Chapter 2 Literature Review
2.2 The Meaning and Concept of FTZ
2.2.1 The Meaning of FTZ
The world currently has over 850 Free Trade Zones (FTZs). Governments in Europe and the Americas, and in nearby Singapore and Hong Kong, are using free ports to offer commercial trade, industrial processing, technology development and logistics services in a single place. The name varies according to purpose and function, and could include foreign trade zones, free ports, transit zones, free perimeters, export processing zones, special customs privileges, special economic zones, etc. And these similar zone are shown in Table 2-1. All these zones are ′special zone′, and all are designed to create a situation in which goods could flow freely, attract foreign investment, and boost economic development. Free Trade Zone is an enclosed area in a seaport, an airport, or some other point areas where goods could be stored or processed, re-exported, assembled, manufactured, and offered more value-added logistics services (Firoz et al.,2003; Mathur and Ajami,1995;
Pan,2005; Tansuhaj and Jackson, 1989; The World Bank, 2007; UN,1996) (as shown in Table 2-2). The purpose of FTZ, nowadays, is to enhance value-added processing, transshipment and just-in-time delivery for the largest profit.
Within FTZ, the potential benefits of FTZs for investors include: (1) no customs duties for goods entering FTZs; (2) preferential tariff treatment for parts assembled into finished products in FTZs and then entering the domestic market; (3) free and safe flow of goods in FTZs; (4) permissible transport of goods among different FTZs; (5) abundance of raw material; (6) cheap labor (Firoz et al., 2003; Tansuhaj and Jackson, 1989). Firms may seek good FTZ access to a port of entry to transportation domestic or foreign markets to optimize costs of manufacturing and of distribution and customer service caused by site location (Mathur and Ajamis, 1995). Enterprise can pursue high value-adding processing, and goods can be efficiently exported from nearby ports through simplified custom clearance (Calabro, 1982; Firoz et al., 2003; Mathur and Ajami, 1995).
One of the reasons for FTZ not located everywhere is that FTZ within or adjacent to ports has the direct transshipment and transportation cost advantage. The other is that FTZs are designed as special zones of ′a country within a country′ for all countries, because
of special tax and customs design.
Originally, FTZs were used for storage and trade, but recently the focus has shifted to manufacturing, processing and assembly. Merchandise entering FTZs is free of customs duties and quotas, and can be stored without time constraint. According to the definition of United States International Trade Commission (ITC), FTZ is an independent, bonded area in which merchandise for re-export is treated differently from that in ordinary customs territory, and merchandise may be admitted to the zone, without being subject to customs duties, unless and until the merchandise enters the domestic market. Mathur and Ajami (1995) observed that enterprises can pursue high value-adding processing and enjoy preferential treatment, though these benefits are offset by higher rent and administrative expenses. Following the value-adding process, goods can be efficiently exported from nearby ports through simpler custom clearance. Firoz et al. (2003) argued that trade restrictions have minimal effects on FTZs.
Additionally, Firoz et al. (2003) described FTZs as providing transportation, insurance, finance, and communication services. Therefore, FTZ can be created with several functions, including trade, finance, warehousing, logistics, value-added service, transshipment and manufacturing. FTZs in Taiwan offer all of these functions. Enterprises of FTZ in Taiwan are divided into FTZ and non-FTZ-enterprises according to their logistics activities, and offer different taxation rates and fee schedules. The detail analysis is described in section 2-2-2.
