The Online Encyclopedia and Dictionary






Free trade zone

Free trade zones, also called free trade areas or export processing zones, designate either parts of a country or groups of countries that have agreed to eliminate tariffs, quotas and preferences on most goods between them. Unlike a customs union, members of a free trade area do not have the same policies with respect to non-members. Free trade areas include the member states of the North American Free Trade Agreement, European Free Trade Association, and South American Community of Nations.

Most FTZs are located in third world or peripheral countries. They are special zones where (some) normal trade barriers such as import or export tariffs do not apply, bureaucracy is typically minimized by outsourcing it to the FTZ operator and corporations setting up in the zone may be given tax breaks as an additional incentive. Usually, these zones are set up in underdeveloped parts of the host country, the rationale being that the zones will attract employers and thus reduce poverty and unemployment and stimulate the area's economy. These zones are often used by multinational corporations to set up factories to produce goods (such as clothing or shoes).

The creation of special free-trade zones is criticized as giving business which set up operations undue influence over already corrupt governments, and as giving foreign corporations more economic liberty than is given ordinary citizens, who face large and sometimes insurmountable "regulatory" hurdles in most third-world nations. Because the multinational corporation is able to choose between many underdeveloped or depressed countries in setting up an overseas factory, and most of these countries do not have limited governments, bidding wars of sorts erupt between their governments. Often the government pays part of the initial cost of factory setup, loosens environmental protections and rules regarding negligence and the treatment of workers, and promises not to ask payment of taxes for the next few years. When the taxation-free years are over the corporation which set up the factory without fully assuming its costs is often able to set up operations elsewhere for less expense than the taxes to be paid, giving it leverage to take the host government to the bargaining table with more demands in order for it to continue operations in the country.

See also

Jamaican Free Zones, Sweatshop, Third world, Multinational corporation, trade, international trade, trade bloc, Free Trade Area of the Americas

Last updated: 08-30-2005 17:20:17
Last updated: 09-12-2005 02:39:13