Development of Free Zones in United Arab Emirates

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2 Development of Free Zones in United Arab Emirates M. Hazem Shayah, School of Economics, Wuhan University of Technology, China. Yang Qifeng, School of Economics, Wuhan University of Technology, China. Abstract In their efforts to achieve economic diversification, the UAE s federal government and the governments of the individual emirates have been actively involved in the development of different economic projects in association with both local and foreign businesses especially in free zones. Therefore, in this article I aim to discuss the general concept of free zones with a Special emphasis placed on analyzing the objectives, characteristics, and evolution of the free zones in the UAE, their state at present and what are the trends for the future. Currently, approximately 80 percent of the UAE s non-oil exports originate from the free zones. Consequently, I believe the UAE can continue its economic plans by the adoption of an export-led growth strategy which can be achieved by developing the existing free zones within the country. Keywords: Free zones, UAE, Trade, Export growth 286

3 1. Introduction Different names such as Export Processing Zone (EPZ), Free Trade Zone (FTZ), Special Economic Zone (SEZ), Free zones (FZ), and Maquiladora are used in different countries to refer to similar institutions. Simply the free zone is a designated area that eliminates traditional trade barriers, such as tariffs, and minimizes bureaucratic regulations. The target of a free zone is to enhance global market presence by attracting new business and foreign investments. Some countries in the Middle East were early adopters of free zones. Syria, Egypt, and Jordan, for example, established government-run zones in the 1960s and 1970s, however in the case of the UAE, Dubai stands apart as it has developed a reputation for international commerce long before its first free trade zone which was established in the 1980s. Akinci & Crittle, (2008) discuss the economic benefits of zone development in general and mention that the economic benefits from zone development are both static and dynamic. The static benefits include: (1) Direct employment creation and income generation (2) Export growth and export diversification (3) Foreign exchange earnings (4) Foreign direct investment (5) Government revenues The impact of these benefits is obviously amplified in poorer countries where jobs and foreign exchange earnings and government resources are scarce. The dynamic benefits are much harder to measure, yet are far more important to the long-term contributions of zone development. These include: (1) Indirect employment creation (2) Skills upgrading (3) Female employment (4) Technology transfer (5) Demonstration effect arising from the application of best practices. (6) Regional development Samen, (2010) discusses the Export processing zones and comments that during the last decades, EPZs have become increasingly popular. Today, there are over 3,000 EPZs or other types of Free Zones in 135 countries around the world, accounting for over $500 billion of total trade. Many developing countries have been using these zones as the ideal vehicle to achieve multiple objectives including: (1) enhancement of foreign exchange earnings by promotion of exports of non-traditional manufactured goods; (2) creation of jobs and 287

4 generation of income; (3) increased competitiveness of exporters; and (4) attraction of FDI with its associated technology transfer, knowledge spillover, demonstration effects, and backward linkages. 2. UAE Economic environment The UAE has an open economy with a high per capita income and a great annual trade surplus. Successful efforts at economic diversification have reduced the portion of GDP based on oil and gas output to 25% since the discovery of oil in the UAE more than 30 years ago. In addition, the UAE a member of the WTO since 10 April 1996 and a contracting party to GATT since March 8, Economic diversification is one of the most important aims of the UAE s strategy according to vision 2021 which was launched in February 2010, and states the need for the UAE to sustain its drive toward economic diversification, as this is the nation s surest path to sustainable development in a future that is less reliant on oil. This means expanding new strategic sectors to channel energy into industries and services where a long-term competitive advantage can be built (The UAE Vision 2021). Yahia (2013) uses a table to show the UAE trade with its major trading partners and that table shows that the UAE trades mostly with Asian Countries, Germany, U.S.A and UK. The criterion is that any country which trades more than 15% (exports +imports) with the UAE is defined as a top trading partner. Table 1: the UAE trade with its major trading partners (average ) country % of total % of total Total of exports and UAE Exports UAE Imports imports as percentage Germany Japan Korean S UK USA China India Iran total of partners the rest of the world Total Source: Yahia (2013) Taking Dubai as one case of the seven emirates it is visible that after oil production slowed Dubai initiated a remarkable reshaping of its economy away from oil. The authorities turned initially to foreign trade to be the engine of economic development but soon realized the need for diversification: foreign trade offered ample possibilities but also generated 288

