A free-trade zone (FTZ) is a specific class of special economic zone.

It is a geographic area where

goods may be landed, stored, handled, manufactured, or reconfigured, and re-exported under
specific customs regulation and generally not subject to customs duty. Free trade zones are
generally organized around major seaports, international airports, and national frontiers—areas with
many geographic advantages for trade.

Role of Free Trade Zones and Free Ports in the

Transshipment and Transit of Counterfeit Goods
Resolution
WHEREAS, it is in the interest of countries to have the strongest enforcement mechanisms possible to
protect consumers, the investment climate and labor markets, promote economic growth, and reduce the
loss of tax revenues that are directly affected by the lack of efficient enforcement mechanisms and
protections against trademark counterfeiting;

WHEREAS, unrestricted regimes for transshipment and transit of goods through free trade zones and
free ports significantly contribute to the trafficking of counterfeit goods around the world;

WHEREAS, it is in the interest of consumers to stand apprised of and be able to avoid counterfeit goods,
some of which pose great dangers to their health and safety;

WHEREAS, trademark owners support the establishment of a legal framework to enable public
authorities, especially customs authorities, to apply border measures that allow effective actions in
relation to counterfeit goods that undergo transshipment or transit through free trade zones and free
ports.

BE IT RESOLVED, that the International Trademark Association urges governmental authorities to take
the necessary actions to apply the following measures to halt the transshipment and transit of counterfeit
goods in free trade zones and free ports:

 Prohibit the admission to, processing in, and export from the free trade zones of counterfeit goods,
irrespective of country of origin of such goods, country from which such goods arrived, or country of
destination of such goods.
 Empower customs authorities to exercise jurisdiction before the entry and after the exit of goods into a
free trade zone, and to inspect goods in a free trade zone or a free port to ensure that no offence as to
trafficking in counterfeit goods is being committed.
 Ensure close cooperation between national customs authorities and the special authorities of their free
trade zones or free ports in order to provide the efficient enforcement of anti-counterfeiting criminal and
civil laws to check the offences of trafficking in counterfeit goods.
 Ensure the applicability and enforcement of anticounterfeiting criminal and civil laws to check the activities
of trafficking in counterfeit goods in free trade zones and free ports that currently allow free movement of
goods of any nature without regard to origin, quality, purpose, and destination of goods; and without or
minimal customs treatment of such goods in transit or transshipment.

Background
A free trade zone (FTZ) is a specified area within the territorial jurisdiction of a country where there is
either a minimum or no customs control on entry or exit of goods. A free port (FP) is characterized by its
whole harbor plants (sheet of water, quays, wharves, warehouses, factories, etc.) that are considered by
law outside the customs boundaries. FTZ’s and FP’s are not subject to such standard government
 restrictions on trade such as Customs treatment, banking laws, taxation, labour laws and economical
laws and transactions. The relation between the free transit of goods within FTZ’s and FP’s and the
corresponding increase of counterfeiting activities in these areas has become one of the most important
issues relating to the protection of trademark rights.

Goods passing through FTZ’s or FP’s and transshipped through multiple ports, creates opportunities for
counterfeiters to disguise the true country of origin of goods. Counterfeiters also take advantage of
customs territories where border enforcement for transshipped or in transit goods is known to be weak,
with the intention of passing the goods through those customs territories to their destination.

Counterfeiters use FTZ’s and FP’s to carry out at least three different types of illegal operations:

 “Merchants” import shipments of counterfeit goods into the warehouses in the FTZs and then re-export
counterfeit goods to other destinations. Therefore, FTZ’s are not only used to ‘sanitize’ shipments and
documents, thereby disguising their original point of manufacture or departure, but also become
"distribution points' in the supply chain for counterfeit goods.
 Counterfeiters import unfinished goods and then “further manufacture” them in the FTZ’s by adding
counterfeit trademarks, or repackaging or re-labeling the goods, and then export those “finished”
counterfeit goods to other countries.
 Counterfeiters often completely manufacture counterfeit goods in FTZ.
The Anti-Counterfeiting & Enforcement Committee believes that the unrestricted regimes for
transshipment and transit of goods through FTZ’s and FP’s significantly contribute to the development
and extension of the scale of trafficking of counterfeit goods around the world. Accordingly, the ACEC
recommends this resolution to the INTA board for the following reasons: (1) A fully uncontrolled
transshipment of goods does not sufficiently protect trademark rights; (2) there is a need for a legal
framework for establishing the responsibility of public authorities, especially customs authorities, to apply
border measures for the purpose of undertaking effective actions in relation to goods that under go
transshipment or transit and are suspected of being counterfeits; and (3) there is also a need to alter the
approach of customs authorities, which often tend to treat goods in transit with lesser scrutiny than goods
imported or exported out of the respective country.

