Special business conditions offered in free trade zones (FTZs) can be used by both good and bad actors. Lower regulatory burdens and operating costs in FTZs make it easier for legitimate businesses to invest in them, creating jobs and fuelling economic growth. But critics attack some FTZs for their lack of transparency and use by criminal networks for their illegal activities. 

Since 2019, the OECD has championed efforts to clamp down on illicit trade and boost transparency in FTZs. Piotr Stryszowski, a senior economist at the OECD, who leads the international organisation’s task force on countering illicit trade, speaks to fDi about the role of FTZs in a more fragmented global economy and its voluntary certification scheme aimed at increasing the visibility and attractiveness of excellent FTZs.

Q: What role do FTZs play in a more fragmented global economy with rising trade tensions?

A: First, the planet of free zones is not homogenous. They differ by type, size and degrees of success. Many zones really struggle. Many zones are limited to one or two companies. There are also big, successful free zones. Definitions aside, good free zones have proven dynamic in a more turbulent environment.

In recent years, the global economy has faced many shocks: Covid-19 led to closed borders and broken supply chains; the Suez Canal blockage was a big shock to trade; and there is still a continuation of tensions between the US and China; and the war in Ukraine. 

Major trading countries are reacting by adapting their strategies to these changing conditions, such as nearshoring and friendshoring. In this new landscape, successful free zones can really play a catalyst role. They’re excellent locations for investment because of the good infrastructure, cost savings and easier bureaucratic procedures they can offer to companies. 

Q: Free zones attracted almost 5% of global FDI projects in 2023, their highest ever annual share. Why do you think more companies are investing in them?

A: In this new world with tensions and changing conditions, the principles by which companies operate, to make cost savings and more revenue, are still valid. Good free zones offer the conditions to save money, save time and offer good infrastructure. Good free zones go even beyond that, they offer human capital and a friendly business environment that enables companies to generate more revenue. They also have good governance, transparent frameworks and respect for the rules-based international trading system.

Q: Critics say that some free zones are havens for illegal activity. How do free zones make countries more vulnerable to different forms of crime and harm?

A: FTZs mean privilege — fewer procedures, oversight and simplified rules — and that can be abused. As much as FTZs facilitate ‘good’ trade, they can also facilitate illicit trade if there is not enough oversight and proactive actions. This can be in all dimensions: illicit trade in counterfeits, excise goods like tobacco and wildlife. Also we see tax crime, environmental crime, money laundering, intellectual property abuses, all sorts of shady activities in FTZs. 

Q: The OECD has a voluntary certification scheme for FTZs to signal their transparency and commitment to ensure trade enabled by them is lawful. How does this work in practice?

A: The FTZ certification scheme, and the criteria in its guidelines, is not rocket science. We are asking for common sense and for FTZs to be proactive. This includes reporting to the competent authorities when you see something wrong. Maintain records of what is coming into and leaving your zone. Don’t employ criminals. Avoid cash. We set the bar high on the path towards transparency, but it’s not impossibly high. We want to empower zones, flagging those practices that are already there. Our approach is to look at excellent zones that can really drive investment, welfare and provide investors with good conditions to thrive. 

The interview has been edited for brevity and clarity.

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This article first appeared in the October/November 2024 print edition of fDi Intelligence