19 February 2020

Free Trade Zones & Freeports – Threats & Opportunities

Controls – Vs – Economic Benefits: Regulation & the law of Unintended Consequences.

A Thought Leader prepared by Richard Heath & James Tumbridge.


The Government has just announced a 10 week Consultation on the launch and creation of new so-called Freeports* throughout the UK where raw materials and componentry for products can be manufactured, assembled, imported and (re-)exported by enterprises enjoying low or no tax status, limited regulation and without being subject to any, some or full tariffs. Freeports and Free Trade Zones exist throughout the world and there are now many thousands of them, particularly in the Far East, Africa and Latin America. Other than dealing with the UK budget this project is perhaps the most pressing for the new Chancellor Rishi Sunak. Mr. Sunak is the person most associated with the idea as he announced it earlier in February 2020 before becoming Chancellor, when he set out a vision on how Britain is set to prosper with the reintroduction of free ports for global trade. He sees them as a boost to trade and manufacturing jobs, and so here we look at the pros and cons of such a policy.

This is a new concept in the UK, so after the consultation period it is intended that bids will be invited from interested cities or towns throughout the country that want to have the special status of Freeports or Free Zones bestowed upon them. The premise behind this initiative is to boost the local economy in those regions or locations which have been adversely affected by Brexit, or are likely to be so, as we diverge from Europe, and in the numbers intended, also to boost or at least maintain national economic growth in order to retain our standing as the 5th largest economy in the world. So the stakes are high, but with this opportunity there are significant downside risks to be considered and addressed so that such Freeports or Free Zones have the correct regulatory framework in place before they are established in order to avoid the serious downside risks that are concomitant with such areas, as will be apparent from this paper.

Received wisdom has it that any complex multi-disciplinary system or process should never be launched upon an unexpectant market or populace without some degree of basic regulation. History is littered with examples of ineffective retroactive regulation being put in place against systems that have either failed outright or at least have struggled to ‘take back control’ of the genie, once it is out of the bottle. The Internet, and the complex network of national and international institutions that attempt govern to it, being the prime example; Freeports and Free Zones are another.

A balance has to be struck between the economic benefits that Freeports or Free Zones can bring and the regulatory controls that are required to govern them effectively. This paper highlights what these risks are, why Free Ports and Free Zones are particularly vulnerable and offers some practical measures that would mitigate against such risks from the outset, before they are established.

* Freeports (FP), Free Zones (FZ) and Free Trade Zones (FTZ) are all synonyms for specially designated areas within a given jurisdiction where normal tax rules do not apply. Other common terms for these designated trade-promotion areas are Free Economic Zones (FEZ), Export Processing Zones (EPZ), Industrial Free Zones (IFZ), Technological Free Zones (TFZ), and Special Economic Zones (SEZ). For the purposes of this article they will henceforth be referred to as FTZs, but this incorporates Freeports (FPs) and all of the aforementioned terms.​

1.  Striking the Balance between Economic Benefits and Controls in FTZs

To achieve what is intended for FTZs, there must be a balance between incentivising economic growth and maintaining jurisdictional, border and Customs controls that prevent dishonest and harmful practices from developing within them. Over-regulation can stifle business development, growth, and profitability; whereas adequate and proper regulation promotes it by creating a predictable environment and by discouraging unfair and predatory acts.

FTZs provide significant opportunities for legitimate business and play a critical role in modern global trade. National governments around the world have found that in offering relaxed regulations, limited taxes and reduced oversight, FTZs can be the driver of economic growth, both locally and nationally by facilitating increased international trade and investment.

What are they though? An FTZ (or Freeport, or indeed any of the other terms and synonyms used to refer to such zones, as listed above) are areas within which goods may be landed, handled, manufactured or reconfigured, and re-exported without the intervention of the customs authorities. Only when the goods are moved to consumers within the country in which the zone is located do they become subject to the normal Customs duties. FTZs are often established around major seaports, international airports, and National Frontiers—areas with many geographic advantages for trade. Examples include Hong Kong, Singapore, Colón (Panama), Copenhagen, Stockholm, Gdańsk (Poland), Long Beach/Los Angeles, Jebel Ali near Dubai & Ras al Khaimah (both in the UAE) and Newark/New York City. Alternative devices, such as bonded warehouses (or Flip-Ports – see section 5) may also be found near FTZS. The lack of Customs Controls and regulation in the FTZ is designed to facilitate faster movement, and encourage re-distribution, designated by the Government as areas with little to no tax burden, in order to encourage economic activity. While located geographically within a country, they essentially exist outside its borders for tax purposes, and have chiefly had great success at stimulating the surrounding economy.

