The global economy has been on a rollercoaster over the past 18 months and free zones have been no exception. The Covid-19 crisis hit right at a time when free zones across the world were already dealing with early signs of a deep restructuring of global value chains (GVCs), mounting pressure from the Organization for Economic Co-operation and Development (OECD) to tighten up transparency and governance standard illicit trade (which has often found fertile ground in free zones in the past) as well as calls by the international community to rethink their incentives-based model, with regards to the possible introduction of a global minimum corporate tax. Dr Samir Hamrouni, CEO of the World Free Zones Organization (World FZO), believes that following the inevitable adjustment demanded by the Covid-19 crisis, zones will become ‘future-ready’ and continue to thrive.
Q: How have special economic zones (SEZs) around the world adjusted to the challenges of the past 18 months?
A: SEZs have maintained a positive outlook regarding their current and future growth amid challenges that we experienced in the last 18 months. In fact, as per our latest survey for SEZs worldwide, 53% of free zones reported normal economic conditions. We also witnessed how they readjusted their operations and strategies to ensure business continuity.
Alongside these adjustments, World FZO has been helping member free zones to turn these challenges into opportunities as economies are starting to recover, thanks to enhanced regional coordination, policy reforms and the latest technology adoption. Through these efforts, we believe that SEZs will become future-ready as they affirm their environment, social, health, safety, security and governance commitments in line with the UN Sustainable Development Goals.
Q: Many SEZs have struggled to attract new tenants. Has the pandemic weakened or strengthened the business case for the development of free zones? Why?
A: The pandemic has affected every business, and companies operating within SEZs were not exempt from it. However, it is safe to say that free zones remain attractive for businesses. According to the UN, global FDI flows decreased by 42% in 2020 due to Covid-19. Despite that, free zones across the world witnessed growth in inward FDI flows, according to our own survey.
Nevertheless, World FZO is keen on helping member free zones address other areas that need additional improvements. One significant factor for the challenges faced by free zones was the disruption in GVCs. To address this concern, producers need to diversify their supply chains. This can provide opportunities for free zones to expand into new markets and activities, ultimately benefiting their respective countries due to demand and investments from abroad.
World FZO envisions a better future for the global business ecosystem, particularly of free zones, which includes being pandemic-proof. To ensure this, businesses within advanced countries are in an ideal position to spearhead collective economic recovery, although companies from emerging economies also have a crucial role to play. After all, enhanced GVCs ultimately require the participation of all global players for healthier market growth and transition.
Q: How is the restructuring of GVCs affecting free zones around the world?
A: GVCs have been restructuring for over a decade now, although the pandemic has indirectly helped expedite the much-needed transformation. So far, we have been witnessing benefits and advantages for free zones because of this.
For instance, governments and policy-makers are beginning to appreciate the role of free zones in driving cross-border trade and investments. Most small and medium-sized enterprises within free zones have achieved considerable growth, leading to additional foreign investments. Also, free zones are given the opportunity to highlight their resilience amid business disruptions, not to mention their active participation in building more sustainable supply chains.
The restructuring of GVCs has also provided an opportunity for free zones to showcase their faster and more cost-effective business set-up compared with mainland set-up. Aside from fiscal and regulatory advantages, free zones were given more ways to offer turnkey solutions on business support services compared with their mainland counterpart.
To take advantage of these benefits, we recommend free zones maintain a proactive delivery of smart solutions and enhance their inter-zone collaboration to expand market opportunities for all stakeholders. This should include technology adoption for tech-ready zones, introduction of sustainability best practices and more public-private partnerships, to mention a few.
Q: To what extent will environmental, social, and governance (ESG) credentials determine the success, or failure, of free zones following the Covid-19 pandemic? What are the best practices for free zones to become beacons for sustainable investment and development?
A: Since the outbreak of the pandemic, we have been witnessing a greater appreciation of the integration of ESG programmes into the strategy of businesses. Organisations are becoming more aware of the key potentials that come with implementing ESG goals to minimise their ecological footprint and engage the larger community in addressing social needs.
Top priority areas for sustainability best practices include climate change mitigation and clean energy transition, which will help drive increased independence from non-renewable power sources. Customers are now paying more attention to ESG metrics of their favourite brands, including banks and non-essential consumer goods manufacturers. They are also becoming more participative in the enhancement of the company’s social and economic impact by providing feedback regarding the company’s principles, services and campaigns.
Now that more investors and customers are favouring companies that have strong ESG values, free zones can focus on advancing the ESG agenda to help businesses align their operations with the market’s preferences. By taking their customers’ and investors’ feedback into consideration, they can promote transparency and accountability, ultimately fostering business-consumer trust. In turn, this will enhance their business operations and profit in the long run.
Q: How has the OECD’s ‘Code of Conduct for Clean Free Trade Zones’ impacted free zones? Has it contributed to better governance and transparency so far?
A: The Code of Conduct for Clean Free Trade Zones, launched in 2019 by the Task Force on Countering Illicit Trade of the OECD, has helped free zone companies establish better business credibility, transparency and governance. With our ongoing efforts to educate companies regarding the risks associated with illicit trade and financial crime, companies have become more vigilant with their transactions.
World FZO has designed its Safe Zone Certification as a new global compliance standard for free zones. This programme incorporates our WCO SAFE Framework AEO concept and the Authorized Economic Operator (AEO) model of the WTO Trade Facilitation Agreement. It also adheres to the OECD’s code of conduct to ensure maximum compatibility among other established standards.
So far, companies within our member free zones are more confident with their operations, especially that the certification clearly identifies free zones that are committed to clean trade and are compliant with global value chain requirements. We will continue enhancing our policies in line with OECD guidelines to advance transparent and responsible operations within free zones.
Q: The proposal of a global minimum tax has gained widespread support from more than 130 countries. How will this affect the argument in favour of free zones?
A: The proposal to implement a global minimum tax has yet to reach its full maturity, and there are other things that will be examined before it gets implemented. The core of this proposal is to balance opportunities for everyone by providing a basic and minimum threshold of the tax that will be charged.
This will of course apply to overseas profits, although each respective government could still set whatever local corporate tax rate it deems necessary and beneficial for their economy. In that case, offshore companies that pay lower rates in another country could be subject to additional taxes by their home governments to match the minimum rate.
On the other hand, special economic zones are known to increase exports, FDI attraction and local employment. They are also pivotal to promoting investment and competitiveness in developing economies. However, since there are no exemptions to the application of the minimum tax rate, we could reasonably expect overseas businesses and operations to comply. Currently, there are rules and nuances that need to be worked out based on the OECD’s blueprint, and we look forward to seeing more consistency to resolve concerns.