zones within the EU have a fixed perimeter with entry and exit points that are subject to Customs supervision. The areas are classified according to the way in which both Community and non-Community goods are dealt with upon import and export. In accordance to the European typology there are two types of free zones in EU:

CoNtrol tyPe i Free zoNes have a perimeter fence so that goods placed there, which is supervised by Customs, are automatically under this regime.

The rules for CoNtrol tyPe ii Free zoNes are essentially the same as those governing Customs warehouses. Unlike with traditional-style free zones, the goods are subjected to a declaration in order to be able to benefit from the arrangement.

Bulgaria6/0

Spain4/0

Cyprus0/2

Croatia24/0

Malta1/0

Portugal1/0

Czech Republic

10/1

The Netherlands

0/1

United Kingdom

0/1

Denmark1/0

France2/0

Slovenia1/0

Germany2/2

Ireland0/2

Estonia3/1

Latvia4/0

Poland7/0

Romania6/0

Lithuania1/0

Greece4/0

Italy2/1

Finland1/3

Control Type I Control Type II

1

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Member States (MS) initially used free zones to smooth Customs procedures and to decrease the administrative burden for traders. But free zones have become increasingly popular globally as a policy instrument for attracting export-oriented foreign direct investment (FDI), defined by the Organization for Economic Cooperation and Development2 as long-term and significant investments across borders. The effects of such investments can sometimes stretch beyond the designated region, to increase the total capital of the host country. More relevant for developing countries, free zones may also create technological transfers from companies established in the zone and spill-over effects of knowledge used by these companies.

In accordance to European Community Legislation, directive 69/75 allows all the Member States to establish Free Trade Zones within the European Economic Community (EEC) territory, but imposes upon them a uniform management of the areas, in order to pursue EEC aims as well as their own. The EEC›s biggest concern is to avoid diversions in the movement of goods as well as unfair competition.

main eu Policies – facilitation of fRee zones thRough customs PolicyThe EC has reviewed the 1992 Community Customs Code, which facilitates the establishment of free zones. The Modernized Customs Code was adopted in April 2008 and its implementing provisions were in place in all Member States by October 2013. The Union Customs Code (UCC) was adopted on 9 October 2013 as Regulation (EU) No 952/2013 of the European Parliament and of the Council. It entered into force on 30 October 2013 and repealed the Regulation (EC) No 450/2008 of the European Parliament and of the Council of 23 April 2008 laying down the Community Customs Code.

The UCC and the related delegated and implementing acts shall: streamline Customs legislation and procedures, offer greater legal certainty and uniformity to businesses, increase clarity for Customs officials throughout the EU, simplify Customs rules and procedures and facilitate more efficient Customs transactions in line with modern-day needs, complete the shift by Customs to a paperless and fully electronic environment, reinforce swifter Customs procedures for compliant and trustworthy economic operators (Authorized Economic Operators).

The modernized code is part of a new strategy for developing the Customs Union and focuses on simplifying the Code’s structure and decreasing the administrative burden for all parties involved. Some major changes include the introduction of EU-wide administrative penalties, progressive computerization of Customs procedures and formalities, a merger of Customs procedures and treatment in three categories (import, export and special procedures), as well as the abolition of Control Type II Free Zones.

main incentives obseRved in eu fRee zonesFree zone treatment applies to both non-community and community goods.

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Non-Community goods stored in the zone are considered as not yet imported to the Customs territory of the Community whereas certain Community goods stored in free zones can be considered as already exported.

Basic Incentives: Free zones are special areas within the Customs territory of the Community. Goods placed within these areas are free of import duties, VAT and other import charges.

To attract companies to a free zone, public authorities often propose several of the following incentives: First and foremost, companies may be attracted by the possibility to store imported

goods under beneficial Customs arrangements. Deferral of payment of taxes until the goods are actually used or re-exported can benefit companies› cash flow.

Another advantage for companies is the differential tax regime offered within the zone, mostly concerning tax incentives related to corporate or personal income tax and value-added tax on goods (VAT).

Thirdly, non-tax incentives such as public grants for developing human resources and R&D are important for companies, as is the potential promotion of land and building facilities at below-market rates by the authorities.

These benefits are finally enhanced by the advanced infrastructure often in place, in particular for those free zones that are conveniently located in, or close to, ports or airports.

On importation, free zones are mainly for storage of non-Community goods until they are released for free circulation. No import declaration has to be lodged as long as the goods are stored in the free zone. Import and export declarations have only to be lodged when the goods leave the free zone. In addition, there may be special reliefs available in free zones from other taxes, excises or local duties. These will differ from one zone to another.

guaRanteeing tRansPaRencyAs free zones mostly operate as specific entities within a larger administration, it is important that roles are clearly distributed. In the case of State aid for example, the host Member State needs to report to the European Commission on activity within the region, but is often dependent on auditing and reporting done by the region itself. This is a sensitive issue as some might perceive free zones as reducing trade in competing ‘normal’ jurisdictions, whereas, on the other hand, local constituencies could perceive enquires to be intrusive.

economic contRibutionWhile free zones are defined in many different ways, aside from the proper legal framework of incentives, they are believed to share a set of economic factors that contribute to their success. The factors attracting companies to free zones include advanced infrastructure, flexible regulation to accommodate different sectors, a convenient location for trade and other non-tax incentives.

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General economic contribution of free zones to the host country: increase in enrepot and transshipment trade; large infrastructure and other investments; increase in foreign capital investment; increase in export competitiveness; increased banking and insurance business; employment generation, direct and indirect; training of domestic labor in new skills; increase in utilization of domestic resources, services, and capital for export generation; development of marketing/sales opportunities for free zones and domestically manufactured products; transfer of management know-how; technology transfer; added port and transport revenues; transport cost saving; foreign exchange earnings as investments, salaries, and port or transport transactions.

successful examPle in eu – Polish sPecial economic zones3 The Special Economic Zones of Poland are very interesting in terms of preservation and extension of validity of the benefits offered to its investors after joining the EU. These benefits relate to exemption from corporate income tax and tax on salaries to users, which constructed commercial facilities in the amount of 30-70% of the total investment. Tax exemption depends on the development of regions in Poland where it is invested. Such benefits are provided on the territory of SEZ and are valid until the end of 2026.

Exemption in Corporate Income Tax (CIT) for legal entities or Personal Income Tax (PIT) for non-legal entities for investors who have obtained the SEZ permit 30-70%4 of capital expenditures or two-year employment costs. Incentives are valid till the end of SEZ existence, i.e. currently until Dec 31, 2026. On the territory holding SEZ status5, but in some cases also on private land that may be included in the SEZ6.

Today Polish Free Zones are operating very well as indicated by CAPEX and the jobs created. Fourteen free zones in Poland have 1,545 companies with 186,000 workers and a total investment of 20.4 billion euros.

fRee zones in non-eu countRies – seRbiaSerbia has 13 free zones that cover an area of 800 hectares and host 211 multinational companies. According to the Financial Times fDi, two Serbian zones are ranked at 41 and 48 in a Global Free Zones list.

In addition to the major benefits offered to users in the form of exemptions of Customs duties and VAT and by provision of infrastructural benefits, it also granted access to zones of free trade area and to a number of bilateral agreements (EU, CEFTA, EFTA, Russia, Belarus, Kazakhstan Turkey, the United States).

Investors are provided financial incentives for the creation of new jobs (2-10,000 euros per employee).

There is no VAT on energy for production companies. Another specialty that characterizes Free Zones of Serbia is a fast and

efficient Customs procedure. Therefore, Free Zones of Serbia generates continuous growth.

In order to successfully promote the free zone concept in Serbia and

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abroad, it established ‘a group of free zones and Customs warehouses’ within the Chamber of Commerce of Serbia. The ‘group’ also contributes to the creation of laws and regulations in this field.

Free Zones of Serbia has achieved significant results in terms of increase of inflow of foreign investments, value of turnover and exports, number of employed workers in comparison to the results achieved outside the teritory of the free zones in the country.

There is no VAT on energy for production companies.

T U R N O v E R I N S E R B I A N F R E E Z O N E S I N R E C E N T Y E A R S 2011 2012 2013 2014

turnover (€ bn) 1.3 2.5 5 5.5

By way of the implementation of certain tax exemptions valid up to the moment of accession of Serbia to European Union, simplification of application of VAT procedure, completion of the Master Plan of Free Zones and prediction assets for infrastructure equipment, Free Zones of Serbia will be more competitive than the free zones in its surroundings and continue to attract foreign investment and increase employment.

conclusionIn the European Union, most of the tax regimes applied are compliant with internal market and State aid rules. The measures in place are mostly meant to streamline Customs procedures among Member States but also underline the importance of sufficient regulatory oversight. Today, a common legal framework represents a Customs Code of the European Community (Union Customs Code).

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[1] Conference paper: XX International Scientific conference, Regional Development and demographic flows of South East Europe countries, June 2015, University of Niš, Faculty of Economy, Serbia“. Kostic D., Simonovic A., Stojanovic V.: Free zones of Serbia as a tool for attraction of investment and increase of employment, page 615-627.[2] Conference paper: XIX International Scientific conference „Regional Development and demographic flows of South East Europe countries, June 2014, University of Niš, Faculty of Economy, Serbia“. Kostic D., Simonovic A., Stojanovic V.: Free Zones of Serbia as a tool for attraction of investments and increase of employment, page 727-740.[3] Conference paper: XVIII International Scientific conference „Regional Development and demographic flows of South East Europe countries, June 2013, University of Niš, Faculty of Economy, Serbia“. Kostic D., Simonovic A., Stojanovic V.: Priorities of Development of South Part of Serbia – the case of Free Zone Pirot, page 739-750.[4] Dr Dragan Kostic (2008): Free production zones and industrial parks; Republic of Serbia, Zajecar, Megatrend university, Fakulty for management.[5] Dr Dragan Kostic (2011): The strategy of development of free zones in Regional Development, XVI 16th Scientific conferences, Regional development and demographic flows of south-east european countries,: 316 - 333. Faculty of Economics, University of Nis..[6] Dr Dragan Kostic (2006): Free zone law (Official gazette Rapublic of Serbia 62/2006) Serbian Government, Serbian Parliament[7] Willemijn de Jong (2013): Establishing Free Zones for regional development, Library of the European Parliament[8] Ernest & Young “Poland (2013) – A true Special Economic Zone[9] Free zones in existence and in operation in the Community (2014), as notified by the

biblioGraPhy

dr draGaN KostiC, CEO, Free Zone Pirot, Serbia.

In addition to the free zones in the EU member states, free zones exist in non-EU countries in Europe that have not yet implemented the Union Custom Code. The use of tax incentives in free zones is a measure that can be limited in time in case the non-EU country aspires to be part of the Union. Notwithstanding the obligation to apply the Union Customs Code, the specific characteristics of certain free zones in Europe dictate national laws on free zones Member States. The day of joining the European Union is the moment when a portion of the applied incentives for investors must be revoked. To what extent existing incentives will be eliminated depends on the outcome of negotiations with the EU, bearing in mind that future benefits provided by one country needs to be compliant with regional market principles.

In the end, free zones may provide a bridge to the future. Flexibility is possible without necessarily changing the rules for entire nations all at once. The platform of free zones provides the most expeditious and practical way to enhance flexibility in international trade and to increase the attractiveness of more countries for productive international investment.

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i N d i a

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iNdia has a federal setup. It comprises of 29 States and seven Union Territories. Many vital subjects of economic development such as land use, labor and power generation and distribution etc., are covered by a concurrent list of the Indian constitution, necessitating consensus between the State governments and Central government for any reforms on such subjects.