5 significant risks for the local economy. Therefore, the government embarked on a series of policies aimed at fostering the development of strategic industries, including tourism, the financial sector, retail and wholesale trade. The opening of several FTZ in the 1990s provided an additional boost to the economy and, away from the straightjacket of the kafala (sponsorship system), allowed competitive re-exporting activities to flourish,(haouas & Soto, 2012). The UAE s average tariff rate is 3.7 percent. Non-tariff barriers are not a significant deterrent to trade. The modern financial sector is efficient and competitive with banks offering a full range of services. Islamic banking is increasingly prominent. State-owned banks have maintained a strong presence, however foreign banks have over 100 branches around the country. The growth rate of the UAE s non-oil foreign trade has been stable for the last ten years except in 2009 when global trade dropped by 13% as a result of economic turmoil. Nevertheless, 2010 saw a strong return when the UAE s total foreign trade increased by 14%, from billion USD in 2009 to billion USD. The ongoing growth in foreign trade reflects the country s strong commitment, through its free trade policies, advanced logistics and encouraging innovative projects to preserve its strong standing in the global trade market. The UAE s foreign trade volume increased between 2005 and 2010 with an average growth rate of 19% as a result of an increase in exports (non-oil exports and reexports). The share of total exports (non-oil exports + re-exports) amounted to 35.7% of the country s total foreign trade in The re-export sector, the second most important component of the UAE s foreign trade with a share of 25% in 2010, reached a value of USD billion during the same year. This steady growth is a result of the Government s ongoing support to this vital sector through a variety of different initiatives. The ease of customs procedures, low administrative import and export costs and the country s advanced seaport and airport infrastructure and facilities, have all positively affected the high competitiveness that the UAE enjoys, making the UAE the world s third-largest re-export market (trailing only Hong Kong and Singapore) and trades with more than 220 countries. Re-export involves importing merchandise of foreign origin into the country and shipping it to another destination in the same condition in which it was imported, or after reprocessing inside the country. The pace of growth has quickened over the recent years, with GDP showing a healthy rise of 4.4 per cent in 2012, following 3.9 percent in 2011, shown in figure1. 289

6 Figure 1: Real GDP change% Source: National Bureau of Statistics In recent years, the UAE recovered from the 2009 global recession with strong growth in tourism, trade, transport, and manufacturing while the real estate and construction sectors have also recovered. The UAE has recorded 4% GDP growth in 2013, according to the International Monetary Fund (IMF), totaling AED 1.4 trillion, which is considered a significant achievement against the instability in many economic markets. Also in 2013, oil production increased and the domestic and regional economic recovery boosted the non-oil sectors of the economy. The UAE's oil production rose by an estimated 4.7 percent in The non-oil sector has also enjoyed strong expansion, particularly in Dubai where data shows that manufacturing and trade grew strongly in the first half of Free zones in UAE 3.1 Introduction Different countries have adopted different names for their FTZ or similar zones. De Armas & Jallab, (2002) have presented a list of terminology that has been used: e.g. industrial free zone in Syria, and Jordan, maquiladora in Mexico and Panama, free trade zone in the Bulgaria and Chile, special export processing zone in the Philippines, special economic zone in China, bonded zone in Indonesia, and free zone in the United Arab Emirates and Turkey. The UAE Government has established nearly 40 free zones, in which 100 percent foreign ownership is allowed and no taxes are levied. The highest concentration of the free zones is in Dubai, with more than half of the total number of free zones (23), followed by Abu Dhabi (5), Ras Al Khaimah (4), Fujeirah (3), Sharjah (2), Ajman (1), and Umm Al Quwain (1). Outside the free zones, local sponsors are needed for foreign companies to be established, and foreign ownership is limited to a maximum of 49 percent.(mina 2013) 80 percent of the UAE s non-oil exports originate from the Free Zones. These zones are exempt from all the licensing, agency, emiratisation, national ownership, and other domestic regulations that apply to customs territory. The UAE s first free zone was established at Jebel Ali in Its success in attracting foreign investment and technological expertise, and the growth of re-exports and transshipment as a major commercial activity led the other emirates 290

