Free Trade Zones

Regional integration has been a top priority for Latin-American countries for a long time. Ever since the establishment of the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) in 1948, countries of the region have worked together to overcome the limitations of national markets, and take advantage of economies of scale This was especially the case during the 1990s up until the early 2010s, a period of time in which the average rate at which regional trade grew was 15% –a number much higher than the global average for the same period. One of the main drivers of this growth were the different Regional Trade Agreements (RTAs) that were signed by Latin-American countries, particularly the Andean Community (1969), MERCOSUR (1991), and more recently, the Pacific Alliance (2011). As a result, according to a 2021 ECLAC report, these initiatives have translated into significant outcomes such as a high level of liberalization of trade in goods. According to August 2020 data, approximately 78% of intra-regional imports from Latin America and the Caribbean have access to a zero tariff as a result of trade preferences2


However, these efforts still have a long way ahead of them. In this regard, in 2019 just 14% of exports from Latin America and the Caribbean went to countries of the region, a figure that has been steadily declining since 2014. This lack of substantial progress can also be identified by the persistence of non-tariff measures applicable to intra-regional imports, which in most countries reach ad valorem equivalents higher than the tariffs applied to the imports in question3


In relation to this increasing need of promoting regional integration, Regional Value Chains (RVCs) have been identified as a highly effective way of achieving said goal. RVCs allow different actors located in different countries within the same region to participate gradually in the production of the same finished product. RVCs consist on the “delocalization” of production, which involves a process known as upgrading. Through this process each stage of the production contributes to the addition of further value to the product, hence the name of the concept: value chain. Through RVCs, developing countries have the opportunity of increasing their exports while also increasing their productivity and technological capabilities4. The benefits of developing RVCs are numerous. Their objectives are to increase export diversification, achieve economies of scale in productions where the scale of the local market is small, increase value-added and technological capabilities, and expand the access of small and medium-sized enterprises to foreign markets5.


Despite these numerous benefits, Latin America has had a slow consolidation of RVCs. An analysis of foreign value-added in domestic exports versus domestic value-added in foreign exports shows the lack of RVCs in the region. According to 2015 data, Latin America lags both Europe and Asia in terms of these two metrics which shows a lack of backward participation in Global Value Chains (the global equivalent of RVCs), as well as forward participation6. The factors contributing to this are certainly many. However, one of the main reasons is the aforementioned existence of multiple Regional Trade Agreements (RTAs) with highly different scopes and rules; a situation often described as a spaghetti bowl7. This wide array of different regimes results in a series of substantial negative consequences that in turn affect the ability of companies to establish RVCs. These consequences are, among others: (i) redundant information and documentation requirements; (ii) delays in customs clearance; (iii) lack of coordination between customs and other national inspection agencies, etc8.


Given these circumstances, Latin-American countries must continue to work together towards a more integrated region. One way to achieve this is, for example, by doubling down on MERCOSUR’s and the Pacific Alliance’s commitment to the Puerto Vallarta Declaration’s Action Plan. This 2018 declaration in which all 8 presidents of the two most important Latin-American RTAs pledged to preserve, and strengthen the multilateral trading system, promote free trade, and open regionalism, among other issues, represents a unique opportunity to achieve higher regional integration9. Off course, there are certainly many other different ways in which Colombia together with its neighbors can tackle the challenges that have prevented Latin-American countries from truly accessing the benefits of RVCs, but this article will dedicate the following paragraphs to one specific alternative that is deemed to be able to enhance the ability of Latin-American RVCs to conduct trade more efficiently: the Free Trade Zones (FTZs) (or Special Economic Zones) and the harmonization of their different regimes across Latin America. 


FTZs are undoubtedly a big engine of Colombia’s international trade and even of Colombia’s economy as a whole. For instance, the outflow of goods from Colombian FTZs in 2021 represented 9.5% of the country’s GDP, while the inflows amounted to 9.6%. That was an increase of 0.8% and 1.4% in comparison to 2020’s numbers, respectively10. There is a total of 120 FTZs in Colombia, located in 22 of the country’s 32 departments11. In Colombia, this mechanism has attracted an astonishing sum of over COP $44.000 Billion in investment since 2007 (13% of which was FDI), has contributed to the creation of 114,603 direct and indirect jobs between 2007 and 202112, and is responsible for yearly exports worth around USD $2.8 Billion13. Furthermore, the fact that the FTZs regime has been in place for more than six decades is additional proof of its robustness. For all these reasons, FTZs’ positive role in Colombia’s international trade environment is undeniable. 


Recently, FTZs have been deemed by UNCTAD as “a crucial development tool for nations”14. Therefore, there have been a number of both global and regional initiatives to amplify their role in international trade. One of said initiatives is the newly established Global Alliance of Special Economic Zones (GASEZ) which “seeks to drive the modernization of these zones across the world and maximize their contribution to the UN Sustainable Development Goals (SDGs)”15. But exactly how do FTZs relate to RVCs? Easy. The RCV consolidation process can greatly benefit from taking place in neutral spaces that are free of taxes, formalities, and procedures, and that are also equipped with an extraordinary infrastructure that facilitates the flow of goods from one country to another16. These characteristics are, of course, a description of an FTZ. According to Colombia’s current regulation of FTZs, the benefits of these zones are17: (i) single income tax rate of 20% (the current rate in the National Customs Territory is 32% for 2020, 31% for 2021), (ii) customs taxes (VAT and customs duties) are not triggereed or paid on merchandise that is introduced into the Free Trade Zone, (iii) possibility of exporting from a Free Trade Zone to third-party countries, (iv) goods of foreign origin introduced into the free trade zone may remain there indefinitely, and (v) VAT exemption for raw materials, parts, inputs, and finished goods that are sold from the national customs territory to industrial users of Free Trade Zone goods or services. Because of this, it is inarguable that RVCs can highly benefit from FTZs’ special economic conditions, which in turn means that FTZs are an excellent tool for increasing regional integration. 


In conclusion, given the fact that there is substantial evidence of the benefits of regional integration –with RVCs playing a crucial role in that process– and the fact that there is still plenty of room for development in this area, there is certainly a huge opportunity for Colombia to find a way of better participating in those value chains and through that, fostering the economic development of the country. In this context, FTZs appear as an excellent alternative to take advantage of this situation. For this reason, Colombia must keep enhancing the reach of this special regime and fostering the development of the already-existing FTZs. In the same way, the private sector should also look into this mechanism as a way of reducing costs, increasing revenue, and creating synergies with other companies from the region, especially after Colombia’s recent implementation of a new FTZ regime: Decree 278 of 2021, which –among other things– seeks to simplify the process of declaration of new FTZs18. Lastly, Colombia should also advocate for a higher degree of harmony between different FTZs regimes across different Latin-American countries so that the seamless flow of goods across the region is guaranteed. For this purpose, Colombia should continue to promote initiatives such as the Puerto Vallarta Declaration or the recent Decision 856 of the Commission of the Andean Community, which established that products or goods from free trade zones of the member countries must enjoy the same tariff reductions as other products or goods, provided they comply with the rules of origin of the Andean Community. 

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13 La República. (2022, February 22). Las exportaciones desde zonas francas crecieron más de 14% durante el año pasado. Retrieved July 21, 2022 from
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15 UNCTAD. (2022, May 17). New global alliance of special economic zones to boost development. Retrieved July 21, 2022 from
16 Ibarra Pardo, M. G. (n.d.). Las Zonas Francas deben convertirse en el nuevo motor de las exportaciones regionales de Colombia. Retrieved July 21, 2022 from
17 Invest in Colombia. (2022). Free Trade Zones - Benefits. Retrieved July 22, 2022 from,%2C%2031%25%20for%202021)
18 Brigard Urrutia. (2021, March 19). Investment opportunity: New competitive free trade zone regime. Retrieved July 22, 202 from

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