Similarly, the various power centers such as the Central government, State Governments and Local governments are empowered to legislate tax laws independently on subjects of their jurisdiction.

As the size and demography of each state is different and natural resources are not distributed evenly, the economic requirement of each state differs. Apart from this, parties with varying political and economic ideologies often run the State governments and the Central government. Thus, it makes it difficult to formulate a uniform economic policy binding all state governments for its implementation.

However, Special Economic Zones (SEZs) are the growth engines that can boost manufacturing, and services to augment exports and generate employment. Initially, the Government of India established seven free trade zones and export processing zones. The first one was established in 1965 at Kandla, Gujarat.

Various State governments have developed 11 zones thereafter. These schemes were functioning under the Customs/Central Excise regulations. Due to the paucity of resources with the government, these zones could not perform successfully. The total investment in these zones was $673 million, the direct employment the zones could generate was $0.013 million and exports made by the zones as of March 2006 was $3.8 billion.

A need was felt to encourage private investment in this sector by creating a comprehensive law addressing all aspects of zone development, monitoring and operations. As a result of this, Special Economic Zone Act 2005 and Special Economic Zone Rules 2006 were enacted. Both the Act and Rules came into effect with effect from 10 February 2006.

As of today, 10 out of 29 states do not have a SEZ presence. Similarly three out of the seven Union Territories do not have a SEZ preference.

Since bringing all economic zones under the SEZs scheme, it has created a clear character and identity across the country. The Special Economic Zones have two distinctive areas such as Processing Area and Non-Processing Area. The entire Processing Area is restricted and entry into this area is regulated by Customs through an entry pass system. The custodian of this area is the jurisdictional Development Commissioner of Ministry of Commerce and Industry, Government of India and it is under the administrative control of

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the Specified Officer posted from the Commissionerate of Central Excise/Customs. It is now treated as a foreign territory from the tariff and taxes point of view.

There are minimum area/built up spaces prescribed for various categories of SEZs. As private land holding is allowed in India, once the land is identified, the application is required to be made by the developer, in the prescribed form, to the Board of Approvals (BOA), Government of India in the Ministry of Commerce in New Delhi. The Board of Approval is an apex body consisting of officials from all relevant departments of Central Government and also of State governments.

A copy of the application is sent to the Principal Secretary – Industry of the state Government with all the supporting documents. The State government scrutinizes the applications and send its recommendation to the BOA at the Ministry of Commerce in New Delhi.

Upon receipt of the recommendation of the State government, the BOA will approve the proposals and issue a Letter of Approval (LOA) to the applicant. The applicant will accept the conditions of the LOA and send the land ownership/possession documents along with a non-encumbrance certificate from the State Revenue Department, certifying that the land is in the actual possession of the applicant to the BOA for notifying SEZ. The notification would be published in the official Gazette.

SEZs are the growth engines that can boost manufacturing and services to augment exports and generate employment.

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The Developer shall submit to the Board, the details of operations proposed to be undertaken by the developer in the SEZ for obtaining its authorization. The Development Commissioner, appointed by the Central Government, is the custodian of notified SEZ, even if it is developed by the private sector. The Commissioner is the authority for demarcating the areas falling within the SEZ.

The Special Economic Zone has Processing Areas and Non-Processing Areas. The Processing Area is for manufacturing goods, processing and providing services. The Processing Area is to be fully secured by boundary wall or wire-mesh fencing having a height of at least 2 meters and 40 centimeters above the plinth level. It is to have a single point of entry and exit and is physically controlled by Customs officials nominated under the overall control of the Development Commissioners. All the goods required for the authorized operations and admitted into the Processing Area would be entitled for exemption from Central and State taxes and duties.

The Non-Processing area hosts the social and commercial common facilities. These include supporting social infrastructure such as schools, educational institutions, hotels, residential buildings and hostels and recreation facilities etc.

The common facilities created for the use of SEZ developers and operators alone would be eligible for exemption from Central and State taxes and duties on goods used to create such facilities. The common facilities created for use by people other than SEZ developers and operators would not be eligible for any duty or tax exemptions on goods used for creation and maintenance of such facilities.

There is an exception to the SEZs for Information Technology/Information Technology Enabled Services, as far as the minimum area requirement and securing of the Processing Area etc. is concerned. The developer would develop the land and may construct buildings and create requisite infrastructure for establishing the SEZ, in accordance with the LA received from the BOA.

Apart from complying with the conditions and regulations stipulated by the Government of India, the developers/co-developers would also provide facilities for common use such as establishing offices of the Development Commissioner, Customs/Central Excise, bank counter, Customs clearance facilities, administrative back-up, security arrangements, warehousing facility and social amenities etc.

The Central government shall constitute an approval committee for each zone to offer single window clearance at a regional level. For the purpose of exercising its powers and performing its functions, the approval committee may invite to its meeting such persons as the committee deems fit, whose assistance or advice it may consider necessary.

The approval committee will consider applications for the procurement of each item required for development of the zone. All the inputs, approved by the committee, used for setting up the SEZ can be imported/procured

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All sale of goods and services from SEZs to domestic customers will be treated as import for the recipient.

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All sale of goods and services from SEZs to domestic customers will be treated as import for the recipient.

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indigenously without payment of Customs duty or domestic duties/taxes with an exception that if any social infrastructure is developed in the Non-Processing Area, for use by people other than the SEZ users, no duty concession is granted on use of inputs for development of such infrastructure.

The Unit Approval Committee will also consider applications from the Lessee of the Zone for setting up units for manufacturing goods and/or for providing services there-from. The formal letter of approval shall be issued only after the applicant by way of registered lease agreement/ lease deed from the Developer produces the proof of possession.

On approval of a proposal, a LA will be issued by the Development Commissioner specifying the items of manufacture, projected annual export and Net Foreign Exchange Earning for the first five years of operations, limitations if any on DTA sale of finished products, by-products rejects etc. The LA shall be valid for one year for Commencement of Production, which may be extended by one more year.

All capital goods, raw materials, components and all other items required by such units for production of goods or services can be imported or procured indigenously without payment of customs duty/domestic duties and taxes.

Profits generated by providing common facilities in the Non-Processing area to SEZ developers, operators or any other entities shall not be eligible for corporate tax (income tax) exemption.

While the developer will be eligible for direct tax (Corporate Tax) exemption for a period of 10 years, in respect of profits generated in the Processing area, the units will be entitled for corporate tax exemption on export profits for five years and 50% concession for the next 10 years subject to certain conditions.

All sale of goods and services from SEZs to domestic customers will be treated as import for the recipient, and all conditions of import as if it is imported from a foreign country are to be complied with, in addition to the payment of complete import duty as per Indian Customs Tariff.

As of now there are 437 proposals with formal approval by the Central government, out of which 348 zones are notified and out of which 202 are operational. It includes seven old zones developed by the Central government, 11 Zones developed by State governments and 184 operational zones developed by the private sector. Out of 202 operational SEZs, 117 are in the service sector and 85 are engaged in manufacturing various goods for export. The total investment made in these zones is $56 billion. The total direct employment generated by these zones is 1.35 million. The total export of goods and services made by these zones as of March 2015 is $77 billion. The total domestic sale by these zones is just $9 billion representing just 10% of the total production.

To conclude, the Special Economic Zones have contributed substantially for the economic development of the country ever since the SEZ Act and Rules were made operational from 2006.

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P. C. Nambiar, Chairman, Indian Council for Special Economic Zones, India.

Ever since the MAT is introduced on the SEZ developer, co-developer and units by the Central Finance Ministry, the SEZ investors have started looking for other avenues. Further, the reluctance of many State governments in formulating State SEZ policies to offer the intended facilities and benefits to SEZ developers and operators, have also killed the enthusiasm of SEZ developers and operators.

If the Central and State Governments offer conducive and stable economic policy support, the SEZ sector could be a great success.

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m a l a y s i a

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isKaNdar malaysia, With an area of 2,217 square-kilometers, is three times the size of Singapore and is the single largest development project ever to be undertaken in the region.

As envisaged by the Comprehensive Development Plan (CDP) launched in 2006, Iskandar Malaysia will be a place where living, entertainment and business would seamlessly converge in a vibrant and sustainable metropolis of international standing.

A great deal of careful planning has also gone into ensuring that the development would be sustainable, taking into consideration the direct and indirect needs of its respective stakeholders.

As part of the Indonesia-Malaysia-Singapore Growth Triangle, Iskandar Malaysia’s strategic location and proximity to some of the world’s most dynamic economies is a key differentiating factor for the development. Located at the crossroads of the important East-West trade routes, it is mid-way between the region’s two economic powerhouses, China and India, and is easily accessed by air, land and sea. Other advantages include a multi-lingual and educated work force and a vast land bank. It is also positioned as an international metropolis to decrease trade barriers and increase human mobility.

Since its official launch in November 2006, the vision of Iskandar Malaysia has gone off the drawing board and is rapidly being transformed into a next generation metropolis. With Phase 1 (2006-2010) completed, a critical mass has been established with the timely delivery of major infrastructure and several iconic investment projects.

Iskandar Malaysia has now progressed into Phase 2 of the Comprehensive Development Plan. Consistent with the Iskandar Malaysia vision of becoming “A Strong, Sustainable Metropolis of International Standing”, the development of the region is being undertaken upon five strategic pillars anchored on three foundations, as identified by the CDP.

These foundations for development are:1. Nation buildingDevelopment is consistent in spirit with national and state level plans and aspirations while aspiring to drive further innovation and reforms in the nation building process.

2. Growth and value creationDevelopment emphasizes growth, productivity and value creation in line with globalization and increased competition.

The catalyst of economic growth

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3. equitable and fair distribution among stakeholdersDevelopment is consistent with the tenets of growth with equity, to ensure that the local and Bumiputera population in particular participate in the growth and value creation in a meaningful manner.

The five pillars in the strategic framework for Iskandar Malaysia is a broad-based approach that encompasses the regulatory, social, physical, infrastructure and commercialization areas.1. international rim PositioningThe development of a regionally and globally competitive Iskandar Malaysia propelled by efficiency and innovation besides being factor and investment driven.

2. establishing hard and soft infrastructure enablersThe required infrastructure includes physical infrastructures such as roads, airport and ports, and public utilities, as well as security, river cleaning and proper sewerage. In addition, soft infrastructure such as fiscal and financial incentives, human capital, efficient and business friendly institutions are necessary.

3. investment in catalyst projectsCatalytic projects will help spur further economic activities in the region. This encompasses projects in logistics services, financial services, health and education services, agricultural, manufacturing, leisure and tourism, creative services and emerging technologies.

4. establishing a strong institutional framework and the creation of a strong regulatory authorityThe creation of an Authority to plan, facilitate approvals through a one-stop center and address social development. The Authority is also tasked with ensuring approval times and government delivery systems especially in respect to investments are significantly improved in order to be internationally competitive.

5. ensuring socio-economic equity and buying from the local populationThe people in Iskandar Malaysia fully benefit from the region’s development, through property and equity ownership, local and Bumiputera participation in various business and economic activities, income generation programs for the youth and abundant employment opportunities generated from the development within the region. Through a development approach that is consistent with the five strategic pillars and grounded upon the three foundations, it is envisaged under the CDP that Iskandar Malaysia will make a significant impact on several key economic fronts.

The roles and responsibilities of the Iskandar Regional Development Authority are:1. PlanningTo integrate and recommend planning policies and strategies of the Federal Government, State Government of Johor and local authorities relevant to enhance Iskandar Development Region’s well-being.