Port Functions
Within the port system, one or more organizations fill the following roles:

 Landlord for private entities offering a variety of services.

 Regulator of economic activity and operations.
 Regulator of marine safety, security, and environmental control.
 Planning for future operations and capital investments.
 Operator of nautical services and facilities.
 Marketer and promoter of port services and economic development.
 Cargo handler and storer.
 Provider of ancillary activities.
The main uses of free ports are:-

 Free Ports Can Help Rebalance the Economy

 “Direct Delivery” at Free Ports improves manufacturing efficiency
 Free Zones help reduce the costs of scrap in the manufacturing process\

Reasons for Establishing Free Trade Zones (FTZs)

I. To help reduce unemployment and gain foreign exchange earnings.

II. To act as engines for industrialisation and economic growth by attracting foreign direct investments.
Many of the Middle East FTZs are designed to attract foreign direct investors.

III. As experimental laboratories for the application of new policy reforms to be applied later to the larger
national economy. China’s financial, labour, legal and pricing policies were first tested in their FTZs before
being applied to the rest of the economy (Amirahmadi & Wu, 1995).

IV. As a compromise between liberal and protective economic strategy and a gateway to the international
community whilst maintaining protective barriers as in the case of Taiwan and Republic of Korea
(Amirahmadi & Wu, 1995).

V. To facilitate technology and knowledge transfer through the creation of forward and backward linkages.

CONTENT
List of Tables

List of Graphs

Abbreviations

Abstract

Introduction

What is a free trade zone?

Overview of Free Trade Zones

Reasons for Establishing Free Trade Zones (FTZs)

Free Trade Zones and World Trade Organisation Agreement

Arguments on the Impact of Free Trade Zones

Benefits and Costs of Free Trade Zones as Industrialisation Tool

Foreign Direct Investments (FDI) Inflow

Increase in national exports and export diversification

Employment Effect on National Economy

Education/Training Benefits (Human Capital Development)

Linkages to the Domestic Economy

Environmental Regulations and Labour Law

Budgetary Impact on Government

Conclusion and Recommendations

References

List of Tables
Table 1: Top Ten Developing Countries with Free Trade Zones

Table 2: Regional Distribution of Free Trade Zones

Table 3: Evolution of Free Trade Zones

Table 4: Types of zones: ILO’s Evolutionary Typology

Table 5: Direct employment in Free Trade Zones

Table 6: Government revenue and costs from zone development

List of Graphs
Graph 1: The Share of EPZ export in Total Export

Abbreviations
Abbildung in dieser Leseprobe nicht enthalten
Abstract
In pursuit of development, governments of developing countries have adopted different industrialisation
strategies over the years. One of such approach to industrialisation is export –oriented manufacturing and
the common policy instrument adopted to stimulate commercial export has been the establishment of free
trade zones.

This paper tries to find out the possible benefits and disadvantages associated with the creation of free
trade zones as a strategy for industrialisation. The first part tries to explain what constitutes free trade zone
by various authorities on the subject, the types and origin of free trade zones. The second part identifies
the various posits on the impact of free trade zone. The third section identifies some of the benefits and
shortcomings of free trade zones as an industrialisation strategy. The final part makes up the conclusion
and recommendations.

