An incentive, such as tax incentives, offers the opportunity for companies to relocate within the country offering that incentive. Many developing nations provide free trade zones; import taxes and customs are waived in these zones if the product is exported. These incentives are often integral to the decisions made to identify where to operate facilities. One example is the Mexican Maquiladora facilities. These factories import equipment and materials duty-free and tariff-free for manufacturing or assembly, then reexport the finished good—typically back to the nation of origin. A maquila is also called a “twin plant” or “in-bond” industry. Currently, approximately 1.3 million Mexicans are employed in maquiladoras.
To encourage commerce and economic expansion, trade barriers like tariffs and quotas are eliminated in free trade zones, also known as special economic zones or export processing zones. Here are some notable examples of free trade zones where duties and tariffs are relaxed for export-oriented production;
- Shenzhen Special Economic Zone, China
- Jebel Ali Free Zone, United Arab Emirates
- Colon Free Trade Zone, Panama
- Manaus Free Trade Zone, Brazil
- Hamriyah Free Zone, Sharjah, UAE
- Aqaba Special Economic Zone, Jordan
- Incheon Free Economic Zone, South Korea
- Mauritius Export Processing Zone
- Shannon Free Zone, Ireland
- Subic Bay Freeport Zone, Philippines
- Tanger Med Free Zone, Morocco
- Novorossiysk Free Trade Zone, Russia
- Kandla Special Economic Zone, India
- Clark Freeport Zone, Philippines
- Labuan Financial Park, Malaysia
These zones typically offer benefits such as duty-free import of raw materials and components and simplified customs procedures. Tax incentives and relaxed labour regulations are also available to improve infrastructure.
It’s important to note that while production in these zones is primarily geared towards export, some may allow a portion of goods to be sold in the domestic market, usually subject to normal import duties. Still, fluctuations in exchange rates often occur and have a marked impact on supply chain network profits. Suitably designed supply chains offer the opportunity to take advantage of fluctuations by building some overcapacity into the network to allow flexibility to supply different markets. This results in altering production to maximise profits. Therefore, when designing a supply chain network, organisations need to build flexibility to help counter fluctuations in exchange rates across different countries.