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To identify and develop strategies for infrastructure, skills, science and technology research in the development of lskandar Malaysia.

2. PromotionTo promote lskandar Malaysia to the general public and potential investors – local and overseas. To drive, coordinate and monitor the development of economic sectors, required enablers and social infrastructure.

3. FacilitationTo provide consultation and information on investing in lskandar Malaysia.To act as the principal coordinating agent on behalf of relevant government agencies in relation to receiving, processing and expediting the requisite approvals for investors in Iskandar Development Region. To assist existing investors in the resolution of issues affecting their business environment.

Over a 20-year period until 2025, the region is expected to record a GDP growth of 8% per annum, resulting in nominal GDP of $93.3 billion in 2025 and GDP per capita of $31,100. The region will have a total of 1.43 million jobs for a population that is expected to reach three million in 2025. The rest of Johor will also benefit with significant spillover effects.

The successful development of Iskandar Malaysia will enable the people within the region and its surroundings to enjoy a better quality of life, with environmental preservation, learning and knowhow, social cohesion, better income and wealth distribution, and greater opportunities for future generations to advance through better education, healthcare, employment and business potential.

Pinewood Iskandar Malaysia Studios in Nusajaya

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Iskandar Malaysia

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economic and investment uPdateseconomic clustersIn order for Iskandar Malaysia’s to achieve its vision to be the “Strong and Sustainable Metropolis of International Standing” by 2025, the region is expected to attract an investment target of RM383 billion by 2025. The following nine key economic clusters will drive investment in the region: 1. Financial services2. Creative3. logistics4. tourism5. education6. healthcare7. electrical and electronics8. Petrochemical and oleo-chemical9. Food and agro processing.

investmentIskandar Malaysia has secured total cumulative committed investments of RM166.10 billion or equivalent to $46.14 billion from 2006 to March 2015,

Singapore, China and USA are the top three foreign investors in Iskandar Malaysia as of March 2015.

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with manufacturing and property sectors being the main contributing sectors.Out of this total cumulative committed investment of RM166.10 billion,

47% or RM78.53 billion has been realized on the ground up to March 2015.In order for Iskandar Malaysia’s to achieve its vision to be the strong and

sustainable metropolis of international standing by 2025, the region must achieve its targeted cumulative committed investment of RM383 billion in the year 2025.

Singapore, China and USA are the top three foreign investors in Iskandar Malaysia as of March 2015.

Investors who are interested in investing in Iskandar Malaysia will be eligible for investment incentives based on the fulfillment of a set of criteria.

featuRed sectoR uPdateseducationEducation is a critical component to human capital, essential for the development of a globally competitive and creative workforce to service knowledge intensive industries and spur innovation and high value-added activities.

In Iskandar Malaysia, the education services sector is one of the targeted nine economic clusters offering excellent investment opportunities. This sector will contribute to the development of human capital resources and industry capabilities.

healthcareInternationally, Malaysia is recognized as having raised fundamental health indicators close to developed country figures.

Over the last decade, Iskandar Malaysia has enhanced the development of quality healthcare services and facilities and even advanced its healthcare services exports to ASEAN markets like Singapore and Indonesia.

tourismTourism is a key driver to development and a major creator of jobs across national and regional economies, including spurring the growth of related sectors, such as retailing, hotel and resort operations, food manufacturing, construction and services.

In Iskandar Malaysia, the services sector is identified as the fastest growing industry over the next 20 years. The contribution of the services sector to the GDP is expected to increase from 50% in 2005 to 58% in 2020.

For the tourism industry, GDP contribution is expected to increase from 8% in 2005 to 12% in 2025 with an average growth of 9.8% per annum and creation of 16,340 jobs.

the catalyst of economic gRowthcreativeRecognising Malaysia’s aspiration to diversify the economy to high value-added activities, Iskandar Malaysia has identified the creative sector as one

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of its economic clusters. The creative sector represents new and exciting opportunities for Iskandar Malaysia to transform itself and Malaysia into a high income, value adding and innovative economy. The creative sector requires inputs from a host of industries; it has the potential to create a huge multiplier effect to the economy.

For example, TV production not only creates jobs for directors, actors and crew members, it also creates jobs and income for the Small and Medium Enterprises (SMEs) and other sectors such as hospitality, food and beverages, building materials, set design and electrical installation services.

moving forwardMoving forward, in order for Iskandar Malaysia to achieve its vision by 2025, the region has adopted the Iskandar Malaysia’s Smart City Framework of which the framework talks about the six dimensions defined as the Iskandar Malaysia’s Smart City Framework.

The six dimensions defined as the Iskandar Malaysia’s Smart City Framework are as follows:1. Smart economy2. Smart governance3. Smart environment4. Smart mobility5. Smart people6. Smart living

Iskandar Malaysia is also committed to a holistic approach towards green economic growth to ensure sustainability and alignment with Iskandar Malaysia’s vision.

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Iskandar Malaysia is also committed to a holistic approach towards green economic growth to ensure sustainability and alignment with Iskandar Malaysia’s vision to become a strong and sustainable metropolis of international standing. The Low Carbon Society Blueprint for Iskandar Malaysia 2025 has been launched at the United Nations Framework Convention (UNFCCC) on Climate Change or Conference of Parties [COP18] (Doha, Qatar) in November 2012.

Additionally, under SE4ALL – Sustainable Energy for All initiative (under Global Energy Efficiency Accelerator Program), Iskandar Malaysia has been selected as 1 of 10 cities/regions, recognized at the United Nations Climate Summit in September 2014.

On the urban connectivity and mobility, the region will improve its public transportation network, which will cover the Bus Rapid Transit (BRT), Rapid Transit System, Water Taxi & Ferry services as well as High Speed Rail (HSR).

The development in Iskandar Malaysia is on track and moving forward, will focus on inclusiveness, sustainability and high income as Iskandar Malaysia moves closer towards a strong and sustainable metropolis in the future.

Above all, enhanced collaboration between stakeholders including state and federal governments, the business community and the community at large is vital in making sure that all play their roles in realizing the vision of Iskandar Malaysia that will benefit the various stakeholders, the region and the nation.

ismail ibrahim, Chief Executive, Iskandar Regional Development Authority, Malaysia.

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o Hernando Jose Gomez, Independent Consultant and Former Director of the National Planning Board of Colombia in his article argues in favor of a well- directed strategy to promote participation of companies in FZs in the activities of global value chains.

o In a case study for the MENA region, Klaus HacHmeier, Economist, OECD France, discusses the relationship between FZs and GVCs and how the former can integrate with the latter.

o isidoro Hodara, Vice President of Zonamerica Uruguay, crystal gazes into the future of FZs and presents a new model for economic diversification, as part of panel discussion.

o The positive relationship between logistics performance and international trade is explored by liliana rivera, Research Affiliate MIT Center for Transportation and Logistics, USA.

o Chief Economist, World Trade Organization robert b. Koopman in his article provides an update on the global trade agenda from a WTO perspective.

o daniel Griswold, President, National Association of Foreign-Trade Zones Washington, D.C. shares the state-of-the-art US free zones program that entices not only high-tech manufacturers but also, more recently, wholesale distribution.

o Alternative site framework and automated customs framework as part of the future of US FZs is discussed by Jan Frantz, Executive Director, BC CAL KAL Inland Port Development Corporation.

o asHisH sHaH, Director of Country Programs, ITC Switzerland, in his article highlights the positive nexus between export performance and FDI inflows of foreign direct investment and says as MNCs move to developing countries in search of cheap labor, GVCs are evolving.

Given that the idea of FZs is rapidly taking deeper roots around the world, it is important to crystal gaze the way forward. FZs have to grow, expand, diversify, stay competitive and compliant, deliver

enhanced stakeholder value and become sustainable business entities. It is in this context that logistics efficiencies and more particularly,

global value chains (GVCs) assume increased relevance.

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in tHe last 50 years, globalization and international trade patterns have changed dramatically. In the 20th century, goods and services traded worldwide were usually final products fabricated entirely within a country, or, to a lesser degree, intermediate inputs and raw materials imported for local processing.

Nowadays, trade in intermediate goods and services are greater than that of final goods, and the importance of intra-industry trade is rapidly growing. From referring almost exclusively to national sectors or local clusters, analysts are increasingly focusing on global value chains.

As the Organization for Economic Cooperation and Development, World Trade Organization and World Bank describe it, international production trade and investments are organized within so-called global value chains, where the different stages of production processes are located across different countries. The whole process of producing goods, from raw materials to finished products, is increasingly carried out wherever the necessary skills and materials are available at a competitive cost and quality. The study estimates that income generated within global value chains has doubled, on average, over the last 15 years, and is expected to grow at an ever steadier pace in the future.

In this globalized business structure, the different activities within a value chain are developed in multiple locations for efficiency and competitiveness purposes. These activities include design, production of components, assembling, marketing, customer service and R&D, among others.

The increased relevance of global value chains in international trade is altering the way businesses are carried out. It is also changing the way globalization is understood.

In this new scenario, imports are more valuable than many countries have perceived them – as they represent inputs for a higher value-added exporting sector – and exports no longer represent a 100% value added contribution to the economy. Regarding this last statement, the United Nations Conference on Trade and Development, for example, estimates that, on average, foreign value added accounts for about 28% of the content of global exports. This share, as they find, can vary considerably by country and industry.

One of the most renowned and cited global value chain examples is the iPod. The hard drive is produced in Japan (32% of the value added of the product), the memory card in Korea (1% of value added), the processors (4% of value added) and the design (27% of value added) is developed in the United States, batteries in various countries (11% of value added), assembly

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in China (2% of value added), and distribution in multiples countries all over the world (27% of value added).

As the iPod example illustrates, many goods and services consumers purchase nowadays are made of components and inputs from many different countries. There is, in a sense, a profound interest from companies and also from governments around the world to participate in global value chains. Becoming a part of a global value chain implies that a company acquires an international scope and a potentially huge global market.

One way to approximate the significance of global value chains in a given country is to jointly analyze the size and importance of exports of intermediate uses in third country exports, the imported inputs used in exports, and the export of business related services. Such analysis indicates that open and efficient economies such as those of South Korea, Germany, United Kingdom, France and the United States are integrated into global value chains, as well as countries that provide raw materials or specialized services, such as Russia, Saudi Arabia, México, Turkey or India.

For companies to successfully be a part of a global value chain, they must be highly competitive. Similarly, governments that wish to promote the participation of firms located within their territory in global value chains must provide an internationalized competitive business environment. This requires not only horizontal strategies such as guaranteeing sound and stable regulation, macroeconomic stability, high quality infrastructure and logistics services, low tariffs, elimination of trade barriers, trade promotion agreements, and competitive financial and labor markets, among others, but also vertical strategies aimed specifically on promoting the global outreach of companies.

Hard drive made in Japan

Memory card made in Korea

Assembled in China

Designed developed in US

Processors made in US

Distributed in multiple countries

Batteries made in various countries

32%01%

02%

27%04%

27%

11%

Global value cHain oF ipod


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A useful instrument that helps spearhead a country´s participation in global value chains are free zone regimes. Free zones are areas inside a country where companies benefit from tax and Customs incentives, among others. Free zone regimes have extensively been established in many countries worldwide to develop strategic sectors or clusters, promote business sophistication, increase exports and develop strategic territories.

The number of countries with free zones has increased from just 10 in 1970 to 135 in 2006 . In total, there are more than 3,500 free zones in the world, with approximately 66 million people employed in them. In many countries located in regions such as Central America and the Caribbean, Asia and the Middle East, free zones have been a crucial factor in the emergence of new sophisticated sectors and in the attraction of foreign investment.