The primary purpose of an FTZ is to remove from a seaport, airport, or border those hindrances to trade caused by high tariffs and complex Customs regulations. Among the advantages of the system are the quicker turnaround of ships and planes through the reduction in formalities of customs examinations and also the ability to fabricate, refinish, and store goods freely. However, FTZs by their very nature are vulnerable to a wide range of abuses by Organised Crime Syndicates which take advantage of relaxed oversight, softened Customs controls and the lack of transparency within these zones. A finely tuned balance is therefore needed between the exercise of Control or Regulation & the freedom to operate without restriction.

Securing the boundary around the entire FTZ and how to control and monitor rights of access to and from it also needs to be considered at the outset – this will have an impact on choosing their exact location and therefore Town & Country Planning considerations will become paramount in those towns or cities with successful bids. If well placed they can be a great boon to the final assembly or local distribution businesses that may be located, or indeed re-located, near them thereby generating local employment opportunities.

2.  Risks & Vulnerabilities of FTZs

Throughout the world there has been abuse of free zones by Organized Crime Syndicates, often known to Interpol, that facilitate the manufacture, distribution and sale of counterfeit goods but this is not to suggest that all FTZs accommodate or facilitate such illegal activity. The 2010 OECD report on Money Laundering Vulnerabilities of Free Trade Zones, for example, delineates these abuses to include ‘participation in an organized criminal group and racketeering, illicit trafficking in narcotics, fraud, counterfeiting and piracy of products, and smuggling.’1

Most FTZs operate as an important and legitimate tool within a country’s economy, facilitating international trade and development. However, the same features of FTZs that provide legitimate business opportunities can be — and are — exploited and misused by organised crime groups to produce, distribute, and sell counterfeit goods. When this criminal activity is allowed to occur in full sight without enforcement, or worse is simply ignored, the underlying objectives of the free zones to promote trade and economic growth are eventually destroyed. The credibility of Law Enforcement and the Rule of Law are also brought into question. There is therefore an urgent need to address this type of abuse before it takes hold, preferably in advance of the system being launched in a country largely new to FTZs, such as the UK.

3.  IP Rights Abuse – Counterfeiting & Piracy

According to the definitive OECD report on the Economic Impact of Counterfeiting and Piracy, (2008, updated 2016) the total global economic value of counterfeit and pirated products was US$509 billion in 2016, which is equivalent to 2.5% of imported goods worldwide and within the EU the number is even higher, at 5%2. The OECD notes that FTZs have emerged as a facilitator of IPR abuses and concludes that “the lack of controls has made the free-trade areas attractive locations for parties engaging in trade of counterfeit/ pirated products.” The report goes on to explain how parties import counterfeit goods into FTZs to “sanitise” shipments, disguise origin, add counterfeit trademarks, manufacture and repackage finished counterfeit goods for export, and use FTZs as “gateways” for smuggling and trans-shipping fake products. The OECD notes that these parties conduct these illicit activities with little or no risk of IPR-related enforcement. In their 2018 report to the EU’s Intellectual Property Office they noted that where economic activity is driven by reduced taxes and customs controls, light regulation and limited oversight it can unintentionally foster growth in counterfeit goods trafficking.  Another OECD report on the Governance Frameworks to Counter Illicit Trade3, pointed to poor oversight of free trade zones, insufficient screening of small parcels and inconsistent penalties on shippers of fake goods as three key areas where lax policy is facilitating trafficking of fake goods.  As well as infringing trademarks and copyright, counterfeit and pirated goods entail health and safety risks, product malfunctions and loss of income for companies and governments.

