Free trade zones have become major growth enablers in emerging economies, and we have seen these concepts powering the UAE economy to a great extent. More than 45 free zones and “economic zones” are contributing to the UAE economy and foreign trade in a much bigger way.
According to UAE Federal Customs Authority, trade through these free zones represented Dh592.4 billion — or 36 per cent — of the UAE’s Dh1.63 trillion foreign trade in 2018. This means more than a third of the UAE’s foreign trade is generated through these zones.
More than 5,400 special economic zones (SEZs) directly employ about 100 million people worldwide, while indirect employment generated by them has reached up to 200 million, according to the World Investment Report, 2019, published by the United Nations Council on Trade and Development.
Although global Foreign Direct Investment (FDI) flow declined 13 per cent to $1.3 trillion in 2018, investment into free zones have been rising steadily due to their proximity to logistics hubs and corridors as well as one-stop services to investors that makes doing business easier.
“SEZs are widely used in most developing and many developed economies. Within these geographically delimited areas governments facilitate industrial activity through fiscal and regulatory incentives and infrastructure support,” the World Investment Report said.
“There are nearly 5,400 zones across 147 economies today, up from about 4,000 five years ago, and more than 500 new SEZs are in the pipeline. The SEZ boom is part of a new wave of industrial policies and a response to increasing competition for internationally mobile investment.”
SEZs can help attract investment, create jobs and boost exports — both directly and indirectly where they succeed in building linkages with the broader economy. Zones can also support global value chain (GVC) participation, industrial upgrading and diversification. However, none of these benefits are automatic, it said.
A solid regulatory framework, strong institutions and good governance are critical success factors, with the inclusion of a comprehensive compliance regime. The legal infrastructure of SEZs should ensure consistent, transparent and predictable implementation of SEZ policies. The responsibilities of SEZ governing bodies should be clearly defined.
China shows the way
China started High-Tech Development Zones (HTDZs) in the late 1990s, HTDZs were established in major cities and in provincial capitals, building on the existing knowledge and industrial base. They then spread across the country. Incentives offered include access to quality infrastructure, corporate income tax exemptions for the first two years, a preferential 15 per cent corporate income tax, exemptions from tariffs on high-tech equipment and special treatment for employees at the discretion of each zone, such as exemptions from income tax, subsidies on housing, cars, etc.
China had established 156 HTDZs by the end of 2017 and that year they contributed $1.42 trillion to China’s GDP, or 11.5 per cent of the economy.
In these zones, the ratio of research and development (R&D) expenditures to total production value was 6.5 per cent, three times the average in the national economy. Patents granted to enterprises in the zones account for 46 per cent of all business patents granted nationwide.
Bangladesh is developing 100 economic zones, expected to attract large-scale investment into a country that is currently growing at about 7.8 per cent, one of the highest in the world today.
No smooth ride
However, SEZs are expected to face challenges in the coming years. Not only their numbers need to be contained and carefully studied, they need to become sustainable as well, ensuring that the investors get good returns and industries continue to run on profits and therefore retain human talents.
The second set of challenge will come from the digital disruptions through the Fourth Industrial Revolution, which has already killed many products and industries. “The new industrial revolution and the digital economy are changing manufacturing industries — the main clients of SEZs. They will need to adapt their value propositions to include access to skilled resources, high levels of data connectivity and relevant technology service providers. SEZs may also have new opportunities to target digital firms,” the UNCTAD report says.
“The current challenging global policy environment for trade and investment, with rising protectionism, shifting trade preferences and a prevalence of regional economic cooperation, is causing changes in patterns of international production. “These changes can significantly affect the competitiveness of SEZs, which function as central nodes in global value chains. International cooperation on zone development is likely to become increasingly important.”
I couldn’t have agreed more.
Ras Al Khaimah Economic Zone Authority (RAKEZ)