F Z s p e r c o u n t ry / p e r c e n ta g e o F e m p l oy m e n t i n F Z

ColoMBiA

DoMiniCAn RePUBliC

PAnAMA

niCARAgUA

gUATeMAlA

HonDURAS

el SAlvADoR

CoSTA RiCA

109 Fzs/0.1%

53 Fzs/0.4%

17 Fzs/1.3%

49 Fzs/1.9%

19 Fzs/0.1%

43 Fzs/1.7%

17 Fzs/1.3%

21 Fzs/1.3%

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Free zones aid job creation. In Asia for example, there are more than 50 million employed in free zones, while in Latin America there are approximately 760,000 working in the free zones. In countries such as Nicaragua, Honduras, Dominican Republic, Panama, El Salvador and Costa Rica, employment in free zones represents between 1% and 2% of total job creation (see graphs).

Companies located in free zones are, by definition, international in scope. They are, therefore, natural candidates to participate in activities of global value chains. Free zones were initially perceived as areas with tax and Customs benefits where strategic sectors – especially export-based – could thrive. Within this framework, efficiency, economies of scale, benefits from cluster agglomeration and logistics – rather than just differences in tax regimes – have become key drivers of productive diversification.

There are several examples of global value chains having part of their activities being developed in free zones. The Tema Free Zone in Ghana is a good example of a special economic area that boosted an underdeveloped region and promoted the growth of small and medium sized companies, through intra-industry exports, in this case, of cocoa and textiles. Increasingly, companies in the Tema Free Zone are generating more value added in these sectors. In Morocco, the Tangier Automotive City and the Atlantic Free Zone offer tax and other incentives to promote investments in the auto-parts industry. Currently, these free zones provide spare parts to Renault´s global network.

China is an example of a country that both actively seeks to participate in global value chains and promotes the establishment and growth of free zones in its territory. Free zones in China, for instance, transship intermediate products from free zone to free zone, through Hong Kong. Companies in Chinese free zones are also key suppliers of global value chains generated by products sold by South Korea´s Samsung Electronics and LG Corporations.

Free zones, especially those of emerging economies, should evolve from participating in global value chains exclusively through assembly and simple processing activities, to also offering more sophisticated technological, financial and logistics services.

Nowadays, in an ever-changing international environment, the role of free zones becomes more complex. Governments should, not only maintain tax and Customs incentives for companies in free zones, but also promote complementary actions to increase their firm´s efficiency and international competitiveness.

Among others, governments and free zone operators should: (i) Promote research and development incentives and facilities in free zones.(ii) improve the competitive environment for companies located in free zones, in areas

such as infrastructure and logistics, regulation, cost and quality of utilities, labor conditions, among others.

(iii) Promote training and skills development programs for employees of companies located in free zones.

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(iv) Provide research and information on global market trends and opportunities to firms in free zones.

(v) organize integration initiatives, such as trade fairs, business forums, among others, for companies in free zones.

(vi) Promote a greater and better use of information and communication technologies in free zones.

(vii) increase communication and joint initiatives among free zones in different countries.(viii) Promote synergies between companies within a free zone, for example for shared

services and facilities, joint research and development projects, among others.

Hernando José Gómez, Former Ambassador, WTo, Colombia.

Moreover, since global value chains are altering the way international trade is perceived and represent a great opportunity for growth and business development and sophistication, there must also be a directed strategy to promote participation of companies in free zones in activities of global value chains. There are ample varieties of economic activities that are carried out in free zones. Globally, you can find free zones in logistics, industrial parks, assembly, specialized services such as health or tourism etc. Among these, industrial parks and services-based free zones are – and will be –crucial for global value chain insertion, as companies in these locations may offer complementary supply solutions to lead firms or final buyers of the production chain.

This requires a joint effort between national and local governments, free zone operators and companies, to: (i) identify opportunities in global value chains (ii) seek and contact key players (iii) establish information systems for companies to have access to specialized clients and suppliers around the world (iv) inform and insure the compliance of international quality standards by companies in free zones and (v) lead marketing campaigns to position local suppliers in global value chain markets.

Globalization is evolving to a state in which all goods and services will involve a complex international process of multi-country company interactions and in which global value chains and intra-industry trade will increasingly transform international trade patterns. In this scenario, free zones have the potential and opportunity to become key catalysts for businesses in this changing environment.

c o u n t r i e s W i t H F Z s1970 101985 461990 602006 135

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Global value cHains (GVCs) are a defining feature of the current wave of globalization and a reflection of the increased degree of interconnectedness of economies. But not all countries, nor all firms within countries, participate in and benefit equally from GVCs.

The Organization for Economic Cooperation and Development (OECD) is exploring the determining factors, economic effects and policy implications of GVC participation across developing countries in five sub-regions in Asia, Africa and the Middle East. The study has shown that many developing countries are increasingly involved in GVCs and that connectivity between the different regions has increased over time. For example, Southeast Asia is an increasingly important destination for exports of intermediates from Africa, while the Middle East and North Africa (MENA) region has become a major destination for intermediates produced in South Asia.

Participation in GVCs is also found to bring about economic benefits, in terms of productivity, sophistication and diversification of exports. Many of the success stories across the sub-regions are linked to positive effects from sourcing imported goods that are used to produce exports.

The important question is how free zones can be used to exploit and further strengthen economic benefits, and how free zones can be tools for “upgrading” in GVCs. Often this concept has been seen as the need to capture a growing share of domestic value added in exports or as targeting

free Zones, global Value Chains: a Case Study for the MeNa region

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more “sophisticated” products or production stages. However, the volume of the activity matters as much, or even more, than the domestic value added share or sophistication – important benefits can accrue from specializing in less sophisticated assembly activities and performing them on a large scale.

The evidence tends to show that the countries, which have grown their domestic value added in exports, have been those whose foreign value added has also grown the most. This suggests that the role of policy is not to increase the share of domestic content in particular industries. Rather, it is to support a general commercial environment that increases the value of exports into GVCs, including through enabling access to imports of intermediate inputs. Recent OECD studies have indeed highlighted the positive effects of trade policy and investment openness to GVCs. In this context, free zones should encourage stronger integration in forward and backward linkages of processed products, but also maintain a high degree of openness to global markets.

oeCD work oN free ZoNeSThe OECD has worked on economic zones in the MENA region since 2005, by analyzing trends in economic zones and by promoting dialogue between policy makers and practitioners from different MENA countries.

Some of the issues that the OECD has dealt with, inter alia, include how free zones could be used to promote structural change and be integrated

The OECD provides a forum in which governments can work together to share experiences and seek solutions to common problems.

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into the economic policy or development strategy of a country; how sector-specific zones can provide targeted services; how free zones could be integrated into economic activities of the rest of the economy, as well as questions of responsible business conduct and of using PPP (Public Private Partnership) models for free zone development.

In this context, the OECD has worked with a number of countries in the MENA region and beyond with significant contributions to: economic analysis (e.g. sector competitiveness analysis); assisting in setting up legal frameworks and regulations for free zones; creating an institutional support structure; aligning and integrating the free zone strategy with national economic strategies and goals; and supporting pilot projects and assisting in the free zone implementation process.

OECD’s Handbook on Special Economic Zones in MENA analyzes the status and trends of Special Economic Zones (including free zones) in the MENA region, identifies best practice concepts, highlights constraints and challenges, and focuses on the future of Special Economic Zones in the global economy.

abouT The oeCDThe OECD is an international organization with currently 34 member states and is based in Paris, France. Its mission is to promote policies that will improve the economic and social well being of people around the world. The OECD provides a forum in which governments can work together to share experiences and seek solutions to common problems. The OECD works with governments to understand what drives economic, social and environmental change. It measures productivity and global flows of trade and investment, and analyses and compares data to predict future trends. The OECD sets international standards on a wide range of things, from agriculture and tax to the safety of chemicals. The OECD is increasingly working with non-member countries. In the MENA region, it has been active through the MENA Initiative on Governance and Investment.

Klaus HacHmeier, economist, oeCD.

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looKinG For tHe horizon in strategic terms, there is a need to ascertain trends in foreign trade that may impact on the future of free zones.

We will examine three trends in international trade that could have a significant impact on free zones:

The future of free Zone:Towards a New Model for economic Diversification

The unprecedented expansion in trade

in tasks

The prospects for negotiations to regulate

international trade in services

impact of increasing global

connectivity

A) Expansion of international trade in tasks in the case of manufacturing, the extraordinary expansion of international trade

in tasks was illustrated by cost and country of origin structure of a popular toy. in the case of services, embedded or not in trade in goods but always acting as

enablers of trade in goods, the illustration was provided by the production of the Texas instruments chip TCM9055, benefiting from substantial value-added inputs by services from a diversity of countries into the value chain.

This phenomenon has led to the blurring of the country of origin concept, as the we exchange goods that could be described as “made in the world”. This was illustrated by an airplane brochure tersely stating “Final assembly of this aircraft was completed in the USA.”

b) Prospects for negotiations to regulate international trade in services They may introduce for trade in services additional disciplines, perhaps along

the lines of those already enshrined in rules for goods, including those related to exporting subsidies.

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They will probably emerge from “plurilateral” instead of multilateral negotiations. At present, there are at least three such negotiations involving disciplines for

services: the TiSA (Trade in Services Agreement under discussion between approximately 60 countries that represent the majority of global trade in services), the TPP (Trans Pacific Partnership) and the TPiAT (involving countries in the north Atlantic basin).

it will not be an easy task for many countries, even to those who are not participating in such negotiations, to dismiss their impact in their own service economy including, whenever applicable, in their free zone regimes.

c) The impact of increasing global connections global flows of trade, finance, people and data continue to expand at an

increasing rate. global flows contribute $250-$450 billion to yearly global gDP growth, with highly

connected countries seeing 40% more gDP growth that the less connected ones. Free zones are uniquely poised to channel this increasing flows of goods,

services and financial flows.

No one can be sure as to the precise timing of these events and the scope and nature of its impact, in free zones around the world. But there is little doubt that some considerable impact may be expected for trends such as those highlighted in this introduction.

n Free Zones are key policy instruments for countries in the developing world The number of countries applying the Free Zones instrument has multiplied by

three between 1985 and 2006. The number of Free Zones has also multiplied. About 20% of the world’s free

zones are in latin America. employment in Free Zones has grown exponentially. Free Zones should become centers for cluster development and entry into

global value chains and promote sophisticated and strategic export-based economic activities.

in the Colombian experience, Free Zones generate 4 to 5 times tax revenue for each dollar of foregone fiscal income.

n Free Zones in Latin America and Asia have different objectives, but both are crucial for development While in latin America, the stress is on product diversification, in Asia free

zones are more often used as an instrument for promoting development of sectors and/or regions.

There is usually a higher level of government intervention in Asia than in latin America. While in Asia there is more flexibility regarding Free Zone territories, in latin

America the regimes are more location-based. Free Zones in Asia tend to receive more sector or region based incentives than

is awarded in latin America.

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SMEs benefit from the Free Zone environment. Free Zones and their tenants can take advantage of the flexibility characterizing most SMEs. SMEs are the backbone of most economies and have more flexibility to adapt to changing market requirements. There are diverse new ways to collaborate among SMEs, not limited to traditional means but also through virtual ways such as through crowd-sourcing.

Free Zones can act as incubators supporting small and medium firms through the pre-incubation, incubation and post incubation phases. The Free Zone has to add value for the developer, the tenants and the host country in order to satisfy the expectations from all stakeholders.

