1. INTRODUCTION

Althought the general concept of free trade zone is uniform in nature, one encounters a number of different types of free trade zones in Latin America. They vary according to national characteristics and the goals set for them by national governments. They range from the traditional isolated closed-border area for exportable manufactured goods (Caribbean "zonas francas", for example) through large open-border areas for the production of goods for sale especially into the domestic market (as in the case of the Brazilian Manaus Free Trade Zone). We will review the main characteristics of these models in the next Section.

The history of free trade zones in Latin America dates back to the early decades of the last century. The first Argentine and Uruguayan free trade zones law were enacted in the 1920s. But the spread of free trade zones across the region is a phenomenon dating from the late 1960s and the early 1970s.

Despite the success and general acceptance of free trade zones in some countries (Mexico, Central America, Caribbean and Chile, for example), different levels of reaction to the instrument can be found in other countries, such as Brazil and Argentina. This means that free trade zone development in Latin America is mixed and varies a great deal, ranging from the well established Mexican, Central American and Caribbean free trade zones to the first stage development of Brazilian and Argentine Export Processing Zones (EPZs/"zonas francas").

2. EXISTING FREE TRADE ZONES IN LATIN AMERICA

Despite the existence of significant differences within each group, one could suggest the grouping of Latin American free trade zones into some six broad categories. These categories include:

1. The Mexican and Central American and Caribbean "maquiladoras"
2. The Brazilian Export Processing Zones (EPZs) and the Argentine "zonas francas"
3. The Manaus Free Trade Zone and the Argentine "Area Aduanera Especial de Tierra del Fuego"
4. Other MERCOSUR free trade zones (Uruguay and Paraguay)
5. Andean Community free trade zones
6. Chilean free trade zones.

According to a study by the International Labour Organization (ILO) there are 107 "industrial parks" in Mexico (which correspond to EPZs), where the "maquiladora" industry is located. Over the past 35 years the growth of the "maquiladora" industry has been significant. In 1999, there were 4,420 "maquilas" (which are now called the "maquiladora" plants), that were responsible for over 1.3 million jobs. The "maquiladora" industry now exceeds petroleum and tourism as a factor contributing to foreign exchange earnings.

Of the same kind as the Mexican there is the "maquiladora" industry in Central America and the Caribbean. In Central America, according to another study by ILO, there was in l997 an overall number of 835 "maquiladora" firms, distributed across the following countries: Guatemala (220), Honduras (217), El Salvador (190), Costa Rica (189) and Nicaragua (19). In the Dominican Republic there were 434 of such firms set up in 35 industrial parks. Both in Mexico and the Central American and Caribbean Countries, even though most "maquiladora" firms are located in industrial parks (similar to an EPZ) they can also be located outside these locations.

In Central America one can also find the well known "Zona Libre de Colon", which is more than a traditional free trade zone. It is a global logistic and financial center where there were in 1998 over 1700 established enterprises, which were responsible for US$ 5.2 billion of imports and for US$ 6.0 billion of re-exports.

According to most recent information available, there are 16 operational free trade zones in MERCOSUR countries: 5 in Argentina, one in Brazil (Manaus Free Trade Zone), one in Paraguay (Ciudad del Leste Free Zone), and 9 in Uruguay. The number of free trade zones in MERCOSUR deserves an explanation because some data refer to a larger number than this. The reason is that in Argentina there are 27 authorized "zonas francas" out of which only 5 are operational, and in Brazil there are 17 authorized EPZs but to date not one has yet initiated its operation, although four have completed their infrastructure works. The Argentine free trade zones are industrial and commercial, and the Brazilian EPZs are only industrial.

Located in Brazil is the largest free trade zone in the region - the "Zona Franca de Manaus" (ZFM). More than 300 industries are installed in the zone, which employs about 50 thousand people. The ZFM sells around 97% of its production in the Brazilian domestic market. The second largest free trade zone in the region is the Argentine "Tierra del Fuego free trade zone", which was created with the objective of developing that island. As in the ZFM, almost all his production is sold into the domestic market. Both ZFM and "Tierra del Fuego" are sometimes (perhaps more adequately) called "import processing zones." One should take into consideration that rather than as a means of export promotion those zones were created primarily as an instrument for developing remote and scarcely populated areas. Accordingly, they have a strategic goal, rather than a strictly economic purpose.

