FOREIGN DIRECT

INVESTMENT AND Dr. Sugandh Arora

FREE TRADE AREA

Learning
Outcomes
After this lecture, you will able to

understand the concept of free trade in international

trade,

measure benefits of free trade zone users.

What is Free trade area ?

• A group of countries that have few or no price controls

in the form of tariffs or quotas between each other.

• Free trade areas allow the agreeing nations to focus on

their comparative advantages and to produce the goods
they are comparatively more efficient at making, thus
increasing the efficiency and profitability of each
country.
What is Free trade area ?

• One of the most well-known and largest free trade

areas was created by the signing of the North American
Free Trade Agreement (NAFTA) on January 1, 1994.

• This agreement between Canada, the United States and

Mexico encourages trade between these North
American countries.
What is Free trade area ?

• Free Trade Zones are also known as Special Economic Zones

in some countries.

• Special Economic Zones (SEZs) have been established in

many countries as testing grounds for the implementation of
liberal market economy principles.

• SEZs are viewed as instruments to enhance the acceptability

and the credibility of the transformation policies and to attract
domestic and foreign investment.
History

• The world's first Free Trade Zone was established in Shannon,

Ireland (Shannon Free Zone).

• This was an attempt by the Irish Government to promote

employment within a rural area, make use of a small regional
airport and generate revenue for the Irish economy. It was hugely
successful and is still in operation today.

• The number of worldwide free-trade zones proliferated in the late

20th century. In the United States free-trade zones were first
authorized in 1934.
History

• This is not to be confused with an "Export Processing Zone" (EPZ) which

is actually a type of free trade zone (FTZ), set up generally in developing
countries by their governments to promote industrial and commercial
exports.

• Most FTZs located in developing countries: Brazil, Colombia, India,

Indonesia, El Salvador, China, the Philippines, Malaysia, Bangladesh,
Pakistan, Mexico, Costa Rica, Honduras, Guatemala, Kenya, Sri Lanka,
Mauritius and Madagascar have EPZ programs. In 1997, 93 countries had
set up export processing zones employing 22.5 million people, and five
years later, in 2003, EPZs in 116 countries employed 43 million people
Free Trade Zone

• A foreign-trade zone is a designated location in the United States

where companies can use special procedures that help encourage U.S.
activity and value added - in competition with foreign alternatives -
by allowing delayed or reduced duty payments on foreign
merchandise, as well as other savings.

• A site which has been granted zone status may not be used for zone
activity until the site has been separately approved for FTZ activation
by local U.S. Customs and Border Protection (CBP) officials, and the
zone activity remains under the supervision of CBP.
Free Trade Zone

• FTZ sites and facilities remain within the jurisdiction of local,

state or federal governments or agencies.

• Airport, seaport, or any other designated area for duty-free

import of raw materials, components, sub-assemblies, semi-
finished or finished goods. Such items can be stored,
displayed, assembled, or processed for re-export or entry into
the general market of the importing country (after paying the
required duties). Also called foreign trade Zone or free zone.
Free Trade Zone

Foreign-trade zones are designated sites licensed by the

Foreign-Trade Zones (FTZ) Board (Commerce Secretary
is Chairperson) at which special customs procedures may
be used. These procedures allow domestic activity
involving foreign items to take place prior to formal
customs entry.
Free Trade Zone

Duty-free treatment is accorded items that are re-

exported and duty payment is deferred on items sold in
the U.S. market, thus offsetting customs advantages
available to overseas producers who compete with
producers located in the United States. Subzones/usage-
driven sites are approved for a specific company/use.
Free Trade Zone

A site which has been granted zone status may not be

used for zone activity until the site or a section thereof
has been separately approved for FTZ activation by local
U.S. Customs and Border Protection (CBP) officials, and
the zone activity remains under the supervision of CBP.
FTZ sites and facilities remain within the jurisdiction of
local, state or federal governments or agencies.
Benefits of Free Trade Zone Users

Duty No duties on or quota charges on re-exports. •

Exemption

Duty Customs duties and federal excise tax deferred on imports.

Deferral
In situations where zone production results in a finished product that has a
Inverted lower duty rate than the rates on foreign inputs (inverted tariff), the finished
products may be entered at the duty rate that applies to its condition as it
Tariff leaves the zone (requires prior authorization).

Logistical Companies using FTZ procedures may have access to streamlined customs
procedures (e.g. "weekly entry" or "direct delivery").
Benefits

Foreign goods and domestic goods held for export are exempt from state/local
Other inventory taxes. FTZ status may also make a site eligible for state/local
Benefits benefits which are unrelated to the FTZ Act.
Benefits of Free Trade Zone Users

• No duties on or quota charges on re-export.

• Customs duties and federal excise tax deferred on imports.

• In situations where zone production results in a finished product that

has a lower duty rate than the rates on foreign inputs (inverted tariff),
the finished products may be entered at the duty rate that applies to its
condition as it leaves the zone

• Foreign goods and domestic goods held for export are exempt from
state/local inventory taxes. FTZ status may also make a site eligible for
state/local benefits which are unrelated to the FTZ Act.
Public Benefit

• Help facilitate and expedite international trade.

• Provide special customs procedures as a public service to help firms

conduct international trade related operations in competition with foreign
plants.

• Encourage and facilitate exports.

• Help attract offshore activity and encourage retention of domestic

activity.

• Assist state/local economic development efforts.

• Help create employment opportunities.

Activities in Zones

• Merchandise in a zone may be assembled, exhibited, cleaned,

manipulated, manufactured, mixed, processed, re-labelled, repackaged,
repaired, salvaged, sampled, stored, tested, displayed and destroyed.

• Production activity must be specifically authorized by the FTZ Board.

(Production activity is defined as activity involving the substantial
transformation of a foreign article or activity involving a change in the
condition of the article which results in a change in the customs
classification of the article or in its eligibility for entry for consumption.)

• Retail trade is prohibited in zones.

Merchandise in a Zone

• Any merchandise that is not prohibited from entry

into the territory of the U.S. may be admitted to a
zone.

• If applicable, import licenses or permits from other

government agencies may still be required to bring
the merchandise into the zone
Zones can be Located

• Zone sites must be within or adjacent to a U.S. Customs and

Border Protection (CBP) port of entry.

• The adjacency requirement can be satisfied if one of the

following factors is met:

1. The zone or subzone site is within the limits of a CBP port of

entry.

2. The zone or subzone site is within 60 statute miles of the

outer limits of a CBP port of entry.
Zones can be Located

3. The zone or subzone site is within 90 minutes' driving time

from the outer limits of a CBP port of entry as verified by the
CBP Service Port Director.

4. For subzones only: subzone sites that are outside the 60

miles/90 minutes driving time from the outer limits of the
CBP port of entry may alternatively qualify to be considered
adjacent if they work with the CBP Port Director to ensure
that proper oversight measures are in place.
Zone Exist Now

• There are about 250 general-purpose zones and over 500

subzones approved Legal Authorities and Requirements

• FTZ Act of 1934 (19 U.S.C. 81a-81u) est. FTZ Board

(Commerce, Treasury) to license and regulate FTZ’s.

• FTZ Board regulations (15 CFR Part 400).

• Customs regulations (19 CFR Part 146).

That’s all for now…