Not All Free Trade is Equal

Free Trade Zones, Foreign Trade Zones, Special Economic Zones, and Sectoral Promotion Programs may all sound like the same entity, but, depending on the country, they can be vastly different. Where global trade is concerned, they can be a great advantage, if understood and used properly, or a relative disadvantage if not well understood.

In the US, a Foreign Trade Zone is an enclosed area, operated as a public utility under the control of US Customs, with facilities for handling, storing, manipulating, manufacturing, and exhibiting goods. Merchandise may be exported, destroyed, or sent into Customs Territory from the zone, in the original package or otherwise. The advantage of the zone is that, although items shipped from the zone are subject to Customs duties if sent into Customs Territory, they are not subject to customs duties if reshipped to foreign points! Furthermore, the usual formal CBP entry procedures and payments of duties are not required on the foreign merchandise until it enters CBP territory for domestic consumption, at which point the importer generally has the choice of paying duties at the rate of either the original foreign materials or the finished product. Foreign Trade Zones can have a huge impact on your working capital and supply chain financing requirements.

A Chinese Special Economic Zone is a different entity entirely. In the People’s Republic of China, a special economic zone is given special policies and flexibile measures by the central government to allow them to encourage foreign investment. The policies allow them to utilize a special economic management system that contains special tax incentives and greater independence for international trade activities. In a SEZ, there is no tax on foreign investor funded companies during start-up years before making a profit, no tax in tax in the first two profitable years, and only half of the normal tax in the third and fourth years.

In India, a Special Economic Zone, which was modeled after the China Special Economic Zones, is a foreign territory for the purposes of trade operations, duties, and tariffs. The specifics vary from zone to zone, as they do in China, but the zones also borrow some of the concepts that originated in the Foreign-Trade Zones Act of 1934 in the US, making them interesting entities.

Mexico has Sectoral Promotion Programs that establish lower tariffs on the importation of inputs for the use of various products, and the special economic zones of Brazil are different entities still. For more information on free trade agreements, foreign trade zones, and special economic zones, see the Free Trade Primer over on the e-Sourcing Wiki which can be used as a good starting point for your research.

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