Free zones remain at the heart of the SEZ system

The generic term “free zone” can be defined as an area of variable size, in which authorized companies are exempt from the normal regime applicable in the host country, in particular with regard to customs (or even taxation where the country so authorizes)². In return for this concession and other benefits, countries expect these companies to create large numbers of jobs, stimulate domestic exports and help diversify the economy by introducing new sectors of activity into it (Bost, 2010).

The use of the term SEZs relegates the term “free zones” to a subtype, with the specific characteristic of being separate customs territories (UNCTAD, 2019).

Indeed, a free zone offers its users reduced or no customs duties for goods that

2 The term “free zones” has not been adopted by all countries as the generic reference term. Only about sixty countries use it commonly, most often in parallel with other terms that are officially used.

are manufactured, assembled or are simply in transit. This makes it possible to differentiate them without hesitation from other types of SEZs. Free zones are still the most prevalent subset within the vast group of SEZs: 2,296 free zones, or 42.6% of the world total of SEZs in 2019 (Table 1).

The various kinds of free zones have a long history, which explains why there are so many definitions. The definitions vary according to the combination of benefits conferred and certain other nuances. In addition to customs advantages, tax advantages are also significant, although they are no longer as prevalent as in the past. Indeed, under pressure from international organizations, many countries have reviewed their taxation regimes and largely revoked tax benefits enjoyed by zone-based companies in order to reduce distortion of competition (Bost, 2010;

Farole and Akinci, 2011). This trend first affected emerging countries and then

Source: Bost F., 2019, University of Reims and UNCTAD, World Investment Report 2019.

Note: This table includes single factory free zones but does not include free points.

Table 1. Distribution of free zones and special economic zones by major geographical area in 2019

Number of free zones

(Bost database) Percentage

of total Number of SEZs

(UNCTAD) Percentage of total

Global 2 296 100 5 383 100

Developed economies 295 12.9 374 7

United States 191 8.30 262 4.70

Europe 85 3.70 105 2

Developing economies 1 869 81.40 4 772 88.60

Africa 215 9.40 237 4.40

Asia 1 196 52 4 046 75

Philippines 385 16.80 528 9.80

China 135 5.90 2 543 47.20

Malaysia 45 2 45 0.83

India 231 10 373 7

United Arab Emirates 47 2 47 0.90

Oceania 1 0.04 3 0.05

Latin America and the Caribbean 457 19.90 486 9

Colombia 101 4.40 101

Dominican Republic 71 3.10 73 1.30

Transition economies 132 5.70 237 4.40

Russia 39 1.70 130 2.40

spread to some middle-income countries. The abandonment of these tax benefits in free zones was negotiated by individual countries member to the World Trade Organization (WTO), so tax rates applied to free zones are now generally identical to rates applied outside zones. However, the tax advantages granted to companies located in free zones remain in force in many least developed countries (LDCs), so that they can maintain their attractiveness to foreign investors.

In 2015, the World Free Zones Organization (WFZO), the largest federation of free zones, proposes the following definition: 

“A Free Zone is an area designated by one or more government(s)³ where economic activities, whether production or trade, physical or virtual with respect to goods, services or both, are permitted and relieved (totally or partially) from customs duties, taxes, fees or with specific regulatory requirements that would otherwise apply” (WFZO (2015).

The European Union, which does not yet use the term SEZs in a generic sense, proposes an even more precise definition of free zones, mostly focused on the issue of customs advantages:

“Free zones are special areas within the customs territory of the Community. Goods placed within these areas are free of import duties, VAT and other import charges. Free zone treatment applies to both. Non-Community goods stored in the zone are considered as not yet imported to the Customs territory of the Community whereas certain Community goods stored in free zones can be considered as already exported. On importation, free zones are mainly for storage of non-Community goods until they are released for free circulation. No import declaration has to be lodged as long as the goods are stored in the free zone. Import and export declarations have only to be lodged when the goods leave the free zone. In addition, there may be special reliefs available in free zones from other taxes, excises or local duties. These will differ from one zone to another. The free zones are mainly a service for traders to facilitate trading procedures by allowing fewer customs formalities.”⁴

The size of free zones vary considerably: from a few hectares for the smallest of them, to several hundred or even thousands of km². Their primary purpose is to export most of their production (manufactured products or services), which justifies the absence of customs duties on imports for raw materials, but also for all imported inputs. Their export focus is therefore one of the main characteristics of free zones.

3 The case of cross-border free zones whose objective is to facilitate trade between two countries, such as the Kaesong free zone between South Korea and North Korea.

4 http://ec.europa.eu/taxation_customs/business/customs-procedures/what-is-importation/free-zones_en

Other SEZs do not always have this purpose because they are largely intended to welcome national and foreign investors interested in producing for the domestic market (this is particularly the case in China).

With these generalities in mind, it is possible to identify two main types of free zones according to their focus (Bost, 2010):

1. Free trade zones (FTZs) were the first type of free zones to have been developed.

The World Bank uses the following definition: “FTZs are fenced-in, duty-free areas, offering warehousing, storage, and distribution facilities for trade, transhipment, and re-export operations.”⁵ FTZs are hubs of international trade by the very nature of their activities: transhipment, re-export, international trade, etc. They play a very important role as trade facilitators in globalization. These areas are generally located in or in the immediate vicinity of seaports (known as “free ports”⁶) and major airports. They are also present along the main transportation axes (maritime, rail and road), along the development corridors, or in border regions.

2. Export Processing Zones (EPZs) are the second kind of free zone. EPZs specialize in manufacturing (textiles and clothing, footwear, sports goods, consumer electronics, industrial components, etc.) and, increasingly, in the provision of services that can be supplied at a distance through digital networks (digital data processing, call centres, financial services, etc.). Their particularity is to export all or part of their production abroad, according to very precise rules set by the investment code of the country of origin (usually varying between 80% and 100%

of their production). If manufactured products from the EPZs are transferred to the domestic market, companies must pay customs duties equivalent to those they would have had to pay if they had imported these products, in order to avoid a distortion of competition. Some of the best known examples of EPZs include Shannon⁷ (Ireland, since 1959); Kaohsiung (Taiwan, since 1966); Manaus (Brazil, since 1967); La Romana (Dominican Republic, since 1968); Masan (South Korea, since 1970); Bayan Lepas (Malaysia, since 1972); Batam (Indonesia, since 1978).

These EPZs have been very successful and have attracted a great many foreign and domestic investors. They have served as models for the dissemination of the concept of industrial free zones and services throughout the world.

5 http://documents.worldbank.org/curated/en/343901468330977533/pdf/458690WP0Box331s0Apri l200801PUBLIC1.pdf

6 The World Bank has proposed the following definition: “Free ports typically encompass much larger areas. They accommodate all types of activities, including tourism and retail sales, permit on-site residence, and provide a broader set of incentives and benefits.” http://documents.worldbank.org/

curated/en/343901468330977533/pdf/458690WP0Box331s0April200801PUBLIC1.pdf

7 In 2017, Shannon lost its official free zone status under new rules in force in the European Union.

But it is now a special economic zone according to UNCTAD criteria. https://ec.europa.eu/taxation_

customs/sites/taxation/files/resources/documents/customs/procedural_aspects/imports/free_

zones/list_freezones.pdf