Keywords: export, free trade zone, industrialisation, development

Introduction
The export capacity of a country represents an important pathway to development for several reasons. For
instance it generates foreign earnings, increases employment and the gross national product of the country.
In an attempt to increase national exports, governments create free trade zones (FTZs) to attract foreign
investors usually by exploiting their comparative advantage. More than 100 developing and transition
economies currently implement some form of free zone policy for the supply of goods and services to
foreign markets. These zones are characterised by incentives or privileges that enable investors to
maximise profits and allow for all types of trade, industrial or service activities. The main reason for the
proliferation in the use of this policy tool is the apparent success of these zones in some countries and the
confluence of four trends: a) the increasing prominence of export-oriented growth; b) the increasing
emphasis on FDI-oriented growth; c) the transfer of production of labour intensive industries from developed
countries to developing countries; and d) the growing international division of labour and global production
networks (Engman et al, 2007). Today, different types of zones have been established throughout the world
especially in developing countries (see Table 1) to stimulate export growth, spearhead industrialisation and
achieve development.

What is a free trade zone?

Free trade zone (FTZ) also known as foreign trade zone in the United States and export processing zone
(EPZ) in developing countries have dramatically increased over the last three decades. While some
scholars differentiate between free trade zones and export processing zones on the basis that
manufactured products in the former are allowed full access to the domestic market and the later offered
limited access and mainly for exports, other scholars make no distinction (Yusen, n. d.). Other common
terms used include industrial free zone and export free zone in Ireland; maquiladora in Mexico; duty free
export processing zone and free export zone in the Republic of Korea; special economic zone in China,
investment promotion zone in Sri Lanka; foreign trade zone in India and free zone in the United Arab
Emirates (Kusago &Tzannatos, 1998). It has, however, been noted that the different terminologies that
have been used over time and space often reflect the specific activities carried out within that particular
zone (UNESCAP, 2005). In general, normal trade barriers in the form of tariffs and quotas are eliminated
in FTZs and bureaucratic requirements and procedures are lowered to attract new business and foreign
investments (WEDC, 2012).
According to the World Customs Organisation (WCO) Revised Kyoto Convention, a free trade zone means
a ‘part of the territory of a Contracting party where any goods introduced are generally regarded, insofar as
import duties and taxes are concerned, as being outside the Customs territory’ (ICC, 2013). Alternatively,
the Encyclopaedia Britannica defines a free trade zone as an area within which goods may be landed,
handled, manufactured or reconfigured, and re-exported without the intervention of the customs. O'Malley
1986 has also defined a free trade zone as ‘an enclave within a country into which goods may be imported
or from which they may be exported free of taxes, duties and often at least some of the regulations applying
elsewhere in the country.’

Although FTZs may be designed and created for different reasons and, as a result, the characteristics that
define the concept have been described in many different ways, it appears that a few common
characteristics are standard features of the modern FTZs. An example is the incentives generally provided
by governments for cooperation within the zone that may include fiscal incentives – exemption from some
or all export taxes, duties on imports of raw materials/intermediate goods, profit taxes, VAT, free profit
repatriation; direct subsidies like water and electricity rates; indirect subsidies like grants for training and
education, free provision of physical infrastructure - transport, telecommunication, production space,
residential and commercial facilities; administrative services – fast track customs services; simplified
licensing procedures; dedicated legal framework; relaxed regulatory environment - easy foreign ownership
procedures, leasing and purchasing land, labour law and environment regulations; and export promotion
services in the form of business advisory services, export credit services, sales and marketing support
(Assenza, 2010).

In this light, free trade zones are similar to export processing zones as defined by Milberg and Amengual,
2008 as “regulatory ‘spaces in a country’ aimed at attracting export-oriented companies by offering these
companies special concessions on taxes, tariffs and regulations.” These similarities are further evident in
the International Labour Organization’s definition of export processing zones as ‘industrial zones with
special incentives set up to attract foreign investors, in which imported materials undergo some degree of
processing before being re-exported again’(ILO, 2007). As reiterated by Engman et al 2007, a frequent
reference to EPZs is free trade zones which date back to the 19th century. Moreover, most FTZs located
in developing countries have export processing zones programmes to promote industrial and commercial
exports. Given the similarity, this paper uses the terms interchangeably to refer to all types of zones or
enclaves covered by government policy framework of custom - free manufacturing and services.

