I have been working on free zones since the mid-nineties and, ever since, can remember pundits speaking of zones’ imminent demise.
Of what foreseeable use — they would wonder — could they be in a context of dropping multilateral tariffs under WTO rules; the phaseout of developing countries’ ‘special and differential’ General Agreement on Tariffs and Trade; the end of the Multifibre Agreement; the more open neoliberal economic paradigm of ‘the Washington Consensus’, tightening EU and OECD ‘tax haven’ rules compounding WTO ‘Subsidies and Countervailing Measures Agreement’ restrictions; and overall national business environment reforms driven by the World Bank's ‘Ease of Doing Business’ ranking-induced competition?
One after another, these arguments and prognostications failed to kill off free zones.
It turned out tariffs had not disappeared. China was not the only competitive hub of light manufacturers in the world. Developing countries were not the only ones that saw the logic in duty-suspensive regimes. Garments were not the only things that could be produced in free zones, which could host more than manufacturing. Keynesian economic policymaking was not dead. Tax incentives were not the only driver of free zone investment and the appetite for aggressive national business climate reform among politicians is limited.
So, with free zones now experiencing a third wave, with thousands of new ones springing up, it is clear that economists have historically failed to grasp what they are actually about.
Free zones are about:
- Finding the best business environment a country offers, from an infrastructure, policy and governance perspective;
- The cashflow advantages of managed customs duty overhead and tariff inversion;
- Business hubs offering ‘centres of excellence’ for collaboration and creation;
- Reducing valuable management time spent on compliance, colocation with logistics integrators;
- Spaces in which governments can test business policy reforms on a politically-acceptable scale
- Reducing transaction frictions;
- Accentuating comparative and competitive advantage;
- Reducing production and operating costs;
- The creation of scale economies.
So, if they stubbornly refuse to die, where are they headed?
As a result of competition rather than global economic policy, uncompetitive zones probably will die, with the importance of being set up in the optimal location and transport nexus, having sufficient scale, identifying and reducing their host country’s real business impediments (which may not be duties and corporate tax), targeting growth sectors, and offering bespoke policies and infrastructure all showing through.
Rather than being public, they will be PPP-run, integrated ‘work–live–play’ business ecosystems, with internal supply chains and markets, permitted to serve outside markets anywhere.
Export processing zones and single-factory zones will disappear and, in their place, more zones like Indonesia’s Labuan Offshore Financial Centre, and Dubai’s International Financial Centre and Internet and Media City, will emerge. This is not big news to keen free zone observers or professionals operating or in zones. But policymakers — like those in the UK — thinking about free zones might take note of what kinds of zones will be relevant in the years to come.
Jean-Paul Gauthier is the CEO of consultancy Locus Economica and secretary-general of Wepza
This article first appeared in the October - November print edition of fDi Intelligence. View a digital edition of the magazine here.