As above mention, all FTZ are intended to improve the competitive advantage of their respective regions. Porter (1990) observed that value chain could be used to analyze the resource of enterprise competitiveness. Value chain analysis can be applied to divide industries according to whether they are engaged in primary or support activities. Primary activities are the main source of profit for enterprises. Primary activities are what Hafreez
et al. (2002) termed core-competences or core businesses. From a value-chain point of
view, the competitiveness of FTZ lies in selecting the most suitable core business for transshipping and maximizing added value. Therefore, it is necessary to redefine port activities for ports that FTZs located from a value-chain perspective.Generally, the enterprises on Foreign Direct Investment (FDI) determinants or location choice are concerned with the establishment of FTZ. For example, Woodward and Rolfe (1993) analyzed export-led companies and found that numbers of FTZ influence
their choice of location when investing in the Caribbean. Head et al (1995) gathered data on Japanese enterprises investing in America between 1980 and 1992 and found a positive correlation between enterprise in investing and the location of FTZ. Mathur and Ajami (1995) and Brenes et al. (1997) also indicated that firms seeking to locate their operations in FTZ should take several factors into account, including the quality of available manufacturing and warehousing facilities, access to air and sea ports, available transportation modes, onsite customs offices to expedite and simplify imported raw material clearing, and infrastructure quality. UN (2005) discussed FTZs aim to attract foreign investment, which is thought to have benefits in employment and growth. It is argued that FTZs promote a ‘critical mass’ of economic activity around ports. While past international experience with FTZs is mixed, successful FTZs are usually characterized by quality infrastructure, a supportive government, lighter regulation, a strong export focus, tax and customs exemptions and long-term stability. By contrast, some FTZs are failed by poor geographical location, weak government commitment, operational difficulties, poor management and inadequate promotion. Some researchers have indicated that the five criteria respondents consider most important for FTZ are political stability, corporate tax incentives, efficient government administration, labor and energy costs (Chen, 2003; Yang, 2003; Lu and Yang, 2006). Hu and Chen (1998) assessed investment in the Okinawa FTZ and found that both FTZ and new industry parks need research and government support, lower electricity, water and labor costs, and incentive which include tax and finance and construction with complete infrastructure. However, although these key successful factors are the most important determinants of productivity, the question of which industries are most suitable for stationing within a FTZ has not yet been considered. While, it is the most important activity in FTZ is to promote a highest value-added logistics industry (UN, 2005). Feng and Hsieh (2008) noted from a logistics point of view that FTZ competitiveness should depend on selecting the optimal core industries in terms of transshipping and adding value. Just as Robinson（2006）observed, the larger the number of value pools, the more sets of functions are migrated via landside logistics operations.
Thus the management strategies used for FTZ should first decide the core industries to make advantage of resources, location and trading activity of FTZs.
We needed to realize character of FTZs activities before we tried to select core
industries. For pursuing the value-chain, we adopted Porter’s (Porter, 1991) theory and divided all activities in the value chain into two kinds of activities: (1) Primary activities:
referring to activities directly relating to production and sales, which create the largest profit for firms. These activities include inbound logistics, operations, outbound logistics, marketing and sales and after-sale service. Given the purpose of FTZs to create maximum added value to transshipment, the primary activities of FTZs are activities that could create added value to transshipment. (2) Supporting activities: referring to activities which support the primary activities. With regards to FTZs, the supporting activities are provision of related services to support whole value chain. In this study, we attempt to identify the primary activities or core industries which could create added value to transshipment.
Table 2-1 Literatures on Free Trade Zone Authors Year Main discussion/ definitions
UNCTAD 1996 a freeport as a designated area within a port or airport where goods can be imported, stored or processed and re-exported, free of all customs duties.
Firoz 2001 FTZ is a ′country within a country′ from the customs point of view.
Firoz et al. 2003 FTZs as enclosed and policies areas in seaport, airport, or some other inland point where goods of foreign origin may be brought in for re-export by land, water, or air without the payment of customs duty. Usually these zones allow foreign traders to store, exhibit, sample, build, blend, mix, sort, re-pack, and manufacture various commodities within the zone zrea.
UN 2005 a FTZ is focused on international trade, especially value-added logistics activities involving light manufacturing and processing.
The zone is outside of customs territory, and is a very similar to an Export Processing Zone. FTZs aim to attract foreign investment, which is thought to have benefits in employment and growth. It is argued that FTZs promote a ′critical mass′ of economic activities around activity around port. This is self-sustaining and also attracts further business.
ESCAP, UN 2003 FTZs are generally defined as secured area adjacent to ports in
Authors Year Main discussion/ definitions
which goods can be stored for prolonged periods without Customs duties, excise tax or inventory tax being paid on the goods. FTZs allow the goods owner Customs entry at its discretion, and complete access to the FTZ at all times. Customs Service appraisal and classification of the goods can be done either at entry to the FTZ, or at open exit into the market, whichever the manufacturer prefers.
Duty is paid only when the goods are released into the territory.