Overview of Free Trade Zones

The first FTZ was established in Ireland as the Shannon Industrial Estate in 1959 to promote employment,
make use of the small regional airport and generate revenue for the national economy. The success of the
FTZ promoted its establishment in other countries. The first Asian zone was created in India in 1965,
followed by Taiwan in 1966 and South Korea in the late 1950s and early 1960s. From the 1960s, many
developing nations began to implement export-oriented growth strategies to promote industrialisation.
Thus, the creation of FTZs became a policy strategy that replaced the import-substitution policy approach
(inward-oriented) as they began to focus on increasing exports (outward-oriented) to promote
industrialisation and economic development.

In 1975, 79 FTZs existed globally, employing around 800,000 people. The majority of zone enterprises
worldwide were engaged in labour-intensive, assembly-oriented activities such as apparel, textiles,
electrical and electronic goods. In the past years, EPZs have been implemented at two different
developmental stages in developing countries. One set of countries (Mauritius, Dominican Republic, and
China) adopted EPZ policies in the early stages of their industrial development, to act as "engine of growth"
by encouraging production and export diversification to propel their economies into industrialization. A
second set of countries (Tunisia; Malaysia; Indonesia; Honduras) implemented EPZ when they already had
strong industrial production and export sectors (de Armas &Sadni-Jallab, 2002).

Today, it is estimated that there are about 3,000 free trade zones in 136 countries accounting for 68 million
direct jobs ( see Table 2) and over US$500 billion of direct trade-related value (Akinci & Crittle cited in ICC
2013). Additionally, the purpose, activities and ownership of FTZs has changed overtime. Most FTZs are
now established to attract both foreign and domestic companies operating in a variety of activities in both
industrial and service sectors. Similarly, the ownership and administration of these zones are not limited to
government authorities but private or public-private partnership (Table 3 and 4). Female workers account
for 60 – 70 per cent of zone work-force worldwide, a number that has remained consistent since the
establishment of such zones. This is due to the fact that, the industries in the zones are mostly electronic,
textiles and clothing manufacturing fields dominated by female workers who are usually unskilled or semi-
skilled and who would have been out of the labour force without the zone (Amirahmad & Wu 1995). As
such, the percentage of female workforce decreases as the activities in the zones diversifies away from
simple assembly operations towards more technologically advanced sectors (Taylor, 2014; Madani, 1999).
In Malaysian EPZs, for example, 40 per cent of the workers are female, down from 60 per cent two decades
ago.

Table 1: Top Ten Developing Countries with Free Trade Zones

Abbildung in dieser Leseprobe nicht enthalten

Source: ILO Database, 2007

Table 2: Regional Distribution of Free Trade Zones

Abbildung in dieser Leseprobe nicht enthalten

Source: ILO(2007) Available from: http://www.ilo.org/public/english/dialogue/sector/themes/epz/stats.htm

Table 3: Evolution of Free Trade Zones

Abbildung in dieser Leseprobe nicht enthalten

Source: Assenza, 2010

TD/TC/WP (2006)39/FINAL

Table 4: Types of zones: ILO’s Evolutionary Typology

Abbildung in dieser Leseprobe nicht enthalten

Reasons for Establishing Free Trade Zones (FTZs)

I. To help reduce unemployment and gain foreign exchange earnings.
II. To act as engines for industrialisation and economic growth by attracting foreign direct investments.
Many of the Middle East FTZs are designed to attract foreign direct investors.

III. As experimental laboratories for the application of new policy reforms to be applied later to the larger
national economy. China’s financial, labour, legal and pricing policies were first tested in their FTZs before
being applied to the rest of the economy (Amirahmadi & Wu, 1995).

IV. As a compromise between liberal and protective economic strategy and a gateway to the international
community whilst maintaining protective barriers as in the case of Taiwan and Republic of Korea
(Amirahmadi & Wu, 1995).

V. To facilitate technology and knowledge transfer through the creation of forward and backward linkages.

Free Trade Zones and World Trade Organisation Agreement

Although the World Trade Organization rules do not explicitly affect FTZs, the measures adopted to attract
foreign firms in the zone in practice may conflict with the agreement on Subsidies and Countervailing
Measures (SCM) which came into effect on January 1995. This agreement prohibits export subsidies that
require beneficiaries to meet certain export targets or use domestic goods as inputs instead of imported
goods; or, subsidy that affects other exporters in the domestic market or rival exporters in a third country’s
market.

