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      There is nobody slamming the brakes on the Free Trade Engine. It is chugging along despite the memories of Tomahawks blazing the Afghan skies and the pounding of
Tora Bora. Despite the garden fresh memories of the Asian meltdown, a riot-scarred Seattle, or the shrill cries of the `sold down the river’ phobia of NGOs over joining the multilateral trade entity, World Trade Organisation (WTO).

      There seems to be no doubt or dilemma over the fact that national economies
need to re-adjust and overhaul.  Fiscal and investment laws will have to be drafted with the larger global trade canvas in focus. It is likely that political and social compulsions would delay national economies from blatantly effecting a volte-face
on their economic policies, but it has to happen anyway at some point.

      And free zones are no exception. In times to come the compulsions of borderless commerce will lead free zone managements in member countries of WTO to devise smarter strategies to stay in line with multilateral obligations.

      What are free zones? A broad definition will categorise free zones as special designated trade sites within a country but outside the customs reach where common laws of foreign trade and finance of a country are exempted from being practiced. In countries where an investment regime does not allow 100 per cent foreign ownership free zones permit it. A clutch of fiscal incentives like income tax exemptions and duty drawbacks lubricate the trade of free zone companies. In the long run, trade experts vouch that there is an inherent aberration when there are two laws in a country - one for the free zones and one outside it.  And that could
be a cause of concern in a multilateral trade regime. There are exceptions though.

Free Zones In Transition Economies

      For WTO member countries in transition mode, free zones are a boon. Free zones
in such cases allow governments to circumvent opposition to amendments of the practiced national investment laws.  It reduces the effects of social friction and gives breathing time to governments to prepare the society for the change waiting
in the wings. 

      The UAE, which became a member of the WTO in 1996, is a case in point. In the UAE, free zones could be the buffer zones before the country enacts investment laws facilitating 100 per cent ownership, assuring national treatment to foreign companies and amending its commercial agency regime. No wonder that many
foreign companies are flocking to the free zones.

      It would be fatal to view economy in isolation sans its social and political roots and ramifications. No country can change economic policies overnight and it is the same with the UAE. Free zones in the UAE could help the country migrate to more liberal economic policies in the future.  Since the UAE with its progressive outlook has low customs tariffs and hardly any quantitative restriction (QR), the major attraction of the free zones is 100 per cent ownership. Apart from this are the exemptions on taxes and commercial levies and full repatriation of capital and profits. Most of these incentives like income tax exemptions may not be compatible to the WTO regime if rules are applied since they do give an unfair advantage to the free zone companies.

      According to a study presented by Raj Bhala, Professor of Law, George Washington University of School of Law in Dubai last year, UAE as a developing country may maintain its current investment regime until 2005 without penalty. This will help create opportunities for UAE nationals in the area of business in the UAE. Bhala says that the UAE would be pressured to further liberalise its laws in the future WTO round of negotiations. The just concluded Doha Ministerial did not seem to give any attention to the nitty-gritty of what each of the Arab world country should do. This was basically because Doha came in the backdrop of many instances of sudden and partly successful anti-free trade tirades. Plus a war in Afghanistan had also clouded the meet.

      But as the Director General of the WTO said in a speech in Geneva before the meet started, the Doha ministerial will bring WTO closer to the Arab region than ever before. To Quote Moore, “The conference should be seen as an opportunity for the Arab region to raise awareness about WTO and the importance of international trade.
It should also be seen as an opportunity for the region to join hands with the rest of the international community in dismantling trade barriers that have kept nations apart for far too long.”

     Today, 11 countries in the Arab world, Bahrain, Djibouti, Egypt, Jordan, Kuwait, Mauritania, Morocco, Oman, Qatar, Tunisia, and the UAE, are WTO members. Five
are observers - Algeria, Lebanon, Saudi Arabia, Sudan and Yemen.

     Moore also pointed out that the merchandise exports of the 16 Arab WTO members and observers amounted to approximately US$ 220 billion in the year 2000,
reflecting a significant rise from 1999, while imports totaled US$ 146 billion. Commercial services have also been extremely important for Arab countries, with exports at approximately US$ 31 billion in the year 2000, and imports at US$37 billion. Significantly, he said Doha would also be a starting point for a new WTO strategy
for the Arab region, though it is still in its infancy.

