20/02/2017

Free Trade Zones: Definition and Locations of Today’s Global Supply Chains

# Logistics Knowledge

Shifts in trade are placing an emphasis on such geographies as India, Singapore, UAE and Africa.
Indian government looks to open a special economic zone (aka free trade zone) at its largest port, JNPT.
Despite the bright outlook for Africa, risks remain and the need for infrastructure investment is great.

Definition of Free Trade Zones

A free trade zone (FTZ) is defined as 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”. Designed to stimulate economic growth, FTZs are often found throughout the world and around mode of transport hubs like major seaports, international airports, and other locations with strong transportation ties.

While most of the focus has been on Europe and the US, drivers of global economic trade since World War II, a shift in trade is occurring as domestic spending power expands in such emerging markets as Africa, Dubai, India and Singapore.

India

Dating back to the 1960s with the introduction of special economic zones, India has had its ups and downs with using these zones to stimulate economic growth due to government bureaucracy, poor infrastructure and the lack of foreign investment. However, through the years, the government has worked to improve these zones by cutting government red tape as well as investing in infrastructure.

In late 2015, the government announced development plans for a special economic zone at Jawaharlal Nehru Port Trust (JNPT), the country’s largest container handler. JNPT accounts for 60% of the total container cargo moving via India’s twelve major public ports and about 40% of the nation’s overall containerized ocean trade.

Singapore

Often viewed as a gateway into Asia as well as its financial center, Singapore continues to serve in not only these roles but also as a gateway for the AESAN Economic Community. The Community which is a collection of Southeast Asian countries including Malaysia, Indonesia, Thailand and Vietnam, is investing heavily in infrastructure projects to link each country in a seamless manner as well as to meet growing domestic needs of its rising middle classes.

Singapore is generally a free port and an open economy. More than 99% of all imports into Singapore enter the country duty-free. Singapore has three Free Trade Zone (FTZ) authorities, PSA Corporation Ltd, Jurong Port Pte Ltd and the Changi Airport Group (Singapore) Pte Ltd. and nine free trade zones.

UAE

Located along the Persian Gulf within the Middle East, the UAE has benefited from global trade as a transshipment location between Asia and Europe. In addition, as the region lessens its dependence on oil exports, it is encouraging diversification into other industries such as pharmaceuticals and telecommunications.

Among the free trade zones available in the UAE is Jebel Ali, one of the largest such entities in the world. Established in 1985, Jebel Ali is home to about 7000 companies from 150 countries around the world. The port is situated between Jebel Ali Port, Dubai, a global top 10 container port and Al Maktoum International Airport, described as “the world’s largest cargo airport”.

Africa

The “Sleeping Giant” is awakening and as such many infrastructure projects are underway. Despite the many risks – political, economic and natural – the interest in this continent is real as foreign investors such as General Motors, Procter & Gamble and Roche Holding expand operations to the continent. Indeed, Africa is seen not only as an outsourcing location but also one with great promise for its rising middle class. According to the African Development Bank, Africa now has the fastest-growing middle class in the world. Some 313 million people, 34% of Africa’s population, spend USD 2.20 a day, a 100% rise in less than 20 years (Note: The bank’s definition of middle class in Africa is people who spend the equivalent of USD 2 to USD 20 a day).

As interest in Africa grows, so too does the need for free trade zones as a means to attract investors. With financial assistance from China, Djibouti has begun construction of what has been described as Africa’s largest free trade zone. The agreement was signed in early 2016 as an initiative to stretch its “One Belt, One Road” strategy into Africa. The free trade zone will be 48 square kilometers and according to the agreement, the zone is expected to handle $7 billion in trade within two years. In addition, Djibouti will create a unified customs system with China, establish a transit trade center and set up a currency clearing system.

What’s Next?

As the focal point of global trade shifts away from Europe and US in favor of Southeast Asia, India, Middle East and Africa, the need for free trade zones will only grow further to support the growth. In addition, the need for logistics and transportation providers will also grow and with this growth, the need for technology and automation will be great to maintain efficient operations.