However, least developed and developing countries with GNP per capita less than US$1,000 per year are
exempted from the prohibition of export subsidies. They lose their exemption status once their GNP per
capita rises to $1,000 for three consecutive years (Assenza, 2010).

While the SCM can affect the use of certain export subsidies, FTZ authorities can still use other incentives
like exemption from indirect taxes, border taxes and import charges to attract foreign investors.

Arguments on the Impact of Free Trade Zones

The various debates on the merits of FTZs has been based on its impact on several elements: from social
issues, like labour rights (including the effect on women and children), environmental protection and urban
planning, to macro-economic issues related to their impact on government revenue, employment, trade and
foreign exchange earnings (Engman et al, 2007).

According to Willmore 1985, FTZs help governments to increase national exports at a lower cost, create
employment and increase incomes. However, linkages between the domestic industry and the zones are
rarely created to promote domestic industries.

In a similar light, Amirahmad & Wu 1995 have stated that FTZs fail when used for promoting technological
transfers, the linkage effects, regional development and distort other sectors like agriculture and increase
unemployment as rural workers are attracted to these zones. However, in cases where the industry
produces capital and intermediate goods, skills are developed.

Alavi & Thompson n. d. have also noted that without the creation of FTZs, most developing countries would
have been unable to attract FDIs and benefited from their comparative advantage of labour intensive
capacity. Additionally, it allows firms to avoid protective legislations which are products of the political
process and rather encourage free trade and economic growth.

Johansson & Nilsson 1997 have identified that FTZs may have an indirect beneficial effect - catalyst effect
- as foreign affiliates are attracted to the FTZs, local firms are stimulated to start exporting by showing them
how to produce, market, sell and distribute manufactured goods on the world market.

According to Engman et al 2007, FTZs from an economic point of view are a sub-optimal policy because
they benefit the few and distort resource allocation. However, it may be useful as a stepping stone to trade
liberalisation in certain countries and governments should consider all available policy options by
conducting a thorough cost/benefit analysis before implementation.

In a cost-benefit analyses which tried to quantify the net benefits derived from zone programmes in Asia,
Jayanthakurmaran 2003 found that static benefits were realised in the form of increased inflow of foreign
exchange; land development; improvements in infrastructure; government services; technology
improvements and skills development to the domestic market.

Contrary, O'Malley 1986 in a survey found that FTZs make very limited contribution to the economic
development of a number of Asian countries and may not justify the costs to the host government in terms
of incentives, infrastructure and exploitation of workers.

Benefits and Costs of Free Trade Zones as Industrialisation Tool

FTZ schemes adopted by governments of developing countries are mainly aimed at economic and social
development by attracting foreign direct investments, which in turn leads to an increase in export, growth
in foreign exchange earnings and the creation of employment opportunities for the domestic work force,
who can also benefit from technology upgrade and management know-how.

Foreign Direct Investments (FDI) Inflow

The privileges and exemptions offered by FTZs attract foreign investors into the country even though not
all the firms located in the zones recently are all foreign companies; there is evidence that shows significant
increase in foreign direct investment in some countries after adopting FTZ policies. The zones created in
South Korea and Taiwan were noted as providing substantial foreign investment in the 1960s (Amirahmadi
& Wu, 1995). This increase in FDIs in zones in these countries has been attributed to them being the first
developing countries to establish export processing zones away from the protectionist restrictions imposed
by import substitution policies and took advantage of the industrial relocation from the developed countries
in the late 1960s and early 1970s (O'Malley, 1986; Amirahmadi & Wu, 1995). Thus, as the zones increased
globally in other developing countries, the ability of their zones to attract more FDI declined as the available
pool of mobile foreign investment is much too small to go round. Consequently, countries are forced to
create more favourable investment environment to secure their share. In countries like China and
Philippines, FDI flows in zones reached 80% in recent years (World Bank, 2007). Also in Mexico, for
instance, FDI in maquiladoras doubled from US$ 895 million in 1994 to US$ 2.98 billion in 2000 and as a
result the maquiladoras share of FDI to total national FDI improved from 6% to 23% over the same period
(Blanco de Armas &Sadni-Jallab, 2002).