In 2001, Paraguay implemented a "maquila" law which was enacted em 1997. According to the National Council of the Maquiladora Industry, over 200 industries were interested in investing around US$ 250 million in the country.

In 1998, there were 40 "zonas francas" in the Andean Community countries: 15 in Bolivia, 12 in Colombia, 6 in Ecuador, 4 in Peru and 3 in Venezuela (in Peru they are considered "centers for export, transformation, industry, trade and services"). Some of these zones are only industrial but others are industrial, commercial and service zones.

Chile, a country having the status of an "associated country" to the MERCOSUR (but not belonging to it), has 2 free trade zones: The very successful "Zona Franca de Iquique" (an industrial and commercial free trade zone very much like the ones existing in East Asia) and "Zona Franca de Punta Arenas" (very similar to Tierra del Fuego free trade zone).

3. THE ROLE OF FREE TRADE ZONES IN THE DEVELOPMENT PROCESS

As is well known, the main function of free trade zones is to provide favorable conditions in which traders and processors can gain easy access to duty free equipment and raw materials for warehousing, re-packing, processing and export. There are, of course, other formulas, such as the duty drawback system, a duty remission or suspension system, and bonded manufacturing system, which allow exporters duty free access to imported materials. But the free trade zone/EPZ is the most efficient arrangement from a manufacturer's point of view. In addition to providing duty free access to equipment and materials, a free trade zone/EPZ usually provides a bureaucracy-free environment for investors.

Free trade zones have therefore been an extraordinary mechanism for fostering export-led industrialization worldwide. They promote economic development by attracting investment and generating employment and foreign exchange earnings. Especially in the case of large and unbalanced developing economies, free trade zones can be used as a means of reducing regional imbalances. All these effects can be observed from the growing international experience with free trade zones development.

This is the conventional wisdom regarding free trade zones development. The additional point I would like to make, that has been extremely important from Latin America's point of view, is the role of free trade zones in the trade liberalization process in goods and services. In East Asian countries there was a realization first, in the early l970s, that one can pursue an immediate and locally controlled liberalization through the creation of free trade zones rather than promoting a general and uniform liberalization across all products and economic sectors. The second strategy takes time and may have a number of undesired short term implications.

In this way a number of Asian countries were able to create incentives for the setting up of export-driven industries, along with the implementation of a cautious and controlled opening process of their economies. They found that it is possible to promote export-led industrialization, allowing those industries free access to import materials, without reducing import barriers to zero across the whole nation.

The last East Asian success story is the People's Republic of China that created his Special Economic Zones, allowing China to grow at an unprecedented pace and is making possible the transition from a centrally controlled economy to a market economy, in a reasonably organized way. By some estimates, zone related operations now employ over 40 million people, or about one in every fifteen Chinese workers. One of China's top zones, Shenzhen, has received over US 15 billion in foreign investments. In this large zone with over 6 million residents, foreign invested firms produce 78% of the area's manufacturing value and 53% of its exports.

Latin American countries, especially those large ones like Brazil and Argentina, still face similar conditions. They exhibit high trade barriers and could benefit substantially from using free zones more intensively, not only for the attraction of foreign investments but for inducing domestic firms to engage in export production.

Another reason why free trade zones could be strategically important for Latin American countries is that they are countries well known for frequent changes in economic and administrative regulations, consequently making the economic climate very uncertain and risky from a foreign investor's point of view. The free trade zone regime is usually set out by means of a law, approved by the Congress. This legal basis makes it more difficult to change.

When approaching a potential foreign investor, an official investment promoter could say: "I am offering you a legal regime and a logistic environment that will be valid for at least 20 years during which you will not be surprised with any change in the "rules of the game". This way, he would be removing an obstacle that has long hindering investment in Latin American countries. In other words, he would be removing a very serious "country risk."

