Navigating the Economic Battleground: Free Trade Zones vs. Non-Free Trade Zones
What Are the Key Differences and Which One Benefits Your Business?
What is a Free Trade Zone?
Calling a country a “Free trade zone” doesn’t mean it is free from tariffs, or that its citizens are able to freely buy and sell goods without restrictions. “Free trade zone” means that the government has imposed low or no taxes on international imports and exports of certain goods while enforcing a minimum level of environmental and labor regulations.
Free trade zones have been implemented in various parts of the world since the 19th century, initially as an economic tool to increase international commerce without incurring high costs of transport. Most European countries have implemented them successfully in their industries; however, they are most notably widespread in East Asia, where they have become a hallmark of development plans since the 1960s.
In practice, a free trade zone is a region in which specific goods can be traded without customs duties or restrictions. Free trade zones usually have a minimum number of legal policies, such as property rights and environmental standards, enforced by law enforcement. They may also impose other guidelines to protect industries and foreign investors from frivolous lawsuits and exploitation.
Free Trade Zones (FTZs) implement a certain set of requirements to provide an easy environment for investors. Such as minimum wage laws, labor protection laws, corporate governance rules, intellectual property protection, etc. Free trade zones usually have a lower or no tax on international imports and exports, which allows companies to freely trade their products without attracting tariffs. They may also provide customs duty exemptions for specific goods for domestic companies manufacturing those goods. Free Trade Zones are usually accompanied by special government incentives with exclusive facilities such as streamlined customs procedures, port infrastructure, guaranteed land use rights, and cheap financing.
Free Trade Zones are often created with the purpose to attract foreign investors and companies to a country, especially those who wish to do business with foreign traders. An effective Free Trade Zone will provide more value than its investment cost, therefore businesses will have the incentive to invest there rather than in other countries without such an environment. Free trade zones are extremely powerful tools for attracting foreign direct investment (FDI) which can create significant economic growth and job creation.
Foreign Direct Investment (FDI) is an investment that is made with the intent to generate a financial return over a long period of time. Out of all FDI transactions, 23% occur in emerging markets. FDI is the largest source of external capital financing for developing countries and emerging markets. However, FDI requires certain conditions to be fulfilled in order to increase investment such as an attractive business environment and legal framework. By constructing free trade zones with specific incentives or exemptions, foreign investors can benefit from these favorable policies while making their investments and at the same time increasing employment rates relative to other parts of the country.
How Does a Free-Trade Zone Work?
Governments may want to establish free zones in order to promote the development of areas of their countries that are less developed. They are used as an incentive for business. The benefits can be an exemption from taxes on imports & exports, exemption from customs duties on capital equipment for export processing operations, low-interest loans, power at concessional rates, etc.
- An FTZ offers a unique opportunity to defer, reduce or eliminate customs duties on your products, which can result in significant cost savings.
- Customs duties only come into effect when your products leave the FTZ and enter the local market. If a product is re-exported, no duties are due.
- While import duty outside the FTZ is applied to each unit, as well as the parts associated with it, only one duty charge applies upon export for units that are fully assembled within an FTZ.
- In addition, if the zone is located in a country where local taxes are imposed on inventory, storing products in an FTZ may provide additional savings. Take advantage of inland Free-Trade Zones
- Typically, an FTZ is found in or near a port, however, inland FTZs, such as the ones at our equipment processing centres in Pooler, Georgia, and League City, Texas in the US, offer even more benefits.
- Inland FTZs have the advantage of more available land versus on-terminal sites. In addition, if there is a need to be close to a customer’s inland factory, an inland FTZ site might be advantageous for sub-assembling components into a larger component that could then be assembled into a machine or vehicle at the factory. Beyond these benefits, inland FTZs offer additional services, such as inspection, inventory management, and technical services, which help to boost velocity in the overall supply chain and deliver cost savings.
Free trade zones are one of the most important tools for stimulating foreign investment in developing countries. A free trade zone allows the simple and rapid import and export of specific goods with minimum legal requirements. When it comes to moving, processing, or assembling imported products, using a Free-Trade Zone has considerable economic benefits. Situated within the Tema Free Zone Enclave, the Meridian Industrial Park gives importers, manufacturers, and distributors the opportunity to experience these advantages. A Free-Trade Zone (FTZ) is a designated area that is considered outside the customs territory. In an FTZ, domestic and foreign goods can be moved, handled, and assembled without paying the duties and taxes normally required by customs and border protection.
What is a Non-Free Trade Zone?
Non-free Trade Zones (NFTZs) are areas with significant tariffs on goods that can be freely imported/exported and other taxes or regulations that are significantly higher than normal in non-free zone areas. The goods that are manufactured in a non-free zone are subject to higher tariffs and taxes than internationally manufactured goods.