7 to create similar free zones to attract inward investment, employment generation, and significant economic development( Ramady 2014). 3.2 Characteristics of Free zones in the UAE The United Arab Emirates benefits from its strategic geographical location between Asia and Europe and from its economic position as the center of cargo traffic in the Middle East. Dubai was the first Emirate to set up a free zone and did so at Jebel Ali. This free zone has some of the most excellent incentives in the world. Later, the federal government launched several new free trade zones intended to establish the Emirates as a global center for trade in gold bullion, research and development of technology, and financial activities. In addition, the United Arab Emirates relaxed the Emirates restrictions for foreign investment in specific real estate projects and allowed 100% foreign ownership of companies in most nonhydrocarbon sectors. Moreover, the UAE reduced corporate income tax on foreign corporations, the administrative steps for investment approval were streamlined, and foreign investor s access to local stock markets improved (Ramady 2012). The incentives, or advantages, offered by the UAE government are summarized below: Table 2: Advantages of free zones in UAE 100% foreign ownership Ready-made factories and warehouses Full repatriation of capital and profits Quick approval procedures No minimum capital investment Abundant and inexpensive energy No currency restrictions No corporate taxes Extended leases Excellent infrastructure Excellent communications access No personal income taxes Efficient transportation system Excellent distribution facilities Additionally the UAE does not apply minimum export requirement in its zones. However limitations do exist within the free zones in the UAE, below some are explained: A free zone company is not allowed to trade directly with the UAE market, the free zone company can trade within the UAE only through locally appointed distributors. A custom duty of 5% is applicable when the free zone company sells in the local market, and employees with visas from free zone companies are expected to work only from the company s offices in that free zone. Regarding import licensing, inside the UAE only firms with an appropriate trade license can engage in importation, and only UAE registered companies, which must have at least 51 percent ownership by a UAE national, can obtain such a license. This licensing provision does not apply to goods imported into free zones. Some goods for personal consumption do not require import licenses. The following are some of the various free zones in Dubai 291

8 Jebel Ali Free Zone Dubai Maritime City Dubai Cars and Automotive Zone Jumeirah Lake Towers Gold and Diamond Park Dubai Flower City Table 3: Free zones in Dubai Techno Park Dubai Airport Free Zone Dubai Internet City - Tecom Dubai Textile City Dubai Media City - Tecom Dubai Studio City - Tecom. Dubai Logistics City Dubai International Academic City -Tecom Given hereunder are the various free zones established in the Emirate of Sharjah and the Northern Emirates:- Table 4: Free zones in Sharjah and the Northern Emirates Sharjah Airport Free Zone Ajman Free Zone Fujairah Media Zone / Creative City Ras Al Khaimah Free Zone Hamriyah Free Zone Fujairah Free Zone Ahmed Bin Rashid Free Zone (UAQ) Rak Media City (RAKIA) Free Zones in Abu Dhabi: 1. Abu Dhabi Airport Free Zone 2. Free Trade and Logistics Zone (Taweelah) 3.3 Types of companies inside the free zones in the UAE Inside the free zones there are special types of companies some of these types are as follows: (1) Limited Liability Company (LLC): LLC allows engagement in local trade and services. It is recommended for companies which want to pursue retail business. In addition to local trade, it also permits global trade. (2) Free zone company: free zone Company allows engagement in global trade and local sale is permitted through a local U.A.E. agent / distributor. (3) Offshore company: offshore company permits only international trading / services outside U.A.E. 4. Suggestions to develop free zones in the UAE The UAE free zones have been one of the strongest pillars of the country s recent economic performance, attracting significant amounts of foreign investment, creating thousands of jobs and facilitating technology transfer into the country. The combined output of the country s free zones accounts for more than half of its non-oil exports and underpins the UAE s ranking as the third most important re-export center in the world. In this section I introduce some suggestions to develop free zones in the UAE as follows: 292

9 The UAE can adopt Export Oriented Industrialization strategies targeting larger markets, which is facilitated through preferential trade agreements given the size of the UAE market especially with the EU and Asian countries. UAE free zone authorities can try the (cluster zoning model) which allows the full integration with the industry value chain with more flexibility and synergy benefits. Cluster zoning is a zoning method in which development density is determined for an entire specified area, rather than on a lot-by-lot basis. Within the specified cluster zone, a developer can exercise greater flexibility in designing and placing structures, as long as the total density requirement is met. There are some opportunities in industries with high-tech content which could be attractive for the case of the UAE such as automobiles and aeronautical components. However actions such as investments, training, R&D, