Free Trade Zone/Special Customs Zone

What is a Special Customs Zone/Free Zone (SCZ)?

During the last 50 years, the SCZ concept has witnessed an exponential boom.  According to the International Labour Organization (ILO), there are currently more
than 3,500 SCZs established all over the globe, generating employment for almost 66 million workers1.

The Chapter 2 (Free Zone) of Specific Annex D to the Revised Kyoto Convention (RKC) defines a free zone as “a part of the territory of a Contracting Party where any goods introduced are generally regarded, insofar as import duties and taxes are concerned, as being outside the Customs territory”.

Although their scope, size, institutional set-up, locations and incentives for investors vary significantly, the SCZ’s general aim is to provide a wide range of economic incentives to attract foreign investment, foster economic activities led mainly by export-oriented activities, and boost employment. 

Challenges in SCZs faced by Customs Administrations

  • Lack of Customs’ involvement in both set-up stage and operating stage
  • Absence of adequate Customs procedures/control
  • Abuse of SCZs for production of illegal goods, e.g. counterfeit goods and their dissemination from SCZs throughout the global supply chain
  • Spread of illegal activates in SCZs targeting globe

 

 

Revised Kyoto Convention (Chapter 2 (Free Zones) of Specific Annex D)

  • The only international agreement for SCZs

Customs policy in relation to SCZs is outlined in Chapter 2 of Specific Annex D to the Revised Kyoto Convention (RKC), and the RKC Guidelines on Free Zones provide technical specifications regarding this Chapter.  Chapter 2 contains 21 Standards covering a wide range of Customs procedures and controls related to SCZs.  To date, the RKC is the only international agreement which includes provisions on this subject.

Based on the RKC, except of for revenue collection, all other Customs functions such as procedures’ facilitation and border control (including inspections and seizures), should be applied and enforced in SCZs.  For example, Standard 4 is essential in that it stipulates that Customs “shall have the right to carry out checks at any time on the goods stored in a free zone”. 

However, despite these Standards, Customs controls in SCZs are generally more flexible than those exercised in other contexts.  Furthermore, some countries interpret these zones as “being outside the Customs territory” altogether, leading to a denial of Customs’ jurisdiction over goods in SCZs, and opening the way for illegal trade.

  • Comprehensive review of the RKC

The WCO kicked off its work of conducting a comprehensive review of the RKC in September 2018, the outcome of which is expected to be completed during the 2020/2021 financial year.  As of 10 March 2019, the WCO has received 5 written proposals from Members on Chapter 2 of Specific Annex D, recognizing the urgent need to review these Standards in order to ensure that the necessary control and facilitation measures to be applied to SCZs are adequately addressed in the RKC.

Essential elements to be discussed in WCO relevant bodies

  • Definition of an SCZ and related terminology;
  • Appropriate competence of Customs to conduct Customs procedures and surveillance over goods/companies in SCZs (including inspections and seizures), in order to combat illicit trade while maintaining and contributing to the economic benefits of SCZs;
  • Customs’ full involvement in the process of establishing SCZs, including planning their construction, and in the approval process for SCZ operators and companies in SCZs;
  • Cooperation with operators and companies in SCZs, for example through periodic dialogues and reporting, the provision of adequate training and the application of the AEO-like concept;
  • Utilization of data to control the overall movement of cargo in SCZs for entry/exit, transit/transhipment, import and export, and even pre-arrival; and
  • Application of modern technologies for Customs surveillance without disturbing the movement of cargo.
  • Cooperation with other governmental agencies (e.g. drug and food authority in some countries to conduct joint control especially on goods stored or processed inside SCZs).

WCO project plan on Special Customs Zones/ Free Zones

  • Field studies and workshops in 6 regions

Considering the rapid expansion of SCZs as well as the diversity of SCZs,
an in-depth analysis of the current situation, through SCZ field studies and workshops in different WCO regions, is essential.  This analysis should include the economic benefits of SCZs and good practices to enhance Customs controls through the utilization of IT and technologies in line with the key findings of the online survey

  • WCO Handbook and comprehensive review of the RKC

This review process should contribute to an assessment of the need to develop common ground for adequate international standards on Customs procedures and control, including the development of a research paper and a Handbook on SCZs.

  • Comprehensive review of the RKC

This process will lead to a possible review of Chapter 2 of RKC Specific Annex D and its Guidelines, this being the only international agreement which includes provisions on this subject.

Result of WCO workshops on Special Customs Zones/ Free Zones

Relevant WCO instruments/tools and documents

WCO Presentation on Special Customs Zones/Free Zones

Revised Kyoto Convention (Chapter 2 (Free Zones) of Specific Annex D)

WCO News October 2018 “Addressing challenges related to Customs controls in free zones”
By Mariya Polner, Senior Policy Advisor, and Satoko Kagawa, Technical Officer, Compliance and Facilitation Directorate, WCO

WCO News February 2019 “Overview of the Dominican Republic’s free zone sector”
By the General Directorate of Customs, Dominican Republic


1 ILO (2014), Trade Union Policy Guide on Export Processing Zones, Geneva, p. 3.