The purpose of setting apart a non-free zone is to allow the government to implement environmentally friendly tax laws and regulations that allow free access to natural resources and control of the land. A non-free zone is usually an industrial area or port where foreign direct investment is encouraged. Setting up an industry results in generating jobs, increasing population, and amount of trade at the port or area. Therefore, establishing these areas will bring profit to the country by raising GDP and attracting foreign investors.
Companies wishing to invest in a non-free zone will have complete protection from the competition, which will not lower their export price. Companies operating in a free trade zone must follow the same rules and regulations and pay the same fees as companies investing there.
Trade tariffs set by a country can be different between free trade zones and non-free trade zones. Due to this difference, Companies who want to invest there have an upper hand over those that choose a non-free zone as it is cheaper for them. In some countries like Japan and Korea, if companies do not have any taxes to pay for importing goods from outside of their country, which will cause high costs for them instead of exporting goods back home. This is because of the high cost of transportation and other related costs.
What are Some Benefits of Establishing a Business in an NFTZ?
The cost of setting up and running a business in a non-free zone is much lower than in a free trade zone. Also, if the government wishes to give incentives, they can be done without a large cost to the country. Some of the incentives may include exemption on import duties, tax-free status of property and equipment, and no labour law requirements such as minimum wage or maximum hours. Other incentives may include tax holidays, favourable interest rates, reduced rates of capital gains tax, low import duties, and customs duty for products of the zone.
A government may wish to establish a non-free zone because it has seen the success of countries that have established a free trade zone and wants to increase exports. It makes sense to establish a non-free trade zone if you are looking at foreign markets to expand your sales. ·
Non-free trade zones are used as development tools to further the government’s objectives which may include promoting exports, creating employment, and developing economically backward regions. They can also be established in developing countries because of their low cost and tax incentives.
Another advantage of NFTZs is that they are located in areas where there is already a developed infrastructure which means that companies setting up in these areas do not have to build from scratch. Additionally, an NFTZ can be established in regions with a high level of human capital, making it an attractive location for investments as it increases the demand for skills and knowledge.
NFTZs provide an incentive to trade with like-minded developing countries. As these countries have infrastructure that needs to be developed, they are willing partners to help develop and create demand so that they can sell their goods and services into international markets. This increases the competitiveness of local businesses which has a significant impact on growth.
Another advantage of non-free economic zones is that governments reduce their dependency on foreign trade partners and create export industries. This gives them more control over their economy and allows them to be self-sufficient in the products they need for domestic consumption.
The establishment of non-free trade zones can assist in the development of infrastructure in a country by providing capital and technology. It also provides areas for companies to set up production facilities, which provide jobs and income for local people. This then creates more demand for products and services within the non-free zone, especially from surrounding businesses that wish to sell their goods and services in the NFTZ. Additionally, the establishment of non-free trade zones creates added demand for local labour which boosts local development.
Unique Advantages of Dawa Industrial Zone’s Dual Business Model for FTZ and NFTZ Businesses
For companies seeking the best of both worlds, the Dawa Industrial Zone offers a unique set of advantages that can significantly enhance their competitiveness and profitability.
A primary advantage of the Dawa Industrial Zone’s dual business model is the ability to operate under both FTZ and NFTZ regulations. This means that companies can import and export goods duty-free, without being subject to customs inspections or other regulatory requirements. This significantly reduces the cost of doing business, making it easier for companies to compete in the global market.
Another advantage of the dual business model is the flexibility it provides to companies. Companies can choose to operate solely under the FTZ regulations or under both FTZ and NFTZ regulations, depending on their specific needs. This flexibility allows companies to tailor their operations to their business objectives and optimize their cost structure.
In addition to the regulatory advantages, the Dawa Industrial Zone also provides excellent infrastructure and logistics support. The zone is located near major transportation hubs, including an international airport and a deep-water port, making it easy for companies to transport goods and materials. The zone also has a robust telecommunications network, including high-speed internet access and advanced IT services, which further enhances business operations.
Again, the zone is equipped with state-of-the-art facilities and infrastructure, such as renewable energy sources, waste management systems, and green buildings, which help companies reduce their carbon footprint and comply with global environmental standards to help promote sustainability.
Finally, the Dawa Industrial Zone’s dual business model provides companies with a competitive advantage in terms of market access. The zone has preferential access to global markets through its FTZ and NFTZ status, making it an ideal location for companies looking to expand their international presence.
In conclusion, the strategic location and supportive regulatory environment in the zone encourage innovation and entrepreneurship, providing businesses with the necessary resources to succeed in today’s global economy. Again, the zone’s unique advantages make it an attractive location for companies looking to establish a foothold in Ghana and expand their reach.
The Dawa Industrial Zone is a purpose-built 2,000-acre industrial park that accommodates a broad range of light and heavy industries across various sectors, such as Agro-processing, Textiles and Garments, Steel Fabrication, Warehousing and Logistics, among others. When operating at full capacity, it is expected to house over 100 companies and provide fully-serviced infrastructure to support their production and operations within the park.