      Coming back to the UAE, Bhala says,  “as a sovereign country, the UAE maintains the right to withdraw or accept penalties for not adhering to the GATT/GATS (General Agreement on Trade and Tariffs and General Agreement on Trade in Services). The WTO requirements are enforceable only via a dispute settlement mechanism which is limited in the type of punishment it can enforce on
a country not following its rules.” In a wider context, the UAE can also offer preferential treatment to Gulf Cooperation Council (GCC) countries as part of a Regional Trade Agreement (RTA) under Article II (3) of the GATS.

      China is another case in point. It is about how a Socialist regime averse to private capital set up a string of free zones to woo private funds. These free zones were out of the ambit of the Socialist Chinese investment regime.  According to reports, by the end of 2000 these trade zones, which “served as the country’s front line to embrace foreign investment and international way of economic and trade practice,” had attracted about US $5.3 billion investment, 80 per cent of which was foreign direct investment (FDI).  It could only be history’s irony that some of the countries in the former soviet Socialist bloc are also now weighing their options on free zones on the lines of the Chinese. Or take the case of Communist Cuba. Cuban free zones “unashamedly” offers incentives to foreign capitalists. Cuba’s `Zonas Francas’ is part of the government strategy to attract foreign investment.

     Whether in the UAE, China, Costa Rica or Nicaragua, the free zone thrust has helped countries channel quiet a lot of inward foreign investments. Closer home is the example of the Dubai Internet City (DIC) which undoubtedly is a stroke of genius in attracting foreign Information Technology (IT) companies in a free zone ambience.  

Wither Free zones?


     No. The free zones will stay. 
But that involves fine-tuning the free zone incentives to tuck them within the
ambit of WTO norms. So that it does not attract flak from member countries of
WTO for violating the tenets of the Agreement on Subsidies and Countervailing
Measures (ASCM), a key covenant under the multilateral regime. Subsidies or
incentives given to national companies can be brought under the scrutiny of
ASCM. WTO members can invoke ASCM and drag countries to WTO’s dispute
settlement mechanism if the incentives given to companies in a country amounts
to prohibited subsidies.  However, companies in the services sector will not attract
the wrath under the ASCM since it is regulated by GATS. The ASCM does not apply
to agricultural produce also since the provisions of the Agreement on Agriculture
regulate them.

     Developing countries have been given a transition period to do away with
subsidies to companies which violates ASCM. The transition period will end in
January 2003 and any plea to extend it will have to be made before December
2001.  Most of the developing member countries of WTO, including India, have
committed in writing that these subsidies will be off within the accepted time
frame. At the Doha Round it was expected that some countries would come up
with pleas for an extension of the deadline to amend the free zone regime to
comply with ASCM.

      Suggestions to make laws compatible to ASCM include harmonizing income tax
rates so that there is no discrimination between companies in the free zones and
outside it. The intention is that there are not too many different investment laws in
a country. China is already hinting at reforms of the free zone norms to comply with
WTO regulations. Chinese are not saying that its entry into the multilateral trade
regime means end of the road for its 15 free trade zones. To quote a Chinese official,
“free trade zone is still a popular thing in the world, and it will play a more important
role in China as the country completely opens up to the outside world.''  

      In the changed scenario the big opportunity for free trade zones will be in
re-inventing itself. The Chinese believe that free trade zones stand perfectly positioned
to take advantage of an expected escalation in the demand for storage, distribution
and logistics services. Transit goods, which can be stored in free-trade zones for up to
a year, at very low cost, will be a lucrative source of income for the zones after WTO.

      Under the WTO regime subsidies are categorised into three – prohibited,
actionable and non-actionable. Prohibited or the red-box subsidies include all forms
of export subsidies which developing countries will have to phase out by 2003 if
they have a per capita income of $1,000.  According to experts, the smart strategy
is to switch incentives to green-box or non-actionable subsidies. This includes
assistance for R&D, concessions for brand promotion and facilitation of technology
imports that are permitted under any global trading law. Do away with income tax
exemptions and provide rebates for expenditure on R&D. Phase out interest rate
subsidies if they are being provided to companies and instead provide venture
capital support to brand development programmes.

      The obvious advantages of the free zones will also come into play in attracting
investments even in a modified tax regime. The meaning of free trade zones'
existence lies in their efficiency in processing goods, the speed to finish the
customs procedures, the capability of cargo flow distributions.  The free trade
zones, which often have convenient geographic advantages and long been good
at cargo processing and distribution, will develop themselves into distribution and
trade centres for imports and exports.  

      According to trade experts, free zones should look at the changing scenario as both a challenge and opportunity. It is a challenge because large part of the world trade will be freer than before and an opportunity because free trade zone, which survive the transition will grow into big industrial cities.