Unfortunately, Organized Crime groups and counterfeiters have also taken an interest in FTZs and they are exploiting the very system that Governments have put in place to help FTZs contribute to economic development. There are now more than 3,500 free trade zones around the world, often located at key ports, in 130 countries in every Continent. This is up from just 79 in only 25 countries in 1975. They have certainly facilitated trade and by so doing have helped emerging economies to attract foreign investment and generate jobs and growth; they have also benefitted wealthier economies such as the USA, Singapore and Hong Kong. The standards, oversight, and regulations governing FTZs have not kept pace with these developments and as a result, organised criminal syndicates are increasingly exploiting FTZs. Halting this trend from the outset therefore is paramount, but it must start with three fundamental understandings:

  1. FTZs are part of the National Territory and Jurisdiction in which they are located;
  2. FTZs are physical locations for goods of a particular status for Customs’ purposes;
  3. Simplified regulation does not mean impunity.

Owing to a concerted campaign of awareness raising and capacity building by IP Rights holders (brand owners) through Public-Private Partnerships with International Governmental and Non-Governmental Organisations and Institutions over the past 20 years or more, Government policy makers are now increasingly recognizing the economic drain caused by counterfeiting and piracy. They understand the vulnerabilities of FTZs which are exacerbating the problem, and they know that they face the daunting task of balancing trade controls with trade facilitation. Since FTZs are geared towards free movement of goods, potential measures to tighten governance could hinder trade. Nevertheless, effective IPR enforcement in FTZs does not mean that policy makers must sacrifice their goal of using FTZs to facilitate legitimate international trade and development.

Rather, voluntary establishment of standards and improved practices, along with the implementation of specific FTZ legislative and regulatory measures, can help address the global threat of counterfeiting and piracy in FTZs, without impeding their effectiveness. The risk accepted, FTZs have become significant contributors to both national economic growth in the countries in which they are located as well as becoming critical to the integrated global economy — and their impact continues to grow.

4.  Customs & Free Trade Zones

A common misconception concerning FTZs is that they are somehow ‘extra-territorial,’ that is they are outside the Nation or Jurisdiction in which they are located and, as a result, are therefore not subject to National Customs Regulations or Processes, or indeed any other Commercial Laws and Regulations that would otherwise apply to them. This confusion leads to an environment that enables illicit activities to infiltrate and thrive within the zones. The World Customs Organisation (WCO) has attempted to correct this misinterpretation, at least as far as Customs Regulations are concerned, by ensuring that its members adhere to the various International Conventions that it is responsible for with varying degrees of success. The UK is a full member of WCO.

Additionally, the apparent confusion over the difference between tariff and non-tariff controls exercised by Customs needs to be addressed. Stripping Customs of its traditional revenue collection role (tariff controls) leads to a further erosion — real and perceived — of its non-tariff collection roles (border inspections, seizures, etc.). National governments need to be very careful to ensure that the economic incentives (i.e. tax- free status) offered in zones do not interfere with or eliminate the critically important non-tariff control functions performed by Customs.

5.  Customs Bonded Warehouses or ‘Flip-Ports’

The distinction between Customs Bonded Warehouses4 or CBWs and FTZs, and the risks that they pose, also needs to be clearly understood and included in any pre-launch Regulatory Governance review of FTZs. CBWs are effectively temporary goods storage centres established under the general supervision of Customs. Bonds are posted by the Goods Consignors or the Rights Holders (Brand Owners) to guarantee the status of goods stored there, and the goods are not subject to duty payments. Goods at the warehouse may be manipulated, or even repackaged, but their identity is largely preserved for the purpose of tariff classification. This process is in contrast to activity within the adjacent FTZ, which may involve manufacturing and legitimate changes in tariff classification, value, and country of origin.

CBWs that are often established and located in the vicinity of FTZs are known to counterfeiters as “Flip-Ports.” Brand Owners have reported that warehouses in or near FTZs are “hotspots” for laundering counterfeit or pirated goods because oversight — by the local government and/or the FTZ operator — is negligible. Warehouses located near extraterritorial SEZs where there is no national Customs intervention are ideal for laundering.

Laundering begins when fakes are unloaded into bonded warehouses or FTZs. The goods are often stored for long periods, partly or fully assembled, and then re-labelled or over-stickered but without Customs supervision. They are then loaded into new containers for subsequent shipment to the destination market for open sale and consumption or to another port, warehouse, or FTZ, where the process is repeated. The movement, storage, re-labelling/over-stickering and re-shipping process serves to disguise illegal origins.