However, not all zones are able to directly attract foreign investors. An example is the zones in Senegal,
which play a marginal role in attracting FDI into the economy (Assenza, 2010). It must be noted that, the
importance of foreign direct investment goes beyond the provision of needed capital (financial and
machinery) into the economies of developing countries to stimulate industrialisation. The investments of
foreign capital and technology act as a catalyst that demonstrate to domestic firms and employers good
practices and in some cases results in joint business ventures encouraging local entrepreneurs in
developing countries. Two prime cases are Mauritius and Dominican Republic where local firms were
stimulated into export activities. A study of individual, non-traditional, manufacturing industries in 11
developing countries and the conditions behind their successful entry into the global market showed that,
in industries where the country in question had little or no previous experience, affiliates of foreign
multinational enterprises in the zones provided managerial experience, marketing knowledge and relevant
technology that were copied by local firms (Rhee & Belot 1990). According to Madani 1999 however, the
demonstrative effect of FDIs in zones are becoming less relevant because of globalisation and regional
integration agreements that provide an alternative source to ‘knowledge packages’ and technology
transfers.

Notwithstanding the beneficial contribution of FDIs, the expected share of these investments is sometimes
over estimated. The cost of infrastructure development, public services and other administrative costs
involved in establishing sustainable FTZs can sometimes outweigh the foreign investments in the zones,
consequently, diverting national resources from more viable alternatives for industrialisation. Governments
of developing countries should, therefore, undertake a careful cost-benefit analysis before operating such
zones (Assenza, 2010).

Increase in national exports and export diversification

The establishment of FTZs can lead to a significant increase in national exports and industrialisation in
developing countries. Data from various statistical researches indicated a substantial growth in the volume
of FTZs gross exports as a share of national exports (Graph 1 shows steady increase of FTZ export as a
percentage of national exports in several developing countries). In Mauritius for instance, the level of
exports increased from 3% of total exports in 1971 to 68.75% in 1994 (Assenza, 2010). The share of exports
of manufactured products in the zones was 177, 7 billion US$, representing 8.3% of total exports of
manufactured goods globally in 2003 (Engman et al, 2007). In countries like Malaysia, Vietnam and Kenya,
FTZ exports represent 80% of the total national exports (Assenza, 2010). Indonesia, South Korea and
Taiwan were also able to manage a high ratio of net to gross export from 49 % to 63% in the mid-1980s
(UNESCAP, 2005). Export diversification is another potential advantage of FTZs since many developing
countries are disadvantaged by a mono-culture economy and rely on the exports of a limited number of
commodities in the primary sector. In an analysis on export diversification from 1991 to 2001 for selected
African countries by Cling et al (2001), FTZ-induced industrial manufacturing proved to result in
diversification of exports in certain countries. In the analysis, Madagascar was found to have diversified its
product base during that 10 year span; the number of products with export value of over US$ 1 million
increased from 38% to about 70% (Engman et al, 2007).

Graph 1: The Share of EPZ export in Total Export

Abbildung in dieser Leseprobe nicht enthalten

Source: Blanco de Armas & Sadni-Jallab, 2002

However, an increase in the volume of exports in an FTZ operating country is not necessarily directly linked
to the creation of the zone but can be related to economic reforms and changes in the global market.
Additionally, FTZs that offer fiscal exemptions from some or all exports taxes can encourage firms operating
in the zones to source their raw materials and intermediate inputs from known or cheaper international
suppliers. Thus, preventing backward linkages and creating balance of trade deficit when sufficient exports
are not achieved over a period of time. While some countries have achieved a high level of net exports
such as South Korea, others have not been able to close the gap between gross and net exports, for
instance Jamaica (Blanco de Armas &Sadni-Jallab, 2002). On the other hand, high gross export volume
can also result in high firm profits that can be reinvested into new activities in the host economy to
encourage industrialisation.

