Pandemic reinforces value of production centres in the same sub-regions

Free trade zones in Central America and the Caribbean have been an important engine for the region's economies. Favoured by the increasing globalisation of recent decades, they could now be boosted by a phenomenon in the opposite direction: "glocalisation", the desirability of having production centres in the same sub-region, close to major markets, in order to avoid the problems in distant supply chains seen during this Covid-19 crisis that has affected transport and communications so much. The two leading Latin American free trade zone countries, the Dominican Republic and Costa Rica, offer affordable and sufficiently skilled labour at the doorstep of the United States.

One of the free trade zones of the Dominican Republic [CNZFE] ▲ One of the free trade zones of the Dominican Republic [CNZFE].

article / Paola Rosenberg

The so-called free trade zones, also known in some countries as free zones, are strategic areas within a national territory that have certain tax and customs benefits. In these zones, commercial and industrial activities are carried out under special export and import rules. It is a way of boosting investment and employment, as well as production and exports, thus achieving the economic development of a part of the country or of the country as a whole.

Free trade zones are important in Latin America, and in the case of the smaller economies they are the main production and export hubs. According to agreement with the association of Free Trade Zones of the Americas (AZFA), there are some 3,500 free trade zones in the world, of which 400 are in Latin America, representing 11.4% of the total. Within this region, they are particularly important in the countries of Central America and the rest of the Caribbean basin. They are particularly important in the Dominican Republic and Costa Rica, as well as in Nicaragua, El Salvador, Colombia and Uruguay (also in Puerto Rico).

These countries benefit from having abundant (especially trained in the Costa Rican case) and low-cost labour (especially in the Nicaraguan case), and this close to the United States. For manufacturers wishing to enter the US market, it may be interesting to invest in these free trade zones, taking advantage of tax benefits and labour conditions, while their production will be geographically very close to their destination.

The latter is gaining ground in a post-Covid-19 world. The trend towards sub-regionalisation, in the face of the fractured dynamics of globalisation, has been highlighted for other areas of the American continent, as in the case of the Andean Community, but it also makes a great deal of sense for greater integration between the United States and the Greater Caribbean. Insofar as the US moves towards a certain decoupling from China, the free trade zones of this geographic area may also become more relevant.

Reproduced from report graphic of the association Free Trade Zones of the Americas (AZFA), 2018

Export processing zones

Free zones can be export-oriented (external market), import substitution-oriented (internal market) or both. The former may have a high industrial component, either seeking diversification or relying on maquilas, or emphasising logistics services (in the case of Panama's free zones).

Free zones for exporting products have been particularly successful in the Dominican Republic and Costa Rica. As the AZFA indicates, of the 31,208 million dollars exported from Latin American free zones in 2018, the first place went to the Dominican Republic, with 5,695 million, and the second to Costa Rica, with 4,729 million (the third place went to Puerto Rico, with 3,000 million). Exports from the Dominican Republic's free trade zones accounted for 56% of all exports from that country; in the case of Costa Rica it was 48% (third in the ranking was Nicaragua, with 44%).

The Dominican Republic is the country with the largest issue number of free zones (71 multi-company zones) and its 665 companies generated the largest number of direct jobs (165,724). Costa Rica has 48 free zones (in third position, after Nicaragua), and its 343 companies generated 93,496 direct work jobs (in fifth position).

In terms of the profitability for the country of this economic modality , for every dollar exempted between 2010 and 2015, Costa Rica's free trade zones generated an average of 6.2 dollars and those of the Dominican Republic 5 dollars (El Salvador ranked second with 6 dollars).

As regards Costa Rica specifically, a late 2019report by the Costa Rican foreign trade promotion agency, Procomer, put the contribution of free trade zones at 7.9% of GDP, generating a total of 172,602 jobs work, both direct and indirect, with an annual growth of issue jobs averaging 10% per year between 2014 and 2018. These areas account for 12% of the country's formal private sector employment . An important fact about the contribution to development of the local Economics is that 47% of the purchases made by firms located in free trade zones were from national companies. An important social dimension is that the zones contributed 508 million dollars to the Costa Rican Social Security Fund in 2018.

The Dominican Republic's free trade zone regime is particularly applauded by the World Bank, which describes the country as a pioneer in this subject instrument of productive and commercial promotion, presenting it as "the best known success story in the western hemisphere". agreement According to the statistics of the committee National Free Trade Zones Export Zones (CNZFE), these have contributed 3.3% of GDP in recent years, thereby contributing to the significant growth of the country's Economics in recent years (one of the highest fees in the region, with an average of over 6% until the onset of the current global crisis). The geographical proximity to the United States makes its free trade zones ideal for US companies (almost 40% of investment comes from the US) or for companies from other countries that want to export to the large North American market (34% of exports go to the US).