Free Trade Zones (FTZs) play a vital role in global economic life. They help attract international businesses to parts of the world that they might not normally come to. They bring jobs, revenue and investment to regions that wouldn’t otherwise get them. And they help companies make their supply chains as efficient as possible. We use them ourselves, as do many internationally recognized brands. Companies have access to lower taxes and facilitated regulatory licencing. Free Trade Zones tend to be well located and convenient. There are lots of reasons why they are a good idea.
However, they have also been exploited. They are less regulated than other business zones, leading some to think that local customs and authorities don’t have the right to police them. This is a misunderstanding, but one that means inspections and oversight are sometimes not as strong as they should be. This fact has attracted criminal organizations to invest in these areas, believing that it would be easier to smuggle illicit goods internationally through them, with a lesser risk of getting caught.
What caused this misunderstanding to originate? I think it was because FTZs are transit areas. Goods most often stay there for a few months at most before they move on. For this reason, local authorities would sometimes turn a blind eye to what entered and left, as goods didn’t stay long enough to really affect their jurisdiction. This occasional historic lack of oversight has fuelled the idea that FTZs are some sort of no-man’s land. They aren’t.
This laissez-faire attitude became an even bigger issue for brand owners as FTZs became more sophisticated. When they were first introduced, they started out as transit areas. However, with such an attractive business environment, the zones broadened their offering, producing goods as well as warehousing them. This made FTZs harder to police for two reasons: When FTZs were essentially just warehouses, the goods leaving the zone were the same as those entering them. They were therefore easy to track. However, with the arrival of manufacturing, the materials going into the zone left as something else: finished goods. Thus, the process became harder to monitor.
Second, and more broadly, the rise of manufacturing meant that increasingly large numbers of goods were being made in areas with little oversight from the authorities but that, at the same time, enjoyed the privilege of being at the centre of the world’s supply chains. Criminals took advantage and abused this.
Free Trade Zone administrators are responding to this challenge. That was clear to me when I attended the annual World Free Zones Organization Conference in Barcelona, in June 2019. They know that legitimate companies and brand owners like us use their facilities and that we don’t want to share space with illegitimate actors.
FTZs, of course, want to attract as many legitimate businesses as they can. We are more sustainable and attract other companies from other sectors to create a global value chain. So, they are working hard to get the criminals out. It’s not an easy job. But all our incentives are aligned.
This is what lies behind the Safe Zone pilot project that’s yielded good results to date. We have also seen recently good collaboration with other key institutions and organizations, which has helped us develop a comprehensive strategy to fight against illegal trade.
The fact that many relevant international institutions, government entities and so many other businesses were present in Barcelona shows just how seriously we are all taking this now. I’ve definitely seen a shift. FTZs are a great thing. No one should be challenging that. The question we need to ask is what kind of Free Trade Zone we want in the future. The priority is protecting products and consumers around the world every day. It affects everyone.
Matteo Mattei, Director of Illicit Trade Prevention for the EU at PMI, was speaking on a panel on illicit trade at the World Free Zone Organization’s (WFZO) 5th annual conference in Barcelona.
Written by Matteo Mattei