Free trade zone development in South America is unlikely to follow the traditional path. In most countries (especially in South-East Asia and Central America and the Caribbean) free trade zone activity concentrated in the production of garment and electronic components for sale in developed country markets, using low cost labor and imported materials. There are a number of reasons why such developments will not take place in countries like Brazil and Argentina. Labor costs in those countries are significantly higher than those in Central America, Caribbean and Africa. And contrary to those countries, they are rich in natural resources, which makes it possible the attract investors to process those materials.

The role of free trade zones in South America is to provide a bureaucracy-free environment, free trade conditions (duty free machinery, equipment and materials) and stability of the "rules of the game" for investors (both local and foreign) who want to process raw materials for export.

4. FREE TRADE ZONES AND REGIONAL ECONOMIC INTEGRATION

A free trade area or customs union is in many ways an enlarged domestic market. Therefore, the issue of whether or not free trade zone investors should be allowed to sell in regional markets is an extension of the domestic market sales issue. Consequently, the relationship between the free trade zone and the free trade area (or the customs union) should be similar to that between the free trade zone and the domestic market.

The issue arose first of all in the European Community or European Union as it is now called. Historically, most free trade zone output was sold in developed markets in Europe and the United States. Now free trade zone investors are looking more towards regional markets than they did before.

The first group of free trade zones (Ireland, Korea, Taiwan and Malaysia) prohibited or severely restricted domestic sales, regardless of whether or not free trade zone producers paid duty on the value of the finished product sold in the domestic market. As most of free trade zone investors were garment producers or electronics assemblers selling in Europe or North America, they did not want access and showed no interest in the domestic market of the country concerned, or in the surrounding regional markets. Now all those countries allow for domestic sales.

More recently established zones in Central America, the Caribbean and African zones do permit some domestic sales, if the import duty is paid on the imported content incorporated in the finished product.

The Mexican "maquiladora" industry grew even faster after the North American Free Trade Association (NAFTA) agreement, due to the confidence of foreign investors and, of course, the substantial difference between American and Mexican wages. From 2001 on the "maquilas" were to be allowed to sell up to 100% of their production into domestic market. These sales could benefit from NAFTA preferential treatment provided they meet rules of origin standards.

In the Central America Common Market (encompassing Guatemala, El Salvador, Honduras, Nicaragua and Costa Rica) the general rule is that free trade zone production is to be exported. Yet, a part of the production can be sold domestically under restrictions of a maximum percentage of the production, the payment of corresponding duties, and meeting other commercial regulations. Sometimes these sales require a special permit from the competent national authority.

All the five countries making up the Andean Community allow for sales into the domestic market, although under different conditions. With the only exception of Venezuela, the other countries treat the products coming from a free trade zone as regular imported products, and as such they are submitted to the normal procedures applied to imported products. Venezuela charges duties only on the imported content incorporated in the imported product. Owing to the existing differences among national treatments, efforts have been made by the Executive Secretariat of the Andean Community to harmonize these conditions or at least to compensate for benefits granted at the moment of entrance into the regional market.

According to the MERCOSUR Decision 08/94 a free trade zone investor of any MERCOSUR country is prohibited from selling into the regional market even though he is willing to pay the full duty on the finished product. In such a situation, a Brazilian EPZ producer is at a disadvantage "vis-ŕ-vis" a producer outside MERCOSUR, e.g., a producer in a Colombian or Korean EPZ.

For a country or a group of countries seeking to stimulate economic activity, it is not logical to place any producers (albeit free trade zone producers) within those countries at a disadvantage "vis-ŕ-vis" third country producers.

5. THE CONCERN ABOUT WTO REGULATIONS

A longstanding concern in the free trade zone community has been to see that regional trade negotiations or World Trade Organization (WTO) rules do not reduce the freedom and efficiency of free trade zones and export processing zones. Regarding this subject, the World Economic Processing Zones Association (WEPZA) has maintained permanent contact with the WTO Secretariat in order to monitor and anticipate any movement or decision that could hinder those goals.