Fluent dialogue and transparent relations with governing bodies is crucial for the future development of Free Zone regimes. The NFTZA has obtained regulatory progress through cooperation with the public sector and this fact contributed significantly to the development of the Foreign Trade Zone regime. Although FTZs were created in 1934, not much growth was accomplished until changes in the regulatory environment were introduced. For example,

SMEs are the backbone of most economies and have more flexibility to adapt to changing market requirements.

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a Customs ruling dated 1980, for which the NFTZA had advocated, was important to foster FTZs. As a further example, in 2009 another regulatory change, also proposed by the NFTZA, helped satisfy the need for increased flexibility and reduce the barriers to small and medium enterprises. In all these cases, there was a degree of dialogue between the private and public sectors that allowed for the optimization of FTZs. The future should include further instances of dialogue and cooperation to face the changing world of international trade. This experience shows how the private sector achieved recognition and gained a prominent voice in trade policy and regulations. The future will reinforce the component of full compliance and layers of safety and security monitoring will bring efficiencies to both regulators and FTZs.

conclusionsThere was a large shared consensus on basic issues such as:• Professional training programs and research and development facilities should take place also

inside Free Zones• Stronger strategic communication has to be improved between Free Zones all over the world• Joint projects and investments between Free Zones should be fostered to develop regional and

international value chains• Fluent dialogue and transparent relations with governing bodies will have to increase in the future• It will be increasingly significant to develop synergies between companies within a Free Zone and

between Free Zones• Free Zones must be attractive for businesses in order to interest investors in sophisticated and

strategic export-based activities• SMEs are important employment generators. Taking the free zones trend in clustering into

account, this aspect has even more relevance as it could lead to the creation of innovation hubs

isidoro Hodara, vice President, Zonamerica Uruguay.

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A region that aims to be a key player in international trade needs to have proper logistics support.

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Free trade zones (FTZs ) around the world offer several advantages. These advantages can be divided into economic and logistics incentives. Economic incentives include preferential tax rates, special corporate and financial rules, and preferential labor and immigration conditions; on the other hand there are advantages related to logistics, which come as a result of being located in competitive locations, with reliable infrastructure and operational advantages. Logistics incentives are going to play a key role for the future of free trade zones.

The role of logistics is to help companies ship their products to other countries with efficiency and timeliness, so there is a positive relationship between logistics performance and international trade. The logistics sector has a direct impact on the competitiveness of regions because even if companies are producing goods efficiently and at low cost, by the time those products are shipped to other countries they may lose their competitive advantage because of inefficiencies in infrastructure and transport. Thus, a region that aims to be a key player in international trade needs to have proper logistics support.

The increasing trend of globalization and international trade has gradually changed logistics operations, increasing the importance of node-to-node logistics. The nodes of the global value chain, also called logistics clusters, are geographic locations where shipments arrive from different places and with multiple destinations to be shipped to. These shipments are transferred from one mode of transportation to another, for consolidation, deconsolidation and transshipment. Logistics clusters comprise three types of logistics firms: logistics services providers, such as 3PLS; logistics divisions of industrial firms such as the distribution centers of manufacturing firms; and companies with logistics-intensive operations such as automobile manufacturers or bulk commodities distributors, for whom logistics represents a large part of the cost1.

Logistics clusters facilitate efficient logistics operations and involve significant capital investment. Such is the example of the Dallas Logistics Hub that is being developed with an investment of $500 million ($113 million from public sources)2. The hub is expected to create 60,000 jobs with an estimated economic impact of $68.5 billion to the region by 20353. The most successful logistics clusters around the world exhibit five common

free Trade Zones and Logistics

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factors The popularity and success of logistics clusters in the world may be the result of the specific advantages that they provide to companies and regional economies4. Clustered companies face transportation cost reductions since the higher cargo volumes entering and leaving the cluster allow a higher utilization of larger conveyances. Agglomeration also promotes a more frequent use of the transportation services and the creation of direct connections with a broader range of destinations. Thus, the companies in the cluster are able to offer better services to their clients and enjoy economies of frequency.

Co-located companies collaborate by sharing transportation capacity, and resources like equipment, warehousing space and employees. For instance let’s look at the case of Inditex (Zara), a clothing retailer, and Caladero, a fishing distributor company, both located in the Zaragoza, Logistics Cluster in Spain. They agreed to collaborate: Indetex sends clothes by plane to South Africa while Caladero brings fresh fish to Spain on the way back and so on. In Atlanta’s logistics cluster SC Johnson, a manufacturer of household cleaning products, and Energizer, a batteries manufacturer, share transportation

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FigURe 2

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capacity. Both companies have distribution facilities in Atlanta’s logistics cluster, specifically in Fairburn, Georgia, and both ship their products to Vero Beach where CVS, a household, beauty and health care retailer that orders products from both companies, has its distribution center. SC Johnson used to ship 20,000 pounds of freight per shipment once a week separately and Energizer used to send 9,000 pounds of freight weekly as well. Both companies decided to collaborate and share the transportation capacity of a 40,000 pounds load truck keeping their shipment frequency to the CVS distribution center in Vero Beach while reducing transportation costs. Nowadays, CVS sends the order for shipment on the same day for both companies and receives a single shipment with products from both companies at its distribution center5.

Resource sharing in terms of workers and warehouse space within the cluster is demonstrated by Vermont teddy bears, a handcraft teddy bears manufacturer that is co-located in Louisville, Kentucky. The company faces a peak in demand a week before Valentine’s Day and in order to cope with the demand they use warehouse space and employees from neighbor companies to manufacture, pack and store the teddy bears. Moreover, UPS Supply Chain Solutions’ skilled workers are shared within the logistics cluster in Louisville. Their staff works at the companies for the period of time they need to complete designated tasks. For example, if the UPS worker finished packing the products of a company, they can be transferred to help another firm right afterwards even though they were in the middle of the shift. This is the benefit of locating logistics related facilities in proximity to others. Companies co-located in clusters are able to approach cost-and-time-efficient solutions through collaboration.

Information sharing, another kind of resource sharing is exhibited in Air Logistics Park Singapore. DHL, the largest logistics operator, and UPS, an important package delivery company and supply chain management solutions provider, have their facilities and operations. The clustered companies shared knowledge when DHL transferred a contract of regional delivery handling for Phillips Health Care, a health care solutions provider, to UPS. The attitude of each company towards the other exhibited professionalism and cooperation. Even though DHL and UPS are competitors, they worked jointly and shared information to ensure a smooth transfer of operations with the common goal of maintaining customer satisfaction during the process and avoiding service disruptions6. The geographical proximity fostered the transfer of knowledge regarding special requirements, hours and specifications of operation and helped the three companies adjusting to the change.

Companies in logistics clusters also experience higher levels of value added services, of which there are several examples. As for returns and repairs, Flextronics, a supply chain solutions company allows customers to send broken computers until 8 pm through FedEx, which are repaired in their hub in Memphis overnight and shipped back in the morning, so that the repaired computer is back by early morning.

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Another value added service exhibited in higher levels in clustered companies is the customization and postponement. For instance, 1-800-FLOWERS.com , a floral and gourmet foods gift retailer, receives late orders for bouquets, organizes and arranges them at night and they are sent the day after, so the significant other of the client can receive the bouquet at 8 a.m. Being located in the Miami American Airlines hub allows the company to offer this value added services. Moreover, Sportech, a sporting goods retailer, in Spain benefits from having its facilities located in a cluster. The company waits for the biggest championships results and winners to arrange kits of sporting goods to satisfy their customers’ demand. The availability of different transportation and carrier options in the cluster enables the firm to offer personalized kits depending on the latest demand trends.7

Kitting is a type of value added service performed in logistics clusters. UPS Supply Chain Solutions, a company in Louisville, handles the logistics basic operations of Nikon, a camera maker company; they perform activities like transportation and Customs brokerage. However, when the products arrive at the UPS Solutions Center in Louisville they are far from ready to be exposed on a retailer’s shelf. The logistics service provider performs value-adding activities by kitting cameras with chargers, batteries and information on discounts. Also they repackage the products to follow each retailer’s requirements allowing Nikon to save time and reduce costs of carrying finished inventory while increasing their flexibility to cope with varying demands from retailers and customers.

The retail display preparation is a different value-adding service that is enhanced in logistics clusters. In Alliance Texas, Exel a co-located company has developed an initiative to improve the retail displays of the clustered companies. Retailers often have certain requirements for product displays. Exel arranges multiple face displays for other companies within the cluster and allows them to select the products and correspondingly suitable faces that meet retail and company needs8. These are just a few examples of innovative initiatives that improve supply chain operations in logistics clusters.9

As for benefits for regional economies, logistics clusters are “employment engines” not only more blue-collar jobs, but also white-collar jobs given its relation with information and communications technologies. They also generate jobs at all levels and in different sectors given that logistics plays a supportive role to other industries.

The regional impact of logistics clusters may be extended to increasing education and training the local workforce. The Alliance Texas initiative is to create a training center within the park. With the local community college they created the Tarrant County College Corporate Training Center, where people are trained to receive foundation-level certified logistics associates and midlevel certified logistics technicians degrees. This strategy ensures a skilled labor pool available for the logistics park and increases the workers skills, value and upward mobility possibilities.

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Furthermore, employees in clusters enjoy higher levels of upward mobility, because logistics is a sector that recruits people with low levels of education and offers them the opportunity to progress in the labor market as it values “on the floor” experience. UPS is an example of this phenomenon; employees start driving trucks and may be progressively promoted until they gain enough experience to reach higher positions.

The logistics industry offers higher wages than other comparable industries. Low-skill workers are in demand for hotels, retail, Indian gaming, manufacturing, construction and transportation and logistics. Hotels, retail and Indian gaming traditionally offer salaries of $15 per hour, while the manufacturing, construction, transportation and logistics industries pay $20 per hour. Additionally the logistics sector wages are known to be competitive when compared to the manufacturing sector.10

The role of logistics is to help companies ship their products to other countries with efficiency and timeliness.

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Some authors have mentioned a positive relationship between logistics clusters and free zones11, specially a high correlation between the location of logistics clusters and free trade zones in the United States12 (See Figure 2). This is expected given that logistics clusters are centers of international trade that may comprise one or more free trade zones, while free trade zones concentrate firms and contribute more than 30% of the global trade.

The Alliance Texas Park is a logistics cluster where 56% of the total space has been designated as a Foreign-Trade Zone with the economic benefits provided by these areas. It has on-site examination stations, free trade zone consulting and services. Additionally, Alliance has a Triple Freeport Tax Exemption enacted by the three taxing entities: city, county and the school district. If a company’s warehouse is located in Alliance, its inventory movements in and out of Texas are tax exempted within the first 175 days from the initial time of arrival to Texas. This benefit provides enough time for companies to store, assemble, process, manufacture or service their inventory in a cost-efficient manner and demonstrates the government’s support toward the logistics hub development. The Alliance Logistics Hub has the characteristics of both free trade zones and successful logistics clusters. In this sense, free trade zones could also play the role of nodes of the logistics network and provide similar benefits to those that logistics clusters offer to companies and regional economies. Free zones could,

UPS employees start driving trucks and may be progressively promoted until they gain enough experience to reach higher positions.

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for instance, encourage transportation capacity sharing, resource sharing, collaboration for solving common problems (lobbying), postponement, returns and repairs and the provision of special innovative products resulting from the interaction between companies located in the free trade zone.

