The Covid-19 pandemic has disrupted trade and investment. For their key role in global value chains, free zones across the globe have been in the eye of the storm investment for months now. However, their special regulation and governance regimes makes them more nimble than national government, thus giving them a chance to adjust to the pandemic quicker, Dr Samir Hamrouni, CEO of the World Free Zones Organization, tells fDi.
Q: What has been the impact of the Covid-19 pandemic on free zones globally?
A: Free zones are usually focused on specific global value chains sectors, such as manufacturing, logistics, global service offshoring, finance, or life science healthcare. Those that supported heavily impact sectors like non-essential goods were affected, but not as much as their host economies. This is largely due to their ability to better handle complex integrated supply chains logistics due to their streamlined regulations and more fluid corporate governance.
Where trade around the world slowed down due to border closures and restrictions on certain goods, free zones have used their special status to help keep trade flows alive. Since almost a quarter of global trade is channelled through such zones, it is safe to say that free zones saved many businesses from shutting down while keeping safe, clean shipping lanes open.
The unique regulatory environment in free zones has also allowed them to react more quickly to precautionary measures imposed by governments worldwide. Due to their small physical size relative to their host economies, they were able to roll out new procedures for trade transactions quickly and safely. This approach, in coordination with free zone developers and authorities, allowed for blended company operations that combined teleworking with on-site presence to tackle pandemic need supply chains. This kept employees and workers in those zones safe while they continued to work, particularly in zones focused on essential goods like medical equipment.
Q: How will free zones adjust to the pandemic and the new normal in global markets?
A: There are three major trends emerging from the crisis economy: digitisation, resilience and transparency. The pandemic has merely accelerated these existing trends at a record pace.
Free zones have been at the forefront of digitalisation for many years now, implementing sophisticated systems to increase productivity in port operations and manufacturing facilities. The Jebel Ali Free Zone Authority in the UAE introduced 5G technology to its port, one of the 10 largest in the world, in 2019. And in 2017, Dubai Airport Free Zone digitised many of its internal operations to enable blockchain transactions. Free zones are already digitally operational and are more likely to lead the way by example for countries and industries to follow in their wake.
Free zones are also more resilient than host economies due to their carefully managed size. Information travels faster within and between free zones, something that the World Free Zones Organization supports diligently by sharing updates with its global members regularly throughout the year. Training and reskilling take place fluidly within free zones for the same reason. Most importantly, free zones are able to adapt and react to changes very well both because they are highly digitised and because their optimised operation size allows them to roll out new procedures in record time.
Streamlined regulation and governance is also fully compliant with transparency in free zones. The World FZO’s Safe Zone programme was developed to showcase this transparency in free zones by tracking dozens of key indicators to demonstrate clean trade credentials. As the world moves towards more transparent trade, free zones are there again ahead of the pack.
Q: Governance, policies, specialisms – where do you see room for improvement in free zone models moving forward?
A: The key improvement that free zones can channel is to improve dialogue with the public sector. This is particularly relevant to local production, logistics, and Tier 1 suppliers to the services industry. By integrating free zones more tightly with their host economy counterpart suppliers, they will be able to contribute even more value to local and regional economies and their sustainability goals. This requires clear communication lines to government bodies dealing with trade regulation and foreign policy.
The pandemic has pushed governments towards protectionism, impacting global value chains significantly as countries seek more local and domestic production. The World Trade Organization estimates that global trade flows could contract by up to 32% this year. Free zones are perfectly positioned to restart these flows. With careful consulting, governments can test fresh policies and strategies in free zones before rolling them out domestically. Free zones can also be used to maintain open borders in a more controlled fashion as we emerge from the crisis because they are easier to monitor due to their specific, ring-fenced status. Insulated from political pressures, free zones can serve the economy as neutral instruments in an increasingly polarised world.
And since free zones are also major conduits for knowledge transfer, they can also lead the way in technological advancements. By specialising in specific business sectors, free zones can be catalysts for supply chain clusters as innovations hubs that leverage local and regional suppliers to drive global trade. As we link these free zones together with more uniform regulation, we could develop a parallel supply chain that could provide the ultimate resilience in the face of future economic shocks.
Q: Do you believe that zones will evolve towards models of charter cities, thus becoming integrated urban areas with special jurisdiction and governance? Particularly as the current crisis squeezes out public budgets…
A: Free zones are essentially prosperity vectors for local economies. They attract foreign direct investment, mostly from private investors but also from public funds in the case of cross-border partnerships like we have seen between China and zones in sub-Saharan Africa. Free zones create jobs and facilitate exports for their host economy. They do so because they enjoy special regulations and fiscal systems, but mostly because they function as apolitical ecosystems. In that sense, they are different from charter cities.
Free zones work well because they are interconnected. The similarities between fiscal regulations in different free zones around the world create natural hubs, nodes, and corridors for trade that are driven by economic momentum. Our work at the World FZO goes in that direction, aiming to harmonise regulation of free zones around the world to create predictability in business transactions while promoting transparency and clean trade. This harmony can best be achieved by economic players that support government goals but are not directed by them.
This does not mean free zones should remain isolated from their host country. On the contrary, free zones that integrate closely with the local economy are those that are likely to build the most resilience. Moreover, since they will provide more value to their host government, they will be able to command more fiscal independence, a key factor in attracting foreign direct investment.
Q: What other element will be key to the success of free zones in a post-Covid environment?
A: Global standards are the cornerstone of efficient and effective free zones. Since most of them are designed for global trade, adopting standards that align with other free zones is crucial to success.
That is why the World FZO is aligned with other multilateral organisations like the OECD, the World Trade Organization, the World Customs Organization and Universal Postal Union among others to define clear standards for free zones to adopt and promote as they join the global stage.
At the same time, it is important to develop flexibility in those standards so that each free zone can adapt to the specific needs and competences of their host economy. It is this delicate balance that we must address together, using regular, constructive, and open-minded discussions that will help both existing and new free zones to prosper fruitfully in the international business landscape.
This article first appeared in the October - November print edition of fDi Intelligence. View a digital edition of the magazine here.