Free trade zones are like a shot of adrenaline for growth in emerging economies. As the weight of global trade shifts in favour of countries in Asia, Africa and the Middle East North Africa (MENA) region, there has been a corresponding rise of free trade zones in these countries that prosper in spite of global instability.
In simple terms, a free trade zone (sometimes called a ‘special economic zone’ or simply an ‘economic zone’), is a designated area in a country where trade can take place without any tariffs or quotas being imposed. According to a 2019 Unctad report, more than 5400 such zones exist globally, employing 100 million people directly, and double that number indirectly.
Backing the trend
What is interesting is that although global FDI flow declined 13% in 2018, we are seeing investment into free zones in the region rising steadily. This is mainly for two reasons. The first is that they are basically a one-stop services shop for investors. These range from attractive fiscal and regulatory incentives to all-round infrastructure support and generous visa quota policy. The second, more humdrum, reason is their proximity to major transport and logistics hubs in key cities. Simply put, free trade zones make business easy.
In return, they bring in valuable investment, create jobs and boost exports. They create an environment for industrial upgrades and technological exchanges. They support overall infrastructure growth. They encourage business innovation and help diversify the economy. All of which are absolutely crucial for emerging markets.
Take China, for example. In the 1990s, China, still a developing country, set up high-tech development zones (HTDZs) in various cities and provincial capitals. Incentives offered include access to quality infrastructure, corporate income tax exemptions for the first two years, a preferential 15% corporate income tax, exemptions from tariffs on high-tech equipment and special treatment for employees such as exemptions from income tax, subsidies on housing, cars, and so on. By the end of 2017, China had established 156 HTDZs, which contributed $1420bn to China’s GDP, or almost 12% per cent of the economy.
Other countries have similar stories to tell. According to a 2016 report by the International Finance Corporation, the eight special economic zones set up in Bangladesh attracted 412 firms that made investments worth $2.6bn, and employed 350,000 people. It is now in the process of developing close to 100 economic zones to attract further investment.
We’ve also seen free trade zones really take off in the MENA region. In the UAE alone, there are currently more than 45 such areas generating more than a third of its foreign trade. The economic zone in Ras Al Khaimah alone is home to more than 14,500 companies from more than 100 countries representing more than 50 different industries.
Of course, not all free trade zones are created equal. The right implementation, from a strong legal and regulatory framework to providing the right industrial and technological infrastructure, is crucial to its eventual success.
Most importantly, a free trade zone should ideally be adapted to the host country’s specific character and build on its comparative advantages. Free trade zones are only as good as the country they are based in, despite their relative insulation from turmoil. Investors have to know, beyond the tariffs and quotas, the regulation is clear, the justice system is reliable and the future is predictable. Accomplish that and this shot of adrenaline can be shared by business, too.
Ramy Jallad is the CEO of the Ras Al Khaimah Economic Zone.