The Dubai Corridor between Jebel Ali Free Zone Authority (JAFZA) and Dubai World Central (DWC) plays the role of a logistics cluster and comprises several free zone areas that exhibit high levels of administrative efficiency, world-class infrastructure and political support, all of which are pivotal to the successful logistics clusters. JAFZA and DWC enable efficient logistics operations by facilitating the sea-to-air flow of goods and services. Situated adjacent to the Al Maktoum International Airport and connected by the dedicated logistics corridor with the Jebel Ali Port and Jebel Ali Free Zone, the whole district has direct access to the United Arab Emirates’ main trans-emirates highways and the planned Etihad Rail Network.

The DWC Logistics District enables logistics businesses to control their inventory and manage their supply chains in an efficient manner. Also, the logistics district features a friendly business environment with admin-istrative efficiency. A single Customs-bonded zone strategy, with a span of approximately 200 square kilometers, allows reductions in the time on the ground of cargo. The DWC Logistics District with its logistics incentives

FigURe 1

p o s i t i v e r e l at i o n B e t W e e n t H e l o g i s t i c s p e r F o r m a n c e i n d e x a n d t H e l e v e l o F i n t e r n at i o n a l t r a d eSource: World Bank (LPI and WITS (2012)

1

1.5

2

2.5

lpi

International Trade as % of GDP

3

3.5

4

4.5

0 50 100 150 200 250 300 350 400 450

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offers the possibility of sharing warehouses, acquiring plots for logistics companies and integrator facilities along with the economic incentives offer of 100% ownership, zero taxes and free capital transfer, representing a paramount and far-reaching global supply chain hub for the Middle East, Southeast Europe, India and Africa13. Free zones in Dubai can actually make the benefits of the logistics cluster even stronger and as mentioned before, play the role of nodes of the global value chain.

Free trade zones display logistics clusters benefits and characteristics. As it is the mentioned case of Alliance Texas that has a critical location that provides easy access to multiple transport modes, such as Class I BNSF Alliance Intermodal Facility rail lines and the Union Pacific Railroad, the roadways near Alliance, namely Interstate 35, 30, 20 and 40, connect the logistics cluster to the south and central regions of the United States, and the Forth Worth Alliance Airport provide co-located companies ground handling and air cargo services as well as on-site U.S. Customs Border Protection. It was designated as a cargo, corporate and military airport controlled and serviced by the Alliance Air Trade Center. The agglomeration of logistics firms like FedEx Freight with is Southwest Regional Sort Hub and UPS Supply Chain Solutions has attracted more companies that seek transportation, logistics and supply chain services

JAFZA and DWC enable efficient logistics operations by facilitating the sea-to-air flow of goods and services.

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1. Sheffi, Y. (2012) Logistics Clusters: Delivering Value and Driving Growth. MIT press, Cambridge, MA.2. Dallas Business Journal (2012) http://www.bizjournals.com/dallas/blog/morning_call/2012/01/

dallas-logistics-hub-owner-emerges.html3. Allen Group (2011) http://dallaslogisticshub.com4. Rivera, L, Gligor, D., and Sheffi, Y. (2015) The benefits of Logistics Clusters. MIT-CTL Research Paper.5. Ibidem6. Sheffi, Y. (2012) Logistics Clusters: Delivering Value and Driving Growth. MIT press, Cambridge, MA.7. Rivera, L, Gligor, D., and Sheffi, Y. (2015) The benefits of Logistics Clusters. MIT-CTL Research Paper.8. Ibidem9. Sheffi, Y. (2012) Logistics Clusters: Delivering Value and Driving Growth. MIT press, Cambridge, MA.10. Ibidem11. See for instance Bruns, A., 2009. Emerging Logistics Hubs. Site Selection Magazine and

Thuermer, K.E., 2008. Red-hot logistics parks and inland ports address shippers’ distribution needs. Am. J. Transport.

12. Rivera, L., Sheffi, Y., and Welsch, R. 2014. Logistics agglomeration in the US. Transportation Research Part A: Policy and Practice. 59: 222-238.

liliana rivera, Research Affiliate, MiT Center for Transportation and logistics, USA.

and connectivity to the free trade zone. For instance, LEGO has moved its warehouse to Alliance to gain the benefits of a more efficient distribution to the United States being close to I-35 and the Mexican border where it manufactures its products . The aforementioned features of the Alliance Texas free zone and logistics cluster have transformed it into an important inland port and global logistics node.

In conclusion, the future of free zones is to focus more on the operational advantages related to logistics. On the one hand, the economic incentives in free zones are not going to continue forever, and on the other hand, even though free trade zones provide logistics services like storage, picking, packing, inventory control, Customs clearance and re-export of products etc., more sophisticated incentives are needed, such as initiatives for collaboration, in terms of resource sharing and transportation capacity sharing and the enhancement of value added services in order to reduce capital expenses, increase supply chain visibility and flexibility and have an externality on the levels on employment and upward mobility of regions. Thus, the invitation for all free zones is to encourage the development of collaborative and innovative logistics initiatives in the future.

biblioGrapHY

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since tHe Financial crisis, world merchandise trade has expanded very weakly compared to the growth observed in the 1990s and early 2000s. The World Trade Organization expects continued slow improvement in trade growth for the next two years, roughly keeping pace with income growth.

While trade and economic growth currently remains fragile around the world, there are steps that can be taken to change this dynamic. Trade can be a powerful policy tool to leverage economic growth and development. It is also important to keep in mind that during the recent financial crisis the policy framework built by the General Agreement on Tariffs and Trade (GATT) and the WTO worked to ensure that trade war did not break out. The success of the multilateral trade system, during times of historic economic stress served the increasingly globalized economy well.

The vision of the WTO’s founders – of cooperation on trade that is truly global – is being realized. Since the WTO was created in 1995, membership has continued to expand and accessions have been a major force for additional trade liberalization and trade friendly domestic policy reform through accession commitments. Together, WTO members now account for approximately 98% of world trade. Today, when the global economy is more interconnected than ever, it is difficult to imagine a world without the WTO. By setting the global trade rules, monitoring adherence to those rules, and helping to resolve disputes between nations when they arise, the WTO plays a crucial role in global governance.

At the WTO, there are active steps being taken and others being pursued. The WTO’s successful Bali Package on trade facilitation, which some estimate could add $1 trillion to global trade, mainly in developing countries, and likely something very important to free zones – is being implemented now.

Lowering trade costs through improved efficiency and effectiveness, reducing costs at borders are very important steps. It is important to recognize the role that free zones can play here, and equally important to study what elements work, or not, depending on the circumstances and goals of the various zones.

But more can be done to develop an even more trade-friendly global environment. At the WTO, members are actively working to develop a work program. We hope this will set us on course to conclude the remaining issues of the Doha Development Agenda, but work is also progressing to

update on the global Trade agenda from a wTo Perspective

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expand the WTO’s Information Technology Agreement and liberalize trade in environmental goods.

The Global Review of Aid for Trade provided an important additional focus to the development component of our work. The WTO and World Bank published a joint study on the challenges that must be addressed for trade to be even more effective at helping the poorest raise their incomes. In addition, the WTO is closely engaged with broader efforts such as the UN›s work on Financing for Development, with a WTO initiative on improving trade finance for companies, especially small and medium enterprises, so that companies can effectively use global markets to improve sales, and to help the developing countries effectively use the private sector to help meet the post-2015 development agenda.

Keep in mind that the previous Millennium Development Goals for poverty reduction were largely met with trade providing a significant contribution to economic development.

WTO members now account for approximately 98% of world trade.

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In addition, the dispute settlement work remains very busy, accessions continue apace, (Seychelles is our 161st member) and regular monitoring and reporting on global and country level trade policy developments continue to serve an important role for transparency, honest exchange and policy intelligence for member countries.

SoMe hiSToriCaL PerSPeCTiVeThe world has experienced several major waves of economic development since the industrial revolution of the late 18th and early 19th centuries. Each wave has been accompanied by an equally major expansion of international trade and marked by faster catch-up growth than the previous wave.

The current and most extensive wave started after the 1980s and has seen some countries, including China and India, open up and embark on the most rapid process of industrial catch-up experienced to date.

As global economic development has widened, deepened and accelerated, the international economic system has had to adapt. In the mid-19th century, a Europe-centric network of bilateral trade agreements governed economic relations. After 1945, economic relations were governed for the first time by a multilateral system of rules, including the GATT – now the WTO, and Bretton Woods institutions – the World Bank and IMF.

Incomes in developing countries have been converging with those of rich countries since the 1990s because growth has accelerated in developing economies, while in developed economies it has slowed down. The performance of developing country G-20 members has been particularly strong.

Successive rounds of tariff reductions, continued liberalization through accessions, well designed and clearer international rules and their transparent application has facilitated, reinforced, and augmented the many domestic policy reforms that helped bring the world closer together – through increased globalization and faster economic convergence.

There is still more that must be done and can be done. Continued reductions in trade barriers and trade costs can help the global recovery and help realize broad based economic growth. Free zones, by design, also aim to reduce costs and encourage economic synergies, and can also make substantive contributions to economic growth and development.

robert Koopman, Chief economist and Director, economic Research and Statistics Division, WTo, Switzerland.

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tHe national association of Foreign-Trade Zones (NAFTZ) has been the collective voice of the Foreign Trade Zones (FTZ) community since 1973. Representing more than 650 members across the United States and Puerto Rico, all involved in the FTZ program, the NAFTZ helps its members get the most out of the FTZ program that is helping U.S. companies and workers thrive in the global economy.

The NAFTZ advocates in Washington to expand the benefits of the FTZ program, to streamline regulations and to solve problems. It holds seminars and an annual conference every fall, as well as hosts monthly educational webinars, distributes a monthly newsletter and informational emails and facilitates the work of a number of active committees where its members can share issues and insights with their peers. The NAFTZ is a founding member of the World Free Zones Organization.

hiSTory of The free ZoNeS DeVeLoPMeNT iN The uNiTeD STaTeSThe U.S. Congress passed the Foreign-Trade Zones Act in 1934 to begin to undo the damage of the Great Depression and reconnect American companies with the global economy. The explicit purpose of the Act as stated in its preamble is to “expedite and encourage foreign commerce.” In 1950, it was expanded to include manufacturing; in 1980, an amendment to the U.S. Customs regulations limited tariff liability only to imported components, not to domestic value added; in the 1990s, Customs regulations expanded the use of FTZs for oil refining, which is now a major user of the program.

In 1996, production machinery was made eligible for duty deferral; in 2000, Congress approved weekly entry for all FTZ users, allowing a reduction in payments of the Merchandise Processing Fee. In the past decade, admissions to FTZs have been automated through the e-214 process [a web-based system that replaces the filing of FTZ data via the now expired Census Bureau’s Automated Foreign Trade Zone Reporting program], while new FTZ Board regulations and the Alternative Site Framework have shortened approval times. Companies are not required to locate in a specific zone area, but zone benefits can come to an existing company site anywhere within a multi-county area.

free Zones, State of the art: The u.S. foreign-Trade Zones Program

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whaT are The MaiN iNCeNTiVeS aND MoTiVaTioNS To LoCaTe iN aN fTZ iN The uNiTeD STaTeS?A foreign-trade zone is a secure area at or adjacent to a U.S. port of entry, with adjacent defined as within 100 kilometers or 90 minutes from the outer limits of the port of entry. Sub-zones or usage driven sites can be further away for individual company sites. Foreign goods admitted to a zone are considered outside U.S. customs territory. Customs collects duties only when the goods leave the zone

and enter U.S. commerce. According to the FTZ Manual, “Merchandise of every description, except that prohibited by law, may be brought into a zone and stored or processed there under certain circumstances without being subject to Customs and Border Protection (CBP) laws of the United States.”