Once again awareness of the possible development of CBWs in and around new FTZs provides the opportunity for Government to regulate against such developments before they become established.

6.  Conclusions & Recommendations

From this brief overview it will be self-evident that whilst there are many practical opportunities and economic benefits that the establishment of FTZs brings to any given country, there comes at least as many risks and vulnerabilities which have the reverse effect. However, with sufficient care and attention to regulatory detail and control, such risks can be eliminated or at least mitigated to a certain extent, provided Policy Makers and Regulators act proactively, before the system becomes established and entrenched in sub-optimal, illicit or illegal custom and practice that is hard, if not impossible to reverse.

The recommended course of action in order to achieve this can be summarised by taking these five proactive measures ahead of the launch of a programme of re-development involving FTZs :

  • Implement sufficient Regulatory Control of FTZs from the outset to mitigate the risks before launch.
  • Aim to strike a pragmatic balance between Economic Benefits & Regulation from the outset.
  • Understand the distinction between tariff and non-tariff Customs Controls.
  • Understand the distinction between FTZs and CBWs (Flip-Ports) and the separate risks that they pose.
  • Consider location carefully in respect of securing the boundary and monitoring rights of access.

The authors are open to providing further advice and recommendations, including the specific regulatory approach that could be taken, in order to establish the UK as a leading Global role model of how FTZs can be used to their full potential without the usual attendant risks of becoming a safe-harbour for Organised Crime to thrive with all its accompanying dishonest and harmful practices. Such an approach will establish the UK as leading economic paragon of virtue and prevent it from becoming just another third division country where Free Zone investment by legitimate business is avoided due to adverse practices taking place in plain sight through a lack of adequate control and regulation.

[1] FATF, Money Laundering vulnerabilities of Free Trade Zones (OECD Paris 2010). OECD fatfgafi Report Paris, 2010

[2] OECD, Economic Impact of Counterfeiting and Piracy (Paris, 2008). OECD Report on Economic Impact of Counterfeiting & Piracy (2008)


[4] Customs Bonded Warehouses are distinct from free Customs zones but are covered under Revised Kyoto Convention, Specific Annex D. The free-zone regime allows more latitude for manipulation of the goods, and creation of new goods as defined by a tariff classification shift or value change, both of which are important to country-of- origin definition. Dependent on preferential trade agreement requirements, the result may actually make a legitimate country-of-origin change.

Richard Heath (IP) Associates Limited was established in 2010 as an International Intellectual Property Public Policy Consultancy, specialising in Brand Protection and measures against Counterfeiting & Piracy. Its Managing Director, Richard Heath, founded the firm after a long career of over 25 years as In- House IP Counsel in various Senior Legal Executive positions in Blue Chip Corporations, including Smith & Nephew PLC and Unilever PLC. He is a Fellow of the Chartered Institute of Trade Mark Attorneys (CITMA), Past President of the International Trade Mark Association (INTA), Former Co-Chair of the International Chamber of Commerce Business Action to Stop Counterfeiting & Piracy (ICC/BASCAP), Former Council Chair of the UK Anti-Counterfeiting Group (ACG) and was a founder of the WCO/Interpol Global Congress on Combating Counterfeiting & Piracy. He remains engaged with various trade associations and is a Director of the Pharmaceutical Trade Marks Group (PTMG). He is one of the Global thought leaders on Public Policy issues that surround Intellectual Property Protection & Enforcement.

James Tumbridge is a Partner of Venner Shipley LLP, leading its regulatory and litigation team.  He has extensive experience in Commercial Litigation, Intellectual Property and Alternative Dispute Resolution (ADR). His practice has covered a wide variety of matters, and he has worked in Canada, the USA and Europe on Intellectual Property related disputes for 20 years.  He has been an ad hoc advisor to various UK MPs and MEPs on a range of IP and dispute issues. Through his engagement with policy makers he has extensive Government relations experience and advises on how to prepare for legislative changes and regulation compliance. James also holds elected office as a Common Councilman of the City of London, and has been an ad hoc advisor to several ministers in the UK.