Foreign Exchange Earnings

One of the primary benefits of creating FTZ is the generation of foreign exchange earnings to enable
governments to acquire imports needed for the rest of the economy (Madani, 1999). This helps developing
countries to import goods and materials needed to improve the industrialization of domestic firms and
increase government revenue for development. Foreign exchange earnings from exports, however, depend
on the source of inputs since most FTZ firms are usually involved in the labour intensive part of the
production process in garment and electronics sectors. And most of the inputs are imported rather than
sourced locally; the foreign exchange effect may be much smaller than the percentage of FTZ exports in
total may imply. Benefits are greatest where backward linkages have been developed like in Korea and
Chinese Taipei but such effects have been much more limited in other countries.

Employment Effect on National Economy

One of the main objectives for establishing zones by governments is employment generation, which in turn
can help increase the income of people and encourage domestic savings and investments into industries.
FTZs, for the most part, have led to creation of jobs as shown in Table 2. According to ILO (2003), the total
employment in zones excluding China has increased from 4.5 million in 1997 to 13 million by the end of
2002. In the Philippines, employment rose from 39,000 in 1986 to 907,000 in 2003, Costa Rica’s from
11,000 in 1991 to 39,000 in 2005 and the Dominican Republic increased from around 165,000 in 1993 to
190,000 in 2004 ( ILO cited in Engman et al, 2007). On the contrary, in some cases the number of created
jobs, in relation to the total labour force of the FTZ country is modest. As noted by Madani (1999), the FTZs
in the Philippines in 1997 employed about 180,000 workers, a significant number but amounted to only
0.6% of the 31 million workforce that was growing at an annual rate of 1.4 million workers. This marginality
of job creation in absolute terms is confirmed at regional and global level (see Table 5). The relative
marginality measured in direct job creation on the other hand does not take into account the indirect
employment created, which is estimated to range from 0.25% in Mauritius to 2.0% in Honduras. This means
that indirect employment generated by FTZs could potentially amount to 77 million jobs worldwide (World
Bank, 2008). Hence, while FTZs do not present a solution to unemployment, it is nonetheless a viable
source of employment creation especially if indirect employment is also considered (Engman et al, 2007).

Table5: Direct employment in Free Trade Zones

Abbildung in dieser Leseprobe nicht enthalten

Source: FIAS Report (2007, forthcoming).

Additionally, FTZs were established in the hopes that they would offer employment to especially the
unemployed males in these countries. But across board, the majority of the jobs in the FTZs are held by
women (Madani, 1999). For instance, in the Caribbean FTZs approximately 80% of the workforce is female
(Dunn, 1994). In Mexico, in the late 1980s, 54% of the work force in the maquiladoras was female
(Summerfield, 1995). In 1995, women constituted 74% of the work force in zones in the Philippines
especially in FTZs specializing in garment production. Moreover, women employed in the zones are usually
paid lower wages than outside the zones; this has been explained as the results of their lower skills and
many might not have sought formal market employment which offer higher salary and other potential
benefits (Madani, 1999). A more important contribution of zone employment is the creation of jobs in relation
to a situation of high unemployment rate and high levels of poverty. The feminisation of employment in the
zones also offers a source of income for families and increases savings potential. Many economists on the
contrary have concluded that employment in FTZs means low wages, high work intensity, unsafe working
conditions and suppression of labour rights.

Education/Training Benefits (Human Capital Development)

There has no doubt been a great deal of knowledge spill-over effect from the creation of FTZs in developing
countries. Rhee’s 1990 survey of zones in Dominican Republic showed a steep labour productivity learning
curve for the first three years of a firm’s operation, followed by a noticeable flattening out of the curve (Rhea
cited in Madani 1999). Managerial training and skills acquired through employment in FTZ firms can be
beneficial in the industrialisation process of the host. By extension, these improved skills and productivity
increase the workers’ income earning capacity when transferred to domestic firms outside the zones. Thus,
domestic entrepreneurs and workers benefit from observing and copying the traits that make the zone firms
successful exporters (Madani 1999). For instance, in Korea 3000 employees received specialised advance
training in Japan through personnel exchange between the zone companies and affiliates abroad.

Linkages to the Domestic Economy

As a strategy for industrialisation, one of the direct contributions of the zones to industrialisation is the
linkages it creates with domestic companies. It does not only help in the transfer of technology and know-
how to local industries but also provide forward and backward linkages in the host economy. The former
exists when the outputs are sold to domestic market, while the latter when inputs are purchased from or
subcontracted to domestic firms. Indonesia, an often cited example, successfully sourced the garment
industry in the zones with domestic fabrics. In 1995 15% of the total raw materials were sourced locally and
in Mauritius 41% (Assenza, 2010). This linkage between FTZ firms and local firms facilitates the
industrialisation process of developing countries. But then again, the UNCTAD World Investment Report
2002 affirms that there are no significant differences between FTZ and non-FTZ based export-oriented
firms in terms of technology transfer because most of the activities in the zones are characterised by low
added value with no access to advanced technology (UNCTAD, 2003). In most cases, companies usually
maintain their Management, Research and Development Departments within their headquarters in
developed countries (Assenza, 2010).

Environmental Regulations and Labour Law

In an attempt to attract foreign companies into their zone, governments of developing countries tend to
relax the regulations in the zones. Because the multinational corporations are able to choose between a
wide range of developing countries with zones to set up their overseas factories, bidding wars or 'races to
the bottom’ sometimes erupt between competing governments which often have weak or non-existent
regulatory and/or supervisory presence with regard to safety and health issues in the work environment
(Assenza, 2010). Occupational hazards are a subject of concern especially in the electronics and garment
industries in some FTZs (Dunn, 1994). These range from allergies and stress from monotonous, repetitive
movements to health risks associated with inadequate canteens and washroom capacities; refuse disposal
and blocked emergency exits. One example is the 1993 Kader Industrial factory fire in Thailand where 240
workers died because of blocked exits and the practice of storing flammable material on the factory site
(Dunn, 1994). Kennett (1990) reports on the FTZ firms contaminating water supplies in the Dominican
Republic notes that, while governments recognize the importance of sustainable development,
environmental laws are usually fragmented and monitoring institutions lack coordination and tend to have
no control over FTZs (Kennett cited in Madani 1999). Though lax regulations might make the host country
more attractive to industries that entail environmental pollution, it can consequently result in creating long
term health issues for the population. Over the years, however, there has been increased environmental
awareness and many private park (zones) operators have been working on environmental protection
measures to identify, mitigate and even neutralize negative environmental externalities. For instance, some
firms have voluntarily stopped the “acid-wash” processes for jeans because of the consequent water and
soil pollution. Others bring in their own consultants from the developed countries to monitor emissions
(Madani 1999). These actions to protect the environment can encourage local industries to copy such
practices.

Budgetary Impact on Government

The establishment of zones entails the expenditure of huge resources by government and consequently
affects the budget of governments especially in public managed zones. The investment in infrastructure,
administrative costs, foregone taxes, subsidies and fees on services provided are some of the financial
resources lost by governments operating FTZs (see Table 6). This loss of revenue becomes more
significant when the zones fail to achieve the purpose for which they were set up. For example, Namibia
zones failed in employment creation and Senegal in attracting FDI (Assenza, 2010). In such cases
resources that could have been invested in the industrialisation process of the country would have been
wasted on zone creation. The potential revenues or cost of operating a zone is dependent on the type of
infrastructure and incentives provided by the government to firms in the zone.

Table6: Government revenue and costs from zone development

Abbildung in dieser Leseprobe nicht enthalten

Source: FIAS Report (2007, forthcoming)

Conclusion and Recommendations

The establishment of zones represents an attempt by government to industrialise its economy to achieve
development. Over 100 developing countries have currently implemented some form of FTZ policy for
industrialisation. Evidence show that zones have had mixed impact, whilst in some countries it has led to
export growth and diversification; foreign direct investments; employment creation, and foreign exchange
generation, in others results have been disappointing. How then is one to assess if free trade zones are
feasible for industrialisation?

As an effective tool for industrialisation, linkages must be created with the rest of the economy as this will
generate profit for domestic businesses and ensure a continuous interest in the zones. And for linkages to
be created depends on the country’s circumstances and structure of the economy. Governments should,
therefore, consider all available policy options through a cost-benefit analysis and bear in mind that
successful zones depend strongly on external factors like private investment and the international market,
which are unpredictable and as such endeavour to minimise upfront cost whenever possible.