Some say they can boost manufacturing while others claim they are used to launder money and avoid tax. The issue of “free ports” has never been more topical, not least in the post-Brexit era. But are freeports really all they appear to be? What exactly is a free port? Typically, when goods enter a country, they have to follow the import regulations of that country. This often involves a tariff—a tax on those imports. A free port or “free zone” is an area that is inside the geographic boundary of a country, but which is legally considered outside the country for customs purposes. Goods brought into the free port don’t face import tariffs (though if they are then sent into the rest of the country for sale, they are then taxed accordingly) – writes Colin Stevens.
Free ports are an area, or linked area, that are subject to special rules to boost economic development, including differentiated duty treatment. These duty changes normally involve businesses avoiding onerous tariffs on imports and exports, and different models can be applied to different regions to boost specific industries. A Free port can exist in both inland as well as in traditional seaport locations.
For international supply chain perspective, free ports allows companies to rethink their logistics planning and warehousing needs and benefit from reduced business rates and tax benefits. Free ports can have better infrastructure and so offer higher digital connectivity than traditional port operations to facilitate import and export trade.
The higher level of digital connectivity may allow better connection to digital end-to-end supply chain with added benefit from digital port backlog management and customs clearance. This again can translate into higher efficiency: reduced waiting times, improved transparency and reduced costs.
Sometimes businesses operating within free ports receive other incentives, such as tax breaks. For example, the Canary island free zone has corporate tax rate of 4percent compared to 25% in the rest of Spain.
There are various economic benefits to free ports but it is claimed that they can be used by organisations to launder money and avoid tax.
In Europe, Copenhagen in Denmark is a freeport and there are two big free trade zones in Germany: the freeport of Cuxhaven, a covered area of about 147,800 square meters, and the freeport of Bremerhaven, around 4,000,000 square meters, The Port of Hamburg used to function as a free trade zone for 125 years, before its closure at the end of 2012.
According to the economic development agency of Germany, freeports in Germany have resulted in some 2,062 recorded foreign direct investment projects and the creation of at least 24,000 new jobs.
Economic freeports exist all over the world, including in the European Union, but, oddly, not in Belgium and the Netherlands, where two of the biggest traditional seaports in Europe exist (Antwerp and Rotterdam).
German MEP Markus Ferber MEP, EPP Group coordinator in the European parliament’s ECON Committee, told this website, “If free ports are used for their original purpose, i.e. to temporarily store goods in transit, there is little wrong with them.
“In fact, there are quite a few free ports in the EU. However, often those free ports are not used for that narrow purpose, but rather to support illicit activities, i.e. tax evasion and money laundering, which is why there needs to be tight regulation and effective enforcement in place. Otherwise, there is a severe risk of abuse. So, some scepticism with regards to free ports is often warranted.”
He went on, “I understand that the UK’s attempt to establish new free ports is mainly driven by a desire to revive economic activity in certain deprived areas, which also raises state-aid and fair competition concerns. This is therefore definitely an issue that would need to be carefully scrutinised in the framework of the EU-UK cooperation agreement”.
However, digitalisation can address some of these key challenges. Higher level of interconnectivity between the buyers, sellers, traders, shippers, freight forwarders, insurance, port authorities and government allows sharing end-to-end supply chain information between parties digitally. This again provides port authorities and government access to accurate real time information which ability to drill down into historical data to detect any tax evasion and money laundering activities. Furthermore digital compliance monitoring can be used to prevent money laundry activities.
Free ports exist within the EU, although in a more limited form than elsewhere in the world.
Freeports, or the equivalent (sometimes going by a different name) can be found all over the world, including in the Middle East.
Egypt has two, Port Said and the Suez Canal Container Terminal, and Morocco has just the one: the Atlantic Free Zone Kenitra. In the Middle East, Qatar has free zones and “special economic zones” with differing laws on taxation and corporate ownership.
Thailand has five: the Ports of Laem Chabang, Bangkok, Chieng Saen, Chiang Kong and Ranong and Taiwan also has five: the Ports of Kaohsiung, Keelung, Taichung and Taipei and Taoyuan Air Cargo Park, Malaysia has just the one, the Port Klang free zone, while there are no less than six in Vietnam.
Surprisingly for its size, India currently has just four freeports, including the SEZ multi product free zone and another in Mumbai, the capital.
China’s first free trade port was opened as recently as 2018 in Hainan and there are now similar freeports in the cities of Guangzhou, Shenzhen and Tianjin.
One can also be found in the country’s 2nd city, Shanghai. As the bridgehead of China’s showcase project, the Belt and Road Initiative, Shanghai established the biggest pilot free trade zone in China.
Zhaoli Wang, of South China University of Technology, said, “Development basis, port shipping, talent attraction, service support, risk supervision and control are the five major comparative advantages and the important driving factors that need to be considered in exploring and leading the construction of China’s free trade port under the BRI.”
A spokesman for the Asia-Pacific Circle think tank said freeports can “foster sounder investments in the BRI area.”
He adds, “These trade zones are also very important tools which enable China to better anticipate and participate in the formulation of international rules and standards on trade and tariff conditions, to acquire greater institutional power and global economic governance.
“In the 13th Plan (2016-2020), the words “Free Trade Zones” or “Free Trade Areas” appear more than 11 times.”
Elsewhere in the region, Hong Kong has nine freeports, including the Central Ferry Piers, Victoria City, Container Terminal 9, Tsing Yi and Kai Tak Cruise Terminal at Kowloon.
China’s biggest free zone is at the City of Qingdao in in South China, and is worth 1.2 trillion RMB towards China’s GDP.
“The Qingdao FTZs aim is to function as an international land and sea trade corridor connecting China with other ASEAN countries, such as Vietnam, Laos, Thailand, and the Philippines. As an important gateway linking the land and sea routes of the BRI (also known as the 21st Century Maritime Silk Road and the Silk Road Economic Belt), these zones will be key gateways for tourism, cross-border finance, and logistics.”
One European company, LGR Global, is enthusiastically embracing the opportunities created by Qingdao and other freeports along the Belt and Road, and is offering customers an incredible suite of functional products and online services to digitize and optimize end-to-end trade finance & supply chain management.
Speaking to EU Reporter, Mr Ali Amirliravi, CEO and Founder of LGR Global, and creator of the Silk Road Coin (SRC) digital currency, said “In SRC Business Ecosystem we are connecting digital trade finance, cross border money movement and end-to-end supply chain in a single interconnected system. We are linking buyers, sellers, traders, shippers, freight forwarders, insurance, port authorities and government digitally together in our trading family. By using blockchain, smart contracts, IoT, AI and SRC utility token we have transformed traditional paper based process into digital where we are able to detect discrepancies in real time and share information between the trading partners and with port authorities and government. Furthermore our interconnected digital trade finance system provides constant, banking grade AML and KYC compliance monitoring to prevent money laundry activities.
Our solution is built to reduce the total transaction cost to all trading partners in SRC business ecosystem. This means reducing operating cost, banking fees and facilitating physical product movement so goods will arrive to destination in good condition withing estimated delivery time. Our solution handles the requirements of both hard and soft commodities (i.e. food products). Our solution has dynamic IoT based track and trace capacity and real-time data feed integration (temp, humidity, GPS) to create opportunities for shippers and stakeholders to intervene immediately in case of trouble and to find solutions”. This solution is not only benefiting buyers to get their goods delivered in good conditions in promised time but also when things go wrong, shippers and insurance companies in claim processing.
In the future, our SRC Business ecosystem and our Silk Road Coin is designed to co-exist with digital RMB. “Adoption of the digital RMB will increase trade throughout the Europe and New Silk Road economies, and as our ecosystem will adopt digital RMB into our solution, we can work to further promote digital multi-commodity trading across the free ports in the New Silk Road.”