The world’s first document free-trade zone was established on the Greek Island of Delos in 166 BCE. It lasted until about 69 BCE when the island was overrun by pirates. The Romans had many civitas libera, or free cities, some of which could coin money, establish their own laws, and not pay an annual tribute to the Roman Emperor. These continued through at least the first millennium CE. In the 12th century the Hanseatic League began operating in Northern Europe, and established trading colonies throughout Europe. These Free Trade Zones included Hamburg, and the Steelyard in London. The Steelyard, like other Hansa stations, was a separate walled community with its own warehouses on the river, its own weighing house, chapel, counting houses and residential quarters. In 1988 remains of the former Hanseatic trading house, once the largest medieval trading complex in Britain, were uncovered by archaeologists during maintenance work on Cannon Street Station. Shannon, Ireland (Shannon Free Zone) established in 1959 has claimed to be the first “modern” free trade zone. The Shannon Zone was started to help the city airport adjust to a radical change in aircraft technology that permitted longer range aircraft to skip a required refueling stops at Shannon. It was an attempt by the Irish Government to maintain employment around the airport and for the airport to continue generating revenue for the Irish economy. It was hugely successful, and is still in operation today. Other free zones of note are the Kandla Free Zone in India, which started about 1960, and the Kaohsiung Export Processing Zone in Taiwan which started in 1967. The number of worldwide free-trade zones proliferated in the late 20th century.
Corporations setting up in a zone may be given a number of regulatory and fiscal incentives such as the right to establish a business, the right to import parts and equipment without duty, the right to keep and use foreign exchange earnings, and sometimes income or property tax breaks as an incentive. There may also be other incentives relating the methods of customs control and filing requirements. The rationale is that the zones will attract investment and create employment and thus reduce poverty and unemployment, stimulating the area’s economy. These zones are often used by multinational corporations to set up factories to produce goods (such as clothing, shoes, and electronics).
Free-trade zones should be distinguished from free trade areas. A free trade zone is normally established in a single country, although there are a few exceptions where a free zone may cross a national border, such as the Syrian/Jordanian Free Trade Zone. Free trade areas are set up between countries such as the Latin America Free Trade Association (LAFTA), which was created in the 1960 Treaty of Montevideo by Argentina, Brazil, Chile, Mexico, Paraguay, Peru, and Uruguay, or the North American Free Trade Agreement between Mexico, the United States, and Canada. In Free trade areas tariffs are only lowered between member countries. They should also be distinguished from customs unions, like the former European Economic Community where several countries agree to unify customs regulations and eliminate customs between the union members.
Free-trade zones have more recently been also called special economic zones in some countries. Special economic zones (SEZs) have been established in many countries as testing grounds for the implementation of liberal market economy principles. SEZs are viewed as instruments to enhance the acceptability and the credibility of the transformation policies and to attract domestic and foreign investment. The change in terminology has been driven by the formation of the World Trade Organization (WTO) which prohibits members from offering certain types of fiscal incentives to promote the exports of goods, thus the term Export Processing Zone (EPZ) is no longer used with newer zones. For example, India converted all of its EPZs to SEZs in 2000.
In 1999, there were 43 million people working in about 3000 FTZs spanning 116 countries producing clothes, shoes, sneakers, electronics, and toys. The basic objectives of economic zones are to enhance foreign exchange earnings, develop export-oriented industries and to generate employment opportunities.