Free trade zones (FTZs) were originally created to facilitate goods in transit. But they have evolved to be much more than that. Governments set them up to boost economic development and promote trade, businesses and investments. Over the years, they have become an important part of global trade and the new global trade routes.
But free trade zones also facilitate trade in counterfeit products and pirated goods. This is the result of free trade zones providing less regulations and oversight coupled with infrastructure and space.
How many free trade zones globally?
The 2018 Review of Notorious Markets published in 2019 by the office of the U.S. Trade Representative (USTR), quotes the International Labour Organization’s data according to which the number of free trade zones grew from 79 zones in 25 economies in 1975 to over 3,500 zones in 130 economies in 2018.
Numbers may vary, depending on the countries covered and chosen definition of FTZs within a database, resulting in exclusion of some zones. However, the increase in number and significance is undebatable.
What are free trade zones?
The World Bank defines free trade zones as “in, duty-free areas, offering warehousing, storage, and distribution facilities for trade, transshipment, and re-export operations.”
What are some characteristics of FTZs?
Free trade zones are usually secured geographic areas that vary in size.
These secured areas offer benefits to businesses that are physically located within the zone.
Although each free trade zone is subject to the laws and regulations of the country in which it operates, they have special laws applied to them. They are usually outside the customs jurisdiction of the territory in which they are located, and are a separate area in terms of customs, not subject to customs duties or procedures that usually apply to imported products. They usually share other advantages such as tax benefits and less regulatory oversight.
This makes import and export easier, but this is not all. FTZs often offer lighter regulations on other issues, such as environmental and labor regulations. In addition, according to the 2018 USTR review, they may offer subsidized infrastructure for assembly, processing and manufacturing businesses. This way businesses can build supply chains and deliver their goods from FTZs.
Is there a connection between FTZs and counterfeit goods?
A comprehensive OECD/EU Intellectual Property Office (EUIPO) study from 2018 confirms the links between FTZs and trade in counterfeit and pirated goods. According to the study, the number of FTZs within an economy correlates with the value of this economy’s exports of counterfeit and pirated products, although there are exceptions. It continues to demonstrate that “the larger the size of the EPZs [Export Processing Zones] in an economy, the greater the value of fake products the economy exports globally.” The increase in the value of counterfeit and pirated products exported by an economy also correlates with the number of businesses operating in that country’s FTZs and the total value of exports from these zones.
To conclude, there is “a clear relationship between the FTZs in a given economy and trade in counterfeit and pirated goods from that economy.” This is specifically true in FTZs that are Export Processing Zones.
Why do FTZs attract trade in fakes?
The environment in free trade zones may draw different kinds of illegal activities, including the manufacture and traffic of counterfeit and pirated products.
This happens due to the lighter oversight and less regulation. No customs, for example, usually results in less inspection of shipments, drawing illicit activities. Also, less oversight of trade may present opportunities for illegitimate businesses.
A report by the OECD/EUIPO from 2017 maps routes of trade in fake goods. It shows that infringing products are usually sent via complex routes, with many stops along the way. Often, goods can move between zones without duties or inspection. Moving fake goods through various transit points helps to falsify documents to mask the point of departure.
According to the OECD/EU Intellectual Property Office (EUIPO) study from 2018, goods in zones can be handled and prepared for shipment to different markets, while preserving duty-free status. FTZs are also used a duty-free place for goods to be handled and then prepared for shipment to different markets. Illegal businesses may break bulk shipments of counterfeits into smaller ones, re-label them and send them to their destination. When repackaging, they can intentionally mislead authorities and consumers regarding a product’s manufacturing brand, place of production, or point of departure.
Shipments made as a result of e-commerce are often personal and small, and add an extra challenge to intellectual property enforcement efforts in general, and in FTZs specifically.
Counterfeit goods are also easier to conceal at FTZs, as many zones are developed and managed by private entities that are not interested or not capable of law enforcement. This is even more true when FTZs are not perceived as part of domestic policing activities.
These illegal activities are so much easier to do via FTZs, where the focus is on boosting trade, which are usually not subject to customs, and don’t have consistent local law enforcement.
What is intellectual property protection in FTZs?
In many countries around the world, local intellectual property protection laws and regulations apply to businesses in free trade zones just as they do outside them. However, they may not be enforced in free trade zones as they do elsewhere.
The USTR review looks at Hong Kong. There, the Hong Kong Trade Description Ordinance prohibits imports and exports of goods bearing counterfeit marks. However, the Ordinance does not apply to “goods in transit”. This allows counterfeiters to use Hong Kong’s free trade zone to ship their products.
Even in countries that have the legal IP protection tools to enforce IP rights in free trade zones, sometimes there is no will to do so, or other issues such as the minimal oversight makes it challenging to provide effective IP protection.
This is addressed in annex D of the Revised Kyoto Convention, which recommends “the protection of patent, trademarks and copyrights” as independently sufficient to refuse admission of goods to a free trade zone.
FTZs are misused by counterfeiters and others involved in illicit trade, and IP enforcement in FTZs is not effective enough.
This hurts IP rights owners.
A large part of this illicit trade originates in e-commerce, with certain FTZs around the world being the point for departure, re-exportation or transshipment of large quantities of fake products.
There is no doubt that governments can better protect IP rights in free trade zones through enforcement and regulations. However, brand owners cannot wait while their IP rights are being abused.
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