Once admitted to an FTZ, merchandise can be stored, sold, exhibited, repacked, assembled, distributed, sorted, mixed with foreign or domestic merchandise, or otherwise manipulated or manufactured. Merchandise in a zone can then be exported, destroyed or sent into the customs territory of the United States. And all this takes place in a duty-free environment, as though the goods were still in international commerce.

The bottom-line purpose of the FTZ program is to allow producers in the United States to reduce, eliminate, and defer duties on foreign-sourced goods. The FTZ program helps U.S.-based producers compete on more equal footing with foreign competitors who do not bear the cost of U.S. duties. The FTZ program allows companies to reduce or eliminate duties in three primary ways:

it eliminates duties on imported goods used by U.S.-based companies to produce final goods for export. Foreign-sourced supplies and components never enter U.S. commerce. Duties are also eliminated on waste and scrap produced in the zone. This allows companies to avoid cumbersome and uncertain duty drawback.

it reduces duties by offsetting “inverted tariffs,” which require U.S. producers to pay higher duties on imported parts and materials than on final products made abroad.

inverted tariffs create an unintended incentive to locate production offshore. By locating in a foreign-trade zone, imported parts can be assessed the lower

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duty rate of the final product. This benefit is especially important for such sectors as the pharmaceutical and auto industries.

locating in a zone can also produce cash flow savings by allowing the producer to pay customs duties when goods leave the zone, closer to the final sale. Duties are also deferred on production equipment that is imported to the zone and used to produce final goods within the zone.

Beyond direct duty savings, companies located in a U.S. zone can enjoy the supply-chain benefits of direct delivery, weekly entry and enhanced security.

Direct delivery allows the expedited delivery of merchandise from the port of first entry to the zone without having to await prior approval for admission by CBP. The e214 is filed the first working day after the merchandise is received in the inventory control and record-keeping system. Direct delivery is available for zone importers admitting the same type of merchandise on a recurring basis, which means that 90% of operator/users qualify. Direct delivery can cut 1-2 days off delivery times and is especially useful on weekend and overnight deliveries. It is a huge benefit for importers of perishables, active pharmaceutical ingredients, and other climate and time sensitive goods. The benefit is widely used by the major pharma companies, automakers, and clothing retailers.

Locating in a zone can also produce cash flow savings by allowing the producer to pay customs duties when goods leave the zone, closer to the final sale.

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Weekly entry allows the filing of a weekly estimate to consolidate multiple shipments into one Customs filing each week. This can result in large savings on the payment of the Merchandise Processing Fee by limiting payments to a maximum of $485 per week rather than multiple payments. This benefit is only available to FTZ users. The Trade and Development Act of 2000 amended CBP entry statue to extend use of weekly consumption entries to include all zones instead of limiting use to only manufacturing operations.

Finally, locating in an FTZ enhances supply-chain security by helping to build trusted trader relationships with Customs. In fact, Customs considers operating in an FTZ to be a “best practice” for the Customs-Trade Partnership Against Terrorism (C-TPAT) program. By definition, a zone site is a secure area with controlled access and an extra layer of accounting and traceability. As one CBP agent told me when I was visiting a zone site in El Paso, Texas, “For us, FTZs are as secure as it can get.”

whaT are The eCoNoMiC CoNTribuTioNS of free ZoNeS iN The uS iN TerMS of TraDe aND jobS?The FTZ Board’s most recent Annual Report documents that the FTZ programme is a more important tool than ever for U.S. companies competing in global markets. In 2013, there were 177 active zones in the

Cars are assembled at the Nissan North America plant in FTZ Subzone 78A in Smyrna, TN.

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United States and Puerto Rico and 289 active manufacturing/production operations. Imports to FTZs now account for more than 12% of total U.S. goods imports—three times the share of 20 years ago.

The most spectacular trend in U.S. zones has been export growth—to a record $79.5 billion in 2013. Since 2009, FTZ exports have been growing at a rate that is three times faster than overall U.S. export growth. In 2014, the United States exported a record 2 million motor vehicles, which is largely a story of international automakers operating in U.S. foreign-trade zones.

A record $835 billion in merchandise was received in FTZs in 2013, almost two-thirds of it domestically sourced. That indicates that U.S. zones are deeply embedded in regional economies. Zones are a place where U.S. workers and capital create value added by combining domestic and foreign-sourced inputs for domestic consumption and export. In 2013, more than 3,000 companies were operating in an FTZ employing 390,000 American workers.

Along with its export and import success, the FTZ program has proven effective in attracting new investment in the U.S. manufacturing sector. Locating in an FTZ allows foreign-owned companies to maintain supply lines to the home country, to locate production closer to the world’s largest consumer market, and to export to the rest of the Western Hemisphere and the world. As a result, zone status has proven to be popular among foreign multinationals. In the international auto sector, companies operating in zones include Mercedes Benz, BMW, Nissan, Toyota, Hyundai, Subaru, and Volkswagen. Other well-known global multinationals with zone operations include Ricoh, Mitsubishi, Yamaha, Airbus, L.G. Electronics, Sony, Michelin, Bayer CropScience, AstraZeneca, Kawasaki, BP, Citgo, Konica, Canon Virginia, Samsung, and STIHL. NAFTZ

F t Z i m p o rt s t r i p l e a s s H a r e o F u . s . i m p o rt s

Sources: FTZ Board Annual Reports, U.S. Census Bureau.

PetroleumOther Merchandise

since 1994

0%

2%

4%

6%

8%

10%

12%

14%

1990

2012

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is partnering with the U.S. Commerce Department’s SelectUSA division to promote the FTZ programme among potential foreign investors.

whiCh SeCTorS fiT beTTer iN free ZoNeS iN The uS? The common thread among FTZ-user companies is that they are all importing goods as part of their supply chain, and those goods are often liable for significant tariffs. The major users of the program today are petroleum refining, electronics, automotive, pharmaceutical, machinery, equipment, apparel and footwear.

The FTZ program has given manufacturers another reason to relocate or “re-shore” to the United States. For example, General Electric has invested $800 million in a huge appliance manufacturing facility with FTZ status near Louisville, Kentucky. The plant opened in 2012 with a brand-new, cutting edge assembly line for low-energy water heaters. In Clyde, Ohio, Whirlpool has opened a 2.4-million-square-foot facility that it calls the largest washing-machine plant in the world. FTZ-status allows the company to reduce or eliminate duties on such imported components as circuit boards, pumps, and motors, which would otherwise face duties as high as 9 percent. With the added attraction of FTZ status, Whirlpool is shifting production of washing machines back to the United States from Monterrey, Mexico.

Foreign-trade zones have proven equally appealing to high-tech manufacturers. In California’s Silicon Valley, Tesla Motors is now producing its state-of-the-art electric sports cars in a foreign-trade zone plant in Fremont. The company imports battery cells, battery pack components, and electric

The FTZ program has given manufacturers another reason to relocate or “re-shore” to the United States.

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daniel Griswold, President, national Association of Foreign-Trade Zones, USA.

motor components, which it combines in the plant with U.S. supplies to make completed battery packs and transmission assemblies. Lam Research, an equipment supplier and service provider to the semiconductor industry, utilizes its foreign-trade zone status to reduce tariffs on components that it uses to manufacture production equipment, more than 95 percent of which it then exports. According to a report in the Silicon Valley Business Journal, the company estimates it saves $1.4 million a year from operating in a foreign-trade zone.

The most recent growth area for zone use is warehouse/wholesale distribution. These facilities speed delivery to consumers and reduce final prices. These facilities use state-of-the-art technology and typically employee hundreds of middle-class workers. Zone savings have encouraged major retailers to maintain and expand their U.S. operations as the hub of global distribution networks.

The leaders of the NAFTZ believe we all have much to learn from each other. We look forward to our continuing collaboration with members of the World Free Zones Organization to raise awareness of the usefulness of trade zones and bring best practices to zones programs around the world. The members of the NAFTZ look forward to working towards building a more integrated and prosperous world.

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tHe Future oF the United States’ Foreign-Trade Zone (FTZ) program may be, in part, predicted by looking briefly at its original intent, reviewing trends that began during the middle years of the U.S. FTZ program, and then examining how both historic and emerging factors could impact the future of U.S. zones.

The perspective brought to this review will include the local level of administering a U.S. FTZ project at the U.S. Customs and Border Protection (CBP) Port of Battle Creek, Michigan, and the point of view from the National Association of Foreign-Trade Zones (NAFTZ), a U.S. membership organization of 700 members that meets the educational, networking and advocacy needs of all the sectors of the U.S. economy that benefit from the FTZ program.

U.S. Foreign-Trade Zones were created by federal legislation in 1934, known as the “Foreign-Trade Zones Act.” At that time, large U.S. manufacturers often moved offshore to the origin of their inputs in order to eliminate paying steep U.S. Customs duties on foreign-sourced goods. The U.S. Foreign-Trade Zones Act was created to “expedite and encourage foreign commerce” in the United States. The Act designated certain geographic areas, in or adjacent to Customs ports of entry, where commercial merchandise could receive the same Customs treatment as would occur outside the commerce of the United States.

In 1950, manufacturing in U.S. FTZs became possible with an amendment to the Act. Yet for the first 36 years of the Foreign-Trade Zones Act, up until 1970, there were a grand total of eight FTZs and three manufacturing FTZ. Progress, yes. Vast growth, no.

In 1980, a U.S. Customs ruling, proposed by the NAFTZ, allowed the manufacturer in an FTZ-designated location to bring foreign sourced parts or commodities into an FTZ, incorporate those parts or commodities into a finished product with U.S. labor, then enter the finished product into the U.S. commerce. With that adaption, the manufacturer in an FTZ had the distinct advantage of paying duty on the value of the foreign non-duty-paid content only. With this ruling, the U.S. FTZ program began its remarkable expansion.

The 1980 Customs ruling met an important need by offering the duty savings benefit to manufacturers. By 2013, there were 177 active FTZs in the country, with 289 manufacturing or production operations. Nearly 400,000 Americans worked in FTZs, the largest volume recorded at the time.

The future of u.S. foreign-Trade Zones

Q u o v a d i s F r e e Z o n e s :

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At the inland Customs port of Battle Creek, Michigan, FTZ 43 was established in 1978. Battle Creek is a small city of 52,000 people. At the time the FTZ was established, unemployment in Battle Creek approached 18%, after the closure of two large manufacturing facilities.

Within a few years, however, Battle Creek’s FTZ designation covered nearly all of a new 3,000-acre industrial park. Foreign direct investment began to flow in, particularly due to the value of the Japanese yen and the German mark. Companies from Japan, Germany, Denmark, Austria, Scotland, Canada and the U.S. set up manufacturing operations in Battle Creek’s newly thriving industrial park. Today, 95 companies contribute 10,000 jobs to the Battle Creek economy. All the foreign-based firms cited the availability of the FTZ and the Customs Port of Battle Creek as among the reasons for their location decisions. Not all the companies used the FTZ. Some used it for only a few years. Others used the FTZ for decades.

Those were the U.S. FTZ middle years – a heyday of manufacturing investment and growth of U.S. manufacturing in FTZs.

The 21st century brought challenges to the U.S. FTZ program. Companies made just-in-time decisions about the sourcing of their inputs, their supply chain logistics, and their expansion plans. The two-year wait to establish a FTZ no longer met the needs of many manufacturers.

A solution came in 2009, with a regulatory option known as the “Alternative Site Framework.” The new framework for organizing the geography of U.S. FTZ offered greater flexibility, swift approval and faster access to zone benefits. The barriers to Small and Medium-sized Enterprises were greatly reduced.