There is no limit on storage time. At no additional Customs expense, a FTZ operator may store, sell, exhibit, break up, repack, assemble, distribute, sore, grade, clean, mix with foreign or domestic goods, destroy, label and manufacture within the FTZ.
FTZ Board 1983 The purpose of a FTZ is to help domestic industries take advantage of a zone and defer customs duties until goods are ready to be marketed in the country where the FTZ is situated. It also has a ′pipeline effect′, in instances when the normal custom channels are congested due to the more complex processing involved with components parts, the movement of raw material through FTZ may saves a great deal of time.
Tansuhaj, S.T., Gentry J.W.
1986 FTZ is a small fenced off area within a country where foreign and domestic goods may enter in order to be stored, distributed, combined with other foreign and/or domestic products, or used in manufacturing operations. When foreign goods are re-exported without entering the US customs territory, they are not subject to quotas, duties, or federal and state laws concerning excise or inventory taxes.
Table 2-2 Special Zones for Economic Development Name of special zone Definition and purpose
Foreign Trade Zone (EPZ) ¾ Foreign trade zones are established under the Foreign Trade Zones Act and the general regulations and rules of procedure of the Foreign Trade Zones Board contained in 15 CFR part 400. This part 146 of the Customs Regulations governs the admission of merchandise into a foreign trade zone, manipulation, manufacture, or exhibition in a zone;
exportation of the merchandise from a zone; and transfer of merchandise from a zone into Customs territory
Special economic zone (SPZ) or free economic
zone(FEZ)
¾ A special or free economic zone covers a large area, including residential areas and hospitals, schools and other business and supporting facilities and infrastructures. It promotes FDI by providing a good business environment with several incentives, such as a global standard level of labour regulation, allowance of repatriation and reduction of taxation for foreign investment, all of which might not be controlled under domestic regulation but under specially designed regulation appropriate to the nature of the facility.
¾ Within this type of zone almost all economic activities are allowed and the zone is not outside of customs territory.
¾ Sometimes other special zones, such as a FTZ, can be established within this zone.
¾ This type of zone is like a microcosm of a country.
Export processing zone (EPZ)
¾ EPZs are a common initiative used by many developing countries in an attempt to facilitate economic development.
¾ An export processing zone can be seen as a traditional zone acting as a manufacturing/processing works for exports, and considered as outside of customs territory.
¾ Industry sectors within this type of zone are usually labour intensive and low skills industries such as producing garments, textiles, shoes, timber, plastics and electronic components using low cost labour.
¾ In general, domestic sales of products manufactured within this zone are limited. Some percentage of products can be sold in the domestic market.
¾ The area covered is relatively small in size, up to two or three square kilometers.
Industrial zones ¾ An industrial zone is a platform for a manufacturing industry and
Name of special zone Definition and purpose
provides industrial clusters.
¾ Domestic manufacturers and a few foreign investors establish their factories to take advantage of relatively good supporting facilities for manufacturing. For FDI, this type of zone often is transformed into an exclusive foreign investment zone for manufacturing.
¾ In general, this type of zone is not outside of customs territory.
Distribution zone ¾ Within a distribution zone logistics activities are carried out with public warehouses. Usually this area is not considered as outside of customs territory.
¾ Inland container depots (ICD) are included this type of zone, but ICDs are generally outside of customs territory.
¾ Distribution zones are usually dedicated to consolidation and distribution and located in strategic inland areas to cover several domestic markets and to provide transportation to other transport nodes such as seaports, airport and rail stations quickly, conveniently and easily.
Costal Open Cities (COC) ¾ There are 14 COCs in China. These C OCs are important for both the current economic development and for the potential future economic development. These COCs are selected due to their strategic location.
They are either close to a major foreign country, or have political significance for China. Within these COCs, SEZs are located. For examples, In Guangzhou, which is a COC, three SSEZs are located:
Shenzhen, Zhuhai and Shantou. Guangzhouis the capital of the Province of Guandgdong. The tax rate in COCs cannot exceed 15%.
These COCs have power to approve individual projects in larger neighboring cities within projectd costs of less than $100 million.
Source: 1. UN, 2005
2. http://ia.ita.doc.gov/ftzpage 3. Sargent and Matthews, 2001.