The universe of free zones contains a vast number of nuances, most of which relate to the degree of support offered to tenants. This results in a wide array of definitions and acronyms: free trade zones, special economic zones (SEZs), foreign trade zones (FTZs), the list goes on. Although hard to pin down with scientific accuracy, the free zone universe is not only vast, but also rapidly expanding. 

Unctad counted 500 free zones in 1995, 3500 in 2006 and 5400 in 2018. The World Free Zones Organization (WFZO) now counts more than 7000 of them. After omitting those with just one tenant, Adrianople Group, an advisory firm focused on SEZs, has identified 4921 active zones spread across more than 90 countries. Around 750 of those are still under construction. 

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As impressive as this growth is, a more compelling trend is the number of governments looking to harness the benefits of free zones for the first time. Since 2020, a growing number of policy-makers around the world have rolled out inaugural programmes or set in motion policies to open their first free zones in the coming years. “Having been at the helm of an economic zone for six years, and hosted countless governmental delegations from all over the world, I can confidently say economic zones are top of mind for policy-makers,” says Krysta Fox, director of consulting firm EZDA and formerly executive director of Dubai Multi Commodities Centre until 2019. 

Universal appeal

Policy-makers have multiple reasons for embracing free zones, which highlights zones’ flexibility as an economic development tool. 

Papua New Guinea’s plan to open 12 free zones is a way to industrialise its resource-dependent economy by promoting downstream processing of everything from fish to limestone.  

Saudi Arabia’s first four free zones, which opened this year, are focused on logistics, manufacturing, maritime and cloud computing. The government is using these physically- and regulatory-confined spaces to experiment with activities that aid its bold Vision 2030 agenda, diversify the economy and polish up the regulatory environment to attract foreign investors. 

“When you have a very ambitious economic policy-making approach in a big, bureaucratic country with lots of important economic players, FTZs are an effective way of creating progress without having to steer the whole ship in a different direction,” says Robert Mogielnicki, a senior resident scholar at think tank Arab Gulf States Institute. 

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In Iraq, the Kurdistan regional government is developing 13 free zones for import substitution. Even Venezuela’s socialist leadership recently relaunched its stagnant FTZ programme by passing a new law and announcing five new zones with the goal of increasing investment and trade. 

Free zones have typically flourished in developing economies, where the marginal benefits of incentives and reduced red tape were most pronounced. However, they are not alien to developed countries either. In fact, Ireland’s Shannon is widely regarded as the first contemporary free zone, and in recent years zones slowly but surely mushroomed in Western countries.  

Notably, both the UK and Italy have launched new SEZ programmes to help distribute economic growth more evenly across their respective countries. The UK has anchored its eight SEZs to the country’s ports. “Freeports have been part of the government’s levelling-up strategy and we are pleased that ports are now seen as a vehicle for economic development,” says Richard Ballantyne, head of the British Ports Association. One year after Italy’s eight SEZs became fully operational, the government has proposed merging them into a single zone with the aim of further capitalising on the benefits. 

According to Ms Fox, in Europe there is still more to come. “We are aware of operators within several countries, members and aspiring members of the EU, that are actively exploring the benefits of FTZs to stimulate economic and social growth,” she says.

Leveraging geopolitics 

These first-time programmes are all driven by classic rationales such as diversification, industrialisation and creating a testbed for new policies. However, today’s geopolitical and trade fragmentation also results in fertile ground for governments to consider starting, or expanding, their free zones offering. Russia’s invasion of Ukraine, the US-China trade war and rising tensions between Beijing and Taiwan have created an uncertain backdrop for global business. For governments sitting on the sidelines, however, it creates opportunities. 

“Geopolitical tensions can make it difficult for certain countries to attract investments, and some firms are ready to relocate,” says Douglas Zeng, a World Bank senior economist. “In that situation, other countries that can stay open, neutral and welcome all kinds of investments, irrespective of the source country, are actually in a better position.” For governments wanting to improve their business environment and willing to offer one-stop-shop services, “free zones now could offer an opportunity that maybe they didn’t have before”, he adds.

These geopolitical factors, coupled with the restructuring of supply chains post-pandemic, are prompting firms to derisk operations by nearshoring — meaning they relocate closer to their target market — or friendshoring, by moving to allied countries. For these firms, moving into a free zone reduces the time, cost and difficulty of what could be an expensive and complex exercise. For manufacturers, there are even more important reasons. Martín Gustavo Ibarra, advisor to the WFZO board, notes that many countries’ mainland laws prohibit the import of equipment that has been used or is more than five years old. “Free zones do not apply this restriction,” he says. 

Protectionist battleground

Free zones’ light regulations, low taxes and focus on international exports mean they are widely viewed as microcosms of free and liberal trade. But recent breakdowns in political and economic relations open up the possibility of them being used as a way to somewhat neutralise the obligations stemming from regional and international treaties, and become a vector for more assertive economic policies. 

“Some governments want to take things into their own hands through a more tailored, narrow approach to economic policy-making,” says Mr Mogielnicki. “An important dimension of this policy stance involves FTZs, which in many respects are isolated from a number of conditions in the onshore economy.” However, he warns about the limits of this approach. “A country can’t replicate the benefits and returns of deeper integration with the global economic community by replacing it with a very tailored economic FTZ approach.”

Preston Martin, president of advisory service Adrianople Group, proposes a more constructive strategy for using free zones to tackle the effects of increasing trade barriers and regulatory hurdles to foreign investment. “FTZs can offer governments a way to mitigate the downsides of protectionism by diversifying export markets and incubating the growth of higher-tech industries,” he says. 

For investors, the benefits of free zones lie in their nimble business environment. To fully embrace their potential, governments must also be agile to see the opportunities free zones present in today’s divided world. 

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