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What is a free trade zone: Meaning, benefits, and how it works

A free trade zone is an area where trade can occur without facing obstacles imposed by customs authorities. Learn more about how it works in this blog.

In a global economy that is marked by interconnected markets and intensified competition, nations are seeking innovative strategies to propel economic growth and attract foreign investment. In this landscape, free trade zones (FTZs) emerge as key instruments, offering a specialized environment within a country's borders to facilitate international trade and commerce. With relaxed regulations and streamlined customs procedures, FTZs promote economic development and foster a conducive environment for trade. In this blog post, we will discuss what free trade zones are, how they work, and their various functions and benefits.

What is a free trade zone?

A free trade zone is a designated area within a country where goods can be imported, stored, processed, produced, modified, and re-exported without being subjected to customs tariffs or other customs regulations. Free trade zones are generally located near significant ports, airports, border facilities, or other areas with geographic advantages for trade.¹
In addition to tax breaks and simplified regulations, corporations operating within a free trade zone enjoy incentives like the ability to import parts duty-free, retain foreign exchange earnings, and receive tax exemptions. These incentives aim to attract investment and generate employment, thus contributing to the overall economic development of the region. Multinational corporations frequently utilize free trade zones to establish factories for manufacturing goods like clothing, shoes, and electronics.²
In India, FTZs are referred to as special economic zones (SEZs). As of 2023, India had 270 operational SEZs.³

How do free trade zones work?

A free trade zone (FTZ) offers a unique opportunity to defer, reduce, or eliminate customs duties on imports. Once goods enter an FTZ, they can be stored, altered, repaired, or manufactured for trade, transshipment, and re-export operations. Goods within an FTZ are not subject to the country’s customs jurisdiction.
Goods within an FTZ can either be re-exported or transferred to the domestic market for consumption. However, relevant duties, taxes, and fees become payable once the goods are moved from the FTZ and transferred to the country’s domestic territory for consumption.⁴

Purpose of free trade zones

Governments establish free trade zones with the objective of facilitating cross-border trade and promoting economic development. Some of the key outcomes governments expect from free trade zones are as follows:

Generation of foreign exchange earnings

By encouraging the export of non-traditional products, FTZs can boost export earnings, positively influencing the exchange rate. This can lead to greater imports at a given exchange rate or imports at reduced costs for domestic consumers

Job creation and income generation

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Increase in foreign direct investment

Through tax exemptions and relaxed regulations, FTZs create a business-friendly environment that enhances a country's appeal to foreign investors. When foreign investors bring capital into an FTZ, it boosts the local economy, fostering growth and development.

Increased technological and knowledge transfer

The presence of foreign companies in FTZs can lead to technological advancements and knowledge spillovers, which benefit local companies. Local suppliers operating within an FTZ are required to adopt global production and quality standards. To achieve this, local workers, staff, and management undergo skill development and training. This upgrades local capabilities and stimulates the production of non-traditional products.⁵

Benefits of free trade zones

The key benefits of FTZs are as follows:

Deferral and elimination of duty:

Free trade zones are exempt from customs regulations. This means that goods entering these zones are not subject to customs duties until they leave the FTZ. This interval between import and export allows companies to defer or eliminate duty expenses while assembling or manufacturing goods for entry into the market or for re-exportation.

Exemption from duties on re-exports:

Re-exported goods are not subject to duties or quotas in an FTZ. By utilizing FTZs, companies can bypass lengthy customs duty drawback processes. Additionally, no taxes are levied on products destroyed within the zone, which can benefit companies dealing with fragile imports or industrial operations generating substantial waste.

Export distribution center benefits:

An FTZ eliminates import duties when finished goods are brought into the country for potential export. Therefore, using an FTZ as an export distribution center can offer numerous advantages when selling goods in international markets.

Streamlined logistics:

The relaxed customs processes within FTZs facilitate quicker turnarounds for airplanes and ships, leading to quicker processing times. In certain FTZs, imports can also be directly delivered to the zone upon customs approval, and permission to break and attach customs seals can be requested. Additionally, a single entry may be utilized to file multiple entries and exports, simplifying logistics processes^.6

Where are free trade zones located in India?

As of 2023, there are 270 operational special economic zones (SEZs) spread across various states and Union Territories across India. Notable SEZs in India include the Reliance Jamnagar SEZ and the Kandla SEZ in Gujarat, as well as the Cochin SEZ in Kerala, among others.⁷ States like Tamil Nadu, Telangana, Maharashtra, Gujarat, Karnataka, and Andhra Pradesh have the highest number of SEZs in the country.⁸

Conclusion

In conclusion, free trade zones (FTZs) stand as key instruments of economic growth and international trade, offering businesses a competitive edge through streamlined customs procedures and tax incentives. By attracting foreign investment, and promoting job creation and technological innovation, FTZs play a pivotal role in driving economic development.
Indian e-commerce exporters who manufacture goods domestically and ship them worldwide must recognize the importance of FTZs and the advantages they provide in global trade. Understanding FTZs can greatly benefit exporters in navigating international markets and optimizing their operations. For more support on compliance, shipping, or other aspects of e-commerce exports, Indian exporters can avail of the tools and services offered by e-commerce export programs like Amazon Global Selling.

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Frequently Asked Questions

How many free trade zones are there worldwide?

Free trade zones are of various types and are increasing in number annually due to their economic benefits. They range from special economic zones to export processing zones, and are all designed to stimulate trade and investment in different regions across the globe.

Who benefits from a free trade zone?

Free trade zones offer multiple advantages to both the government of the nation and the businesses operating within the zone. The government attracts foreign direct investment, and generates employment and economic development, while businesses enjoy tax exemptions and incentives which encourage growth and competitiveness

How can I renew my RCMC after its expiry?

If your RCMC is about to expire, you can renew it on the official DGFT website.

Published on April 24, 2024.

Sources:
1. https://www.american-trading.com/news/what-is-a-free-zone-in-international-trade
2. https://en.wikipedia.org/wiki/Free-trade_zone
3. https://www.statista.com/topics/11148/sezs-in-india/#topicOverview
4. https://www.dripcapital.com/en-us/resources/blog/free-trade-zones-ftzs
5. https://www.unescap.org/sites/default/d8files/pub_2377_ch2.pdf
6. https://dfreight.org/blog/what-is-a-free-trade-zone-or-ftz/
7. https://www.statista.com/topics/11148/sezs-in-india/#topFacts
8. https://www.statista.com/statistics/1396465/india-leading-sezs-by-goods-exports/

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