The manufacturer in an FTZ had the distinct advantage of paying duty on the value of the foreign non-duty-paid content only.

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The Alternative Site Framework and its streamlined approval process encouraged more FTZ designations. From 2007 to 2013, applications doubled for new zones, expansions, production notifications and manufacturing designations.

In 2013, warehouse and distribution in zones experienced the largest increase in foreign-status products. The fastest growth in warehouse and distribution occurred in the export categories of vehicles, electronics, textiles and footwear, electrical machinery, consumer electronics and consumer products.

Among manufacturers in FTZs, notable increases occurred in foreign-sourced machinery, equipment and vehicle parts – a reflection on the vitality of international automakers operating in FTZs.

As the growing economic importance of U.S. FTZ achieved recognition, the NAFTZ and its members gained a prominent voice in determining the direction of trade policy and federal regulations.

U.S. FTZs exist in an environment of strict compliance. There are two sets of federal regulations (FTZ Board in the U.S. Department of Commerce and CBP), as well as the amended Foreign-Trade Zones Act. Thoughtful changes over the years adapted and re-aligned the regulatory environment when new needs were identified. FTZ administrators, users, operators, the NAFTZ and other participating government agencies worked together to improve access and flexibility for the U.S. FTZ program.

Let’s look to the future now. On 1 November 2015, the Automated Customs Environment (ACE) came into effect. Relying on improvements in technology, communication tools and computer capabilities, and interagency transparency, all Customs filings in the United States will be conducted electronically. Paper forms become obsolete. Other participating government agencies intend to work together, using a single electronic window with Customs. Goods arriving at U.S. ports that are transferred to bonded transportation modes may be monitored to deploy information to CBP field offices throughout the country. The collaboration promises to greatly improve communication between the trade and government entities.

The NAFTZ supports this important development. Our subject matter experts contributed their time and expertise; alongside CBP and other participating government agencies to ensure the ACE data fields will address the unique needs of FTZs.

Whether that agency is the U.S. Food and Drug Administration, the Consumer Products Safety Commission, the U.S. Census Bureau, the U.S. Department of Agriculture, the U.S. Fish and Wildlife Services or others, we may anticipate the implementation of ACE to also play a progressive role in many aspects of safety and security monitoring.

Advancements and improvements in security monitoring, already including Customs-Trade Partnership Against Terrorism (C-TPAT) and the Trusted Trader program, streamline the process when importers establish security in their supply chains and strengthen their internal controls with the

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laws and regulations administered or enforced by the U.S. CBP. Layers of safety and security monitoring also bring efficiencies for FTZ

users, including the automated electronic tracking of goods. The objectives and services of the World Free Zone Organization might someday contribute similar efficiencies toward trade opportunities for zone users through electronic tracking of goods traded internationally from zone to zone. When we advocate for compliance and public awareness of free zones with data transparency, progress becomes possible in the public sector.

Furthermore, the impact of external trends appears to be increasing the use of free zones around the world. Bringing together free zone participants for the purpose of sharing knowledge, networking and education is a good start for all of us. Gathering and disseminating knowledge about free zones contributes to a future capability for zone-to-zone transfer of goods across national borders.

The inherent need for robust inventory control systems in free zones may allow zones to pioneer that new world of trade. Tariff and non-tariff barriers to trade will undoubtedly exist for the foreseeable future. The U.S. FTZ program will continue to address those barriers no differently than it has in the past, preparing solutions for greater access, flexibility, and barriers we cannot yet anticipate.

I believe that together, we may walk on a path of best practices to promote the growth and capabilities of all free zones.

Jan Frantz, Chairman, Board of Directors, national Association of Foreign-Trade Zone (nAFTZ), USA.

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tHe landscape oF trade has significantly transformed over the past 30 years. The contribution of trade to global GDP increased from less than one-fifth in the mid-1980s to nearly one-third in 2012. A significant contributor to this of course has been China, which experienced a rise in its share of world exports from 2% to nearly 11% between 1985 and 2013.

export Performance and fDi inflows of foreign Direct investment

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Trade flows and patterns have also experienced noteworthy transformations. In 1996, almost half of sub-Saharan exports went to European and European Free Trade Association countries [Iceland, Liechtenstein, Norway and Switzerland] however, by 2010, this share was reduced to 36%. Over the same period the share of exports directed from Sub-Sahara to the Asia Pacific region rose from 11% to 19 %. Although, it has been argued that the BRICS countries [Brazil, Russia, India, China and South Africa] have led this transformation, the growth of trade in developing economies is not confined to this set of countries. The MINT countries namely Mexico, Indonesia, Nigeria and Turkey are getting ready to become the new tigers and have shown rapid growth over the last decade as have other countries including the F7 group of countries.

Another important phenomenon that must be pointed it out is the increasing proliferation of Regional Trade Agreements and Free Trade Agreements. The new agreements currently being negotiated under the label of “mega treaties” such as the Trans Pacific Partnership and Transatlantic Trade and Investment Partnership are expected to have far-reaching impact on trade and investment flows. These agreements are significant as they negotiate themes that go beyond those that are negotiated under the multilateral trading system including investment issues, competition policy, IP rights, non-tariff measures and labour laws.

The transformations in global trade patterns and flows are certain to impact the business environment. In turn, multi-national corporations (MNCs) are not only setting up production facilities in developing economies to reap the benefits of cheap labour, but they are also doing so in order to capture larger market shares in those respective consumer markets.

As MNCs expand, global value chains (GVCs) have been playing a major role in interconnecting economies and forcing them to specialize in specific activities and stages of production, rather than in entire industries as was previously the case. As a matter of fact, over 70% of global trade nowadays takes place in the form of intermediate goods, services and capital goods. This increasing international fragmentation of production has produced a new form of intertwined elements known as the “trade-investment-services-know-how nexus”. A simple example to explain this inter-connectedness would be an iPhone, which includes 785 suppliers located in 31 different countries, each of which is specialized in a specific stage of this production process.

As a result of all the efficiency gains accompanied with the fragmentation of the production process through further specialization, GVCs are expected to have a continued upward trend in the coming decades. For companies to benefit from the increase in trade, it will be necessary for them to find a place within these value chains. In turn, their competiveness must not only be higher, but they also need to be quick in adapting to the evolving needs of global value chains.

The escalating rates of GVCs have also been accompanied by very high levels of “servicification”. Services in the form of transportation, logistics, finance and telecommunications not only play an important role in shaping

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these chains, but they also play a vital role in determining the competitiveness of the participating enterprises. Improving logistics services, in particular, is essential to effective GVC participation. In fact, it has been calculated that every extra day needed to prepare goods for export and import could potentially reduce trade flows by up to 4%. So what can be conveyed out of this is the necessity for free zone areas to provide companies located within them with state of the art services to help them enhance their competitiveness.

Adding to the importance of trade patterns transformation and to the importance of GVCs, is South-South trade, an important phenomenon that must be addressed when discussing the future of international trade. Over the past 30 years, trade between southern countries has quadrupled, rising from about one fifth to one fourth of world trade in the past decade. In fact it is this growth rate that has driven overall growth in world trade over the last 20 years. A main contributor to these prominent growth rates is the regional and preferential trade agreements signed among these developing countries. For example, intra-COMESA (Common Market for Eastern and Southern Africa) trade has increased from $8 billion in 2004 to $22 billion in 2014. Similar patterns have also been witnessed within the South African Development Community and the East African Community where intra-trade has tripled over the last 10 years.

Regional trade is hugely beneficial, particularly for Small and Medium Enterprises (SMEs) which form the backbone of the private sector in

Export clusters within free trade zones of Costa Rica have helped SMEs become an integral part of horizontal and vertically integrated production processes.

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developing countries and make a significant contribution to employment. According to the International Labour Organization, SMEs provide two-thirds of all formal jobs in developing countries within Africa, Asia and Latin America, and 80% in low-income countries. Free zones, therefore, can be the fertile platform which provide SMEs with an opportunity to become part of industry clusters and integrate into regional value chains. We find numerous examples including the success stories of Malaysia and Costa Rica, which have shown how export clusters within free trade zones have helped SMEs become an integral part of horizontal and vertically integrated production processes.

An important element of trade is the role of conducive trade policies and business environments in promoting trade. There is a clear positive correlation between countries which have in place sound trade policies related to tariff regimes, taxes, licenses etc. and their trade performance. It is therefore not surprising that countries that have improved their rankings on the Doing Business Index are also those that have shown strong trade performance. According to the World Bank’s annual Doing Business report, since 2005, China and India are among the top 40 most improved economies, in terms of creating a favourable regulatory environment for trading and entrepreneurship. Also, one-third of the top 30 most improved economies are from Sub-Saharan Africa. These economies also happen to be the most dynamic and fast-growing economies in Africa in terms of trade performance. Trade policies and regulatory frameworks are thus critical to boosting trade and investment in one’s country.

This brings us to another important aspect of trade, which is foreign direct investments (FDI) and its intrinsic link with trade flows and patterns. FDI flows into countries have an impact on trade performance, either indirectly through investments in infrastructure such as roads, telecommunications and ports or directly through investments for trade such as setting up of production facilities, joint ventures etc. In turn, what can be highlighted from this is the fact that FDI and trade are two sides of the same coin. Thus, governments need to promote trade and investment concurrently to improve the country’s trade performance.

The best example is China that has been the leading global exporter for a number of years now and is simultaneously the second largest recipient of FDI inflows (behind the United States) and ranks third for FDI outflows (behind the United States and Japan). Many free zones around the world have been great catalysts in promoting FDI into the country, which in turn has resulted in technology transfer, skills development and helped raise the overall level of competitiveness of the countries concerned.

A recent World Trade Organization study states that: FDi is considered to be the most important channel through which technology is

transferred to developing countries. FDi leads to higher productivity in locally owned firms, particularly in the

manufacturing sector.

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The amount of technology transferred through FDi is influenced by various host industry and host country characteristics.

Having identified the main elements that shape global trade patterns, what do the projections tell us regarding how trade will look over the next five years?

Recent studies by Ernst & Young and PriceWaterhouseCoopers have shown that: World trade in goods will increase 2.5 times to reach $35 trillion compared to 2010,

while world trade in services will double to around $6 trillion. China’s exports to europe – at over $1 trillion – will be twice as large as US exports

to europe. Fast growing markets and China in particular, will represent the fastest-growing

source of final demand over the coming decade. FDi is likely to be increasingly directed to emerging markets over the coming

decade,and regional supply chains will grow in importance as a result. intra-regional Asian trade will be worth $5 trillion. emerging markets will challenge developed economies in the production of high-

end consumer durables. Today’s ‘F7’ frontier markets – Bangladesh, Colombia, Morocco, nigeria, Peru,

Philippines and vietnam – will become tomorrow’s growth markets. europe’s exports to Africa and the Middle east will be around 50% of its exports to

the US. europe will be the most important market for Sub-Saharan Africa’s exports and

account for a quarter of all its trade. The total flow of services trade from europe to Asia Pacific (excluding Japan) will

be larger than to north America. The machinery and transport equipment sector — which includes consumer

electric products – will make the largest contribution to trade over the decade.

By highlighting the essential elements that shape global trade and their predicted impact of future trade patterns, it is now necessary for free zone authorities need to take these scenarios very seriously and develop their strategies and policies in line with these future scenarios and ensure that they factor in all the necessary elements if they are to remain relevant.

asHisH sHaH, Director of Country Programs, iTC Switzerland.


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