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Journal of International Business and Law

Abstract

Free trade zones (FTZs) date back to the time of the Phoenicians; they developed in the 1970s and proliferated from 1980 until today. FTZs are duty-free areas where goods may be warehoused, processed, sold, serviced, distributed, showcased, packaged, labeled, sorted, assembled, and manufactured as finished goods, prior to re-exporting them as duty-exempt finished products. More than one 135 countries operate tax-free trade zones. There are more than 3,500 of these zones and subzones all over the world, and 277 FTZs and 500 subzones exist in the United States, creating 68 million direct jobs and over $500 billion of direct trade-related value added within the zones. FTZs benefit both importers and exporters because both save on taxes, reduce transportation costs, avoid financing charges, and thereby increase their business cash flow. Exporters view FTZs as an entry into foreign markets, an opportunity to defer or avoid customs duties, and a way to obtain income tax exemptions or reductions. This article is a primer on the way FTZs work in the United States and abroad. It asks whether FTZs have had an impact on the U.S. economy. The article delves deeply into the business benefits and tax advantages of FTZs. U.S. exports from general purpose zones and subzones have generally increased from 1989 to 2008, earning the U.S. from $10 to $40 billion. Despite the plethora of bilateral trade agreements and the fall in U.S. tariff rates, which have increased the importation of foreign products into the U.S., the use of FTZs has grown significantly since 1970 and resulted in an increase in US exports. By using FTZs, the U.S. manufacturer can get around the "inverted tariff rate" which encourages the importation of foreign goods into the US. FTZs reduce costs for the American business and incentivize exportation of U.S. products. FTZs can play a significant role in economic growth by increasing exports, enhancing industry competitiveness, and attracting foreign direct investment. Special privileges are given to manufacturers who export the products processed in the FTZ. Export processing zones (EPZs) focus on manufacturing of exports only and allow investors to import and export goods free of duties and exchange controls, facilitate licensing and other regulatory processes, and liberate businesses from obligations to pay corporate taxes, value added taxes, or other local taxes. The purpose of FTZs is to attract foreign direct investment; alleviate unemployment, especially for women; foster economic reform strategies by developing and diversifying exports; and test new approaches to foreign direct investment and to government policies related to law, land, labor, and the pricing of goods. Some FTZs succeed (if they are focused on increasing exports) and some FTZs fail (if the industry simply takes advantage of the tax advantages without producing substantial employment or export earnings and without providing healthy labor and environmental conditions for the workers). FTZs have been criticized for bad labor practices, environmental abuses, the failure to increase exports sufficiently, and the liberal use of zones by money launderers and narcotics traffickers. Nevertheless, FTZs reduce the cost of manufacturing in America, reduce the massive trade deficit, and help create new jobs for American workers. There are conflicting reports on the advantages and disadvantages of FTZs and their impact on the U.S. economy. In order for FTZs to increase exports, facilitate constructive international trade, and enhance international business, rational and reasonable regulatory schemes must ensure that zones are being used for the primary purpose of increasing exports and safeguarding social and environmental standards both in the U.S. and abroad.

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