Benefits of FTZ
Free trade was introduced many years ago by the United States in order to stimulate growth in specifics regions by creating a liberalized trade system there. Although it has proven advantages, setting up a free trade zone has additional costs as well, and therefore analysis should take into consideration a number of factors to determine if the advantages of free trade outweigh its disadvantages.
1. No tariffs
The main concept behind free trade is to allow traders to carry out their transactions without any interference of any kind from the government. In other words, the government removes special taxes, or tariffs on import. As a result, this motivates investors to participate in trade, thereby leading to increased revenues.
2. Comparative advantage
This is a popular theory that strives to explain the logic behind free trade. Basically, a free trade allows countries with specific advantages to produce a given service or commodity to compete with other players, including foreign countries and third party member country’s. This could lead to better goods of superior quality as well as lower production costs.
3. Attracts investment
As noted above, free trade is mostly geared toward attracting investment. Most countries looking to implement free trade have to offer cheap labor as a form of comparative benefits, thereby allow industrialists to reduce their production costs. For instance, foreign countries can set up factories and then use the local labor to help in production processes.
4. Limits liberalization
Another benefit of setting up a free trade zone is that it helps limit trade liberalization, which in turns allows the government to try out economic policies in a manner that will not have an impact on the economy. Therefore, free trade is an economic experiment, which allows the government to study economic trends.
Despite having numerous advantages, countries in a free trade zone may face fierce competition from other countries, leading to economic underdevelopment.