What Are Free Trade Zones?

Written by kalyn villaneda
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What Are Free Trade Zones?
Free trade zones make it possible for the continued expansion of a global economy. (Stephen Schauer/Lifesize/Getty Images)

Since the end of World War II, the economies of the world's countries have become increasingly intertwined. For many countries, international trade generates a significant portion of their Gross Domestic Product (GDP). International trade gives countries access to products or raw materials produced in other countries. The trade of oil, for example, is essential for countries that have no natural oil resources of their own. Other goods that are traded across borders include shoes, toys, cloth and electronics. Free trade zones were established to make the trade of these good easier.

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Definition of Free Trade Zone

A free trade zone is an area within a country that allows unrestricted international trade. In these zones, trade is not limited by customs, trade tariffs or other barriers that can impede the exchange of goods. Transnational corporations use free trade zones to ship their products across national borders. Lifting customs regulations and tariffs allows faster turnaround of trade ships and planes and lowers the cost of trade to encourage companies to do business in foreign countries.

Purpose of Free Trade Zones

Aside from removing restrictions that make international trade a hassle, free trade zones help spur economic growth. This is especially true in developing countries. Free trade zones help encourage international trade and increase foreign exchange earnings. Job opportunities are also available at free trade zones, decreasing unemployment rates.

Locations

Free trade zones can be found in more than 116 countries. They are located mostly in developing countries because of the zones' ability to improve the economy. They have also been established in developed countries such as the United States, however. Latin American nations were the first countries to draw attention to free trade zones. These zones have since spread across the world and can be found in countries such as Brazil, Bangladesh and Taiwan. Most free trade zones are located at seaports and international airports, where trade is most likely to occur.

Free Trade Agreements

In some cases, countries make agreements with one another that open up an entire region to unrestricted trade. The European Union (EU) is an example of this. Within the member nations of the EU, goods can be moved freely across borders without customs restrictions or trade tariffs. The North American Free Trade Agreement states that the borders between Canada, the United States and Mexico are open to free trade as well.

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