There are many different areas around the world where those involved in trade can find slight loopholes, fewer bureaucratic entanglements, and save on the cost of logistics. Today free trade zones are such areas, which fall under the category of special economic zones. But these are not a new concept.

Free trade zones have been around for quite some time, but they have recently been gaining in popularity. It stands to reason that with such gains, there are bound to be many more in the future. It seems that as economic and political changes are influencing trade, the appeal of free trade zones has increased, especially in areas around the world like China. But what exactly is a free-trade zone? Why does it matter? And what benefits does it afford?

What Is a Free Trade Zone?

A free trade zone is considered a special economic zone, or SEZ, which is a designated area for commercial purposes. In the said area,

economic trade is free from any trade-related fees like taxes or duties.

In such areas, any goods that you manufacture, you store, or you have handled are subject to various preferences for customs. Many of these areas around the world offer incentives and release to encourage investment.

The organization for economic cooperation and development, OECD, stipulates free trade zones as countries inside of which tariff and non-tariff trade barriers between different members are effectively done away with, where there is no standard trade policy for non-members.

Why would people be interested in free trade zones? Well, they bring with them many benefits. The first benefit is that a free trade zone promotes trade. It also offers more business opportunities, especially concerning the incentives designed to encourage investment.

Using free trade zones helps to keep your logistics costs low. With the reduction of tariffs and non-tariff trade barriers, you can reduce the amount of red tape that you might otherwise face in other areas of the world, and similarly do away with a great deal of bureaucratic formalities.

With these free trade zones, you can increase your earnings through foreign exchange, help to create more employment opportunities, and enhance investment.

Free Trade Zone History

As mentioned, free trade zones are part of these special economic zones. To better understand them, it’s essential to take a look at that category.

There are many variations to the definition of an exclusive economic zone, but no matter the difference you review, they all have the same established purpose.

The United Nations, for example, has defined a special economic zone as an area that provides a regulatory regime for investors and businesses. That regulatory regime is typically different than what would be applied in a National or a sub-National economy.

Initially, the use of special economic zones, which at the time we referred to only as free zones, was next to airports, seaports, or situated in between two or more Nations. These zones started in the 1960s, but their popularity didn’t increase until the 1980s.

As of today, there are over 5,400 special economic zones around the world. 1,000 of them, just shy of 1/5, were established within the last five years. But that’s not all. With popularity growing it’s expected that 500 new zones will be set up over the next few years.

The World’s Major Free Trade Zones

So where are these special economic zones around the world? Which are the most popular free trade zones?

Well, the North American Free Trade Agreement, known as NAFTA, is one. It involves the United States, Mexico, and Canada. It was established in 1994. It has a population of 450 million, a total trade of approximately 1 trillion dollars every year, and a total GDP of 24.9 trillion dollars.

The European single Union Market involves 28 member states from the European Union as well as Switzerland, Iceland, Liechtenstein, and Norway. It was established in 1993. It has a total population of 500 million and a total GDP of 14 trillion dollars.

The African Continental free trade area, known as the AfCFTA, is another example. This is a newer example and was only established this year, 2019. As of right now, it has a population of 1.2 billion people which makes it the biggest Free Trade Agreement if you measure by population. It has 52 out of 55 member States involved with a total GDP of 2.5 trillion dollars.

The Association of Southeast Asian Nations free-trade area, or AFTA, involves Cambodia, Myanmar, Laos, Vietnam, Philippines, Malaysia, Indonesia, Brunei, Thailand, and Singapore. This was established in 1992. It has a total population of 580 million. The total GDP is worth one point five trillion dollars, and the total trade is 1.7 trillion dollars per year.

China is of particular note because it has 12 special economic zones. The first of these 12, the Shanghai free-trade zone, was established back in 2013. But since that time, China has added 11 more. The most recent addition was Hainan in 2018. As mentioned, Shanghai was the first in 2013. Two years later saw the addition of Guangdong, Fujian, and Tianjin. In 2017, many more were added including Zhejiang, Sichuan, Shaanxi, Liaoning, Hubel, Henan, and Chongqing.

Wrapping Up

There are many free trade zones beyond what is listed above. With more trade zones cropping up every year, they are sure to bring with them a great many more options for people within trade and logistics to find ways around bureaucratic red tape, to enjoy the investment opportunities afforded by such special economic zones, and to save on the cost of logistics overall. As political entanglements are impeding trade and increasing costs, especially with places like China, taking advantage of these free trade zones is now more critical than ever.

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Daily Hernandez

Daily is our Licensed Customs Broker, she has more than 18 years’ experience with international trade matters, strategic planning for international transactions and trade compliance. She has substantial experience with customs duty savings regimes, including free trade agreements, foreign trade zones, and valuation methodologies.