The reason for this concern is that the lack of precise rules relating to free trade zones leaves open to the integration agreements to set such regulations, which could generate unfair competition among free trade zones across regional groupings. For this reason the "Comité de Zonas Francas de las Americas" has recently elaborated a proposal for the free trade zones harmonization to be submitted to the WTO, with the aim of obtaining a specific agreement within the WTO.

While some analysts understand that the Agreement on Subsidies and Countervailing Measures may pose some burden on free trade zones, the fact is that the WTO agreements do not mention export processing zones, free trade zones or the like anywhere in the agreements. Also, no case has been brought before the WTO or the GATT dealing specifically with export processing zones or free trade zones.

Regardless of the success of the Comité de las Americas initiative, as far as the Latin American free trade zones are concerned a pragmatic view reminds us that not only was the "maquila" regime maintained during the North American Free Trade Association (NAFTA) negotiations but the "maquiladoras" grew even faster after the agreement was put into effect. And also nothing happened to the US foreign-trade zones.

As it is most likely that the current Free Trade Area of the Americas (FTAA) will replicate the NAFTA general terms (terms which are favorable to free trade zones), one can expect that a similar outcome will occur when this enlarged trade block starts operating. Given that the USA will certainly take care of their very successful FTZs, the less we can say is that "we will be in good company."

6. CONCLUDING REMARKS

The support for free trade zones appears to be growing worldwide. In Latin America, an increasing number of people recognize the benefits of free trade zones in attaining a wide range of economic goals, such as reducing regional imbalances, strengthening the balance of payments and furthering technological diffusion in those countries.

Even though international experience shows some unsuccessful free trade zones (especially when the location was poor and the legislation non-competitive) in most cases free trade zones have been successful in reaching the goals set at their creation.

Additionally, the fact that a free trade zone is an export promotion mechanism free from any WTO restriction makes it even more attractive once those countries need dramatically foster their exports and investments. The policy instruments traditionally used for these objectives are severely prohibited by existing WTO rules.

Of course we cannot expect that free trade zones will bring about miracles in developing Latin American countries. They are just one mechanism that can be used for that purpose. Success is by no means guaranteed. This is especially clear if we take into consideration that most Latin American countries lack some of the preconditions usually required for successful free trade zone development. Such preconditions include good location and infrastructure, a highly skilled labor force, a policy environment favoring exports and a good business climate which investors find attractive.

But the point is that free trade zones are beginning to be seen as an important contributing factor for development promotion. This can be observed even in countries like Brazil and, to a lesser extent, Argentina where free trade zones have been traditionally considered a threat for those economic and political sectors that grew behind high protectionist walls against imports over the last half century.

The current restrictions and impediments raised by the Brazilian Government towards the development of export processing zones are the main factors barring free trade zone development in MERCOSUR countries. Once this opposition is reduced, as we expect it to be within the foreseeable future, a new climate will be created for free trade zones development in Latin America. It is very likely that Argentina would follow such a change in the Brazilian position.

A final point I would like to make refers to the institutional representation of free trade zones in the region. In Latin America free trade zones face a number of somewhat different problems as compared with those faced by East Asian, European and US free trade zones. Nevertheless, there are many situations that require a common solution or action. There have been a number of initiatives over the last decade to handle this question and we have not arrived at a completely satisfactory solution.

There is a close working relationship among the Latin American free trade zones. We usually meet together in regional meetings we organize on a regular basis, especially under the auspices of the World Economic Processing Zones Association (WEPZA). This does not involve, however, the powerful National Association of Foreign-Trade Zones (NAFTZ) of the United States.

NAFTZ has traditionally a weak participation in other free trade zones events, in Latin America and elsewhere. I believe that with the creation of the FTAA there will be a move to make these Hemisphere free trade zone organizations to develop a closer relationship. That will favor the Latin American free trade zones, once there is a tendency for the harmonization of those zones in the FTAA context. Not only is the US free trade zone legislation is more flexible than that of their Latin American counterparts, but the US Government has a more open view on free trade zone operations.