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Trade Performance of Free Trade Zones

Type of the publication: 

Free trade zones (FTZ) have become widespread with the liberalisation of international trade and investment. They are a key player in the deepening of the global value chain (GVC). However, little is known about their contribution to world trade due to a lack of information on their location and status. This paper sets out to improve knowledge in this area by analysing the trade performance of FTZ countries at macro-level with a focus on FTZ externalities and distortive costs. We have built an original database of FTZs where we define them as processing zones benefiting from import tariff incentives. We show that FTZs raise trade only by easing the negative impact of protection. As importers of components and raw materials, they raise the rest of the world’s exports. This confirms the contribution of FTZs to the GVC. This result is robust to a change in the model specification, errors and bias due to data collection issues and sample composition.

Image: ©IRD - Vergoz, Thibaut