Turkey’s 20 operating free zones carried out $23.8bn in foreign trade in 2006, an increase of only 1.97% over 2005, the Directorate General of Free Zones has reported.

Experts say the flat growth in trade originating from the zones is due to the government’s lifting of some critical tax exemptions on user firms.

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Companies that began operating in the zones from 2004 are not exempt from withholding tax, as others have been. But all exemptions of withholding and employee income tax (10%-20%) on the 3876 firms operating in the zones, including 648 foreign firms, will be lifted at the end of 2008. All the companies will have to pay corporate tax (20%-30%) when Turkey becomes a full member of the EU, still eight to 10 years away, or when their operating licences expire.

“The heady growth of the 1990s and early 2000s for the free zones are over,” M Vacit Sar, a board member of the Kocaeli Free Zone, east of Istanbul, said in an interview with fDi magazine. “I suspect that some firms will be leaving the zones because they will have lost their competitive edge.”

Manufacturing bias

He has urged the government to make changes to Turkey’s free zone laws that would allow information and communication technology companies to provide outsourcing services from the zones, including the establishment of call centres.

“The present free zone law is geared toward manufacturing, not services,” he says. “We can attract many call centres to the zones.”

Nevertheless, several Turkish free zones are growing. The Istanbul Leather and Industry Free Zone (Desbas), located in the east of the country near the new Sabiha Gökçen International Airport, has been Turkey’s biggest free zone in terms of trade volume since the early 2000s. In 2006, Desbas carried out $6.96bn in import and export trade, an increase of 5.5% over 2005. Some 720 companies, including 120 foreign firms, use its facilities in manufacturing and trading of leather and fur garments, footwear, chemical auxiliaries, dyes, construction materials, machinery, ready-wear and apparel, and optical and electronic instruments.

Eastward shift

In the Antalya Free Zone, one of the first two free zones to begin operating in Turkey, some 30 local and foreign boat building companies have set up shop in the past three years to build luxury yachts, high-speed boats, sailboats and catamarans.

“The global boat-building industry is shifting from the industrialised West to Turkey and to the Antalya Free Zone,” says Ayla Öner Bayhan, acting director of the zone.

German medical supplies manufacturer MAQUET is producing sophisticated surgical operating table systems and cardiopulmonary equipment, including catheters, at the Antalya Free Zone. Meanwhile, Dutch-Turkish joint venture Wagner Kablo produces wire and cable harnesses for motor vehicles, household appliances and whirlpool baths at a plant there.

Since they began operating in 2006, the free zones have contributed $149bn to Turkey’s foreign trade figures.

Some 785 companies operating in the Turkish free zones are manufacturing firms, 2452 are trading companies, 24 are management firms, and the remaining 615 are mainly office rental firms, warehouse and logistics operations, banks, insurance companies, repair and maintenance workshops and brokerage companies. At the end of 2006, the free zones employed 42,040 persons, with the Aegean Free Zone having the most personnel – 13,729 workers.

Considerable opposition existed over the free zones at the time they were built. Opponents said the costs of building and operating them and the tax exemptions, low-cost rental and leasing rates would outweigh the benefits. The free zones are considered to be within Turkey, but outside its customs boundaries.

“The free zone system has served as a locomotive in attracting foreign investment and bolstering Turkey’s imports and exports,” Kürsad Tüzmen, state minister of foreign trade, told a conference of the World Economic Processing Zones Association in Antalya in April.

Trade volumes in Turkey’s main free zones in 2006 ($,000)