Clear link between free trade zones and counterfeit trade

Free trade zones are linked to a 5.9 per cent rise in the value of counterfeit goods exported from hosting countries, says a new report.

Published by the Organisation for Economic Co-Operation and Development (OECD) and the European Union’s Intellectual Property Office, the report claims that free trade zones (FTZs), which have been set up to boost business and economic activity, are “unintentionally fostering growth in counterfeit goods trafficking”.

The finding follows a number of previous claims that FTZs are being exploited by criminals who take advantage of the zones’ low taxes, scant customs controls and limited regulation and oversight.

According to the report – titled Trade in Counterfeit Goods and Free Trade Zones – the number of FTZ around the world are growing with the flow of goods moving through them expanding, and confirms that a link exists between FTZs and the trade in counterfeit products.

Looking at a global database on customs seizures and other FTZ data, the report established that “the existence, number and size of FTZs in a country correlate with increases in the value of counterfeit and pirated products exported by that country’s economy”.

“In all analysed cases zones significantly intensify an economy’s counterfeiting activities. Their presence in a given economy is likely to result in higher volumes of trade in fakes departing from that economy,” the report adds.

According to the findings, which are described as robust and statistically significant, an additional FTZ within an economy is associated with a 5.9 per cent increase in the value of exported goods that are fake.

The results “indicate that free trade zones have become a useful tool for counterfeiters, who regularly misuse them in their operations… These results confirm the anecdotal evidence pointing to the misuse of FTZs to conduct illicit trade, and they should be a prompt for future actions,” the report said, noting that national and international efforts were “urgently needed to ensure that zones are not undermined by illicit activities”.

Commenting on the report, Marcos Bonturi, public governance director at the OECD, said the “clear evidence” that FTZs increased counterfeiting should be a “call for action” by all stakeholders. “We will be working in the months ahead to help free trade zones step up their efforts to stop illicit trade, while at the same time maintaining their role as facilitators of legal trade,” he said.

There are more than 3,500 FTZs, often located at key ports, in 130 countries or economies in North and South America, the Asia-Pacific region, Europe and Africa. This is up from 79 FTZs that were located across 25 countries in 1975.

These special economic zones facilitate trade by offering businesses advantageous tariffs and lighter regulation on financing, ownership, labour and immigration, and taxes. They have helped emerging economies to attract foreign investment and generate jobs and growth, although they have also benefited wealthier economies such as the US, Singapore and Hong Kong.

This report builds on previous studies of FTZs. An OECD and EUIPO report last June, which mapped the trade routes and global hubs for counterfeit goods, pointed to issues with free trade zones and called for more in-depth analysis on the role of FTZ in transhipments and counterfeit trade.

Meanwhile, an OECD report published earlier this month, highlighted the lack of control over goods passing through free trade zones, which was being exploited by criminals. “Without further actions from governments to increase oversight and transparency in FTZs, criminal elements will continue to use zones to exploit the shortcomings in institutional law enforcement capacities,” the report said.