Academic journal article AEI Paper & Studies

In Name Only: Are Free Trade Zones Assisting Capitalism or Criminals and Crony Capitalists?

Academic journal article AEI Paper & Studies

In Name Only: Are Free Trade Zones Assisting Capitalism or Criminals and Crony Capitalists?

Article excerpt

Global free trade negotiations have been stalled for nearly two decades, yet bilateral trade deals and free trade zones (FTZs) have compensated for this stagnation by continuing to enhance trade and growth. FTZs have flourished in emerging nations, even within autocracies that rhetorically oppose open trade. FTZs possess many attributes of capitalist economies--free exchange, low taxes, no tariffs or other customs rules, and light regulation. All of these traits can attract foreign companies, foreign investment in domestic companies, industrial production, and overall wealth generation. However, such zones are also troubling; they can produce several negative results including a strong mafia presence, massive counterfeit operations, tax evasion, money laundering, and even terror financing. At best, FTZs are workarounds that are desirable only when the political system is captured by vested interests that limit international trade. At worst, they are deniable locations for odious regimes to gain hard currency and even credibility.

Executive Summary

While waiting nearly twenty years for a new global free trade agreement, governments have been trying to protect domestic economies and attract foreign trade and investment at the same time. One solution has been the expansion of special zones, often in ports or disadvantaged areas. In principle, these zones are supposed to have a light touch--limited regulation and customs oversight and low or no taxes. In practice, many of these sites have no functioning safeguards at all and attract businesses of all stripes, including the illegal and dangerous. The worst zones are not run by legitimate administrators but by mafia kings--some even finance terror groups like Hezbollah, and many seek to deprive legitimate businesses and authorities of their income and tax revenue. Even ports in more respectable nations often assert that FTZs are separate from them, and therefore, they are only partially responsible for what transpires in them.

The victims of these trade zones are wide and varied, and most never make the press. I've been given examples, but many are hard to properly verify. Fake products that are either made or traded through these zones apparently kill many: The 149 American deaths caused by a fake blood-thinning drug, (1) the bus crash that killed 15 in Canada because of counterfeit brakes, (2) and the 51 deaths in Libya due to alcohol poisoning. (3) The wider harm is just as tragic, with violence and corruption financed by trade in these zones: the illicit cigarette smuggling that acquires millions of dollars for terrorist organizations, (4) or the 16 Italian judges who were found to be partnered with the Camorra. (5) In most cases like this, no one would think to put some of the blame on the zones where the products and funding are generated.

Criminal syndicates are finding that the creation and distribution

of counterfeit goods carry lower penalties than narcotics trafficking, are much harder to detect, and tend to be low priorities for authorities. Furthermore, the market for everyday and luxury products they are now infiltrating is far greater than the one for traditional criminal activities. Plus, items like pharmaceuticals are easily adapted into the syndicates' existing networks and areas of expertise. These illegal and dangerous activities are enabled by the lack of oversight at many FTZs in emerging markets.

As is to be expected, citizens of countries with well-developed consumer protection and a fair judiciary (i.e. good governance) enjoy the best protection from illicit goods. It is doubly unfortunate that free trade zones are used by emerging economies that are struggling to participate in external trade because of poor governance. Fakers and pirates are able to take advantage of the loosening of controls in trading posts where rules are already poorly enforced due to a lack of will and/or capacity.

Panama's Colon zone is the second largest FTZ in the world, after Hong Kong, where multibillion dollars of trade and thousands of businesses take advantage of its proximity to the Canal. …

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