Free trade zones are developed in places that are geographically advantageous for trade. Places near international airports, seaports, and the like are preferred for developing free trade zones.
The Free Trade Zone can be defined as a labor-intensive manufacturing hub, which involves the import of components and raw materials, and the produced goods are exported to different countries.
The Free trade zones are located in the developing countries. Outsourcing the zone to the FTZ operator minimizes the bureaucracy and the businesses established in that zone may be given tax benefits. One of the main purposes of the free trade zones is to develop the economy of that location by providing more job opportunities, business options, manufacturing options, etc.
These zones are mostly used by transnational corporations for establishing factories for the manufacturing of several goods. The goods depend on the availability of the raw material, skilled labor, and well-equipped technical staff. Some of the oldest Free Trade Zones in the world are found in South America. Free trade regulations were endorsed in Uruguay and Argentina, as early as 1920. During the 60s and the 70s there was a rapid surge in the development of FTZs across the world.
There were around 3000 free trade zones across 116 countries in the year 1999, where nearly 43 million people were working. These FTZs produce various goods such as shoes, clothes, sneakers, toys, convenient foods items, electronic goods, etc. The other important purposes of such trade zones are the development of export-oriented units, increase in the foreign exchange earnings, and generation of employment opportunities.
The main idea behind creation of free trade zones is to facilitate cross-border trade by removing obstacles imposed by customs regulations. Free trade zones ensure faster turnaround of planes and ships by lowering custom related formalities. FTZs prove to be beneficial both for the importers and exporters, as these zones are designed to reduce labor cost and tax related expenditures. Free trade zones help the traders to utilize the available business opportunities in the best possible way. FTZs promote export-oriented industries. These zones also help to increase foreign exchange earnings. Employment opportunities created by free trade zones help to reduce unemployment problem in the less developed economies.
International free trade zones are placed mostly in developing countries. It was in the initial decades of the 20th century that the free trade zones in Latin America came into prominence. International FTZs are spread over 116 countries across the world. Among the major products that are produced in free trade zones electronics goods, cloths, toys, and shoes are worth mentioning.
The setting up of Free trade zones have also been criticized, for encouraging commercial activities sometimes under the influence of corrupt governments, and for providing the multinational corporations with more economic liberty. A number of developing countries have allowed the local industrialist to set up units located within the free trade zones, in order to exploit the export-based incentives.
The governments of these countries provide relaxation of the rules pertaining to environmental protection and negligence to the workers, tax holiday for the first five years, and sometimes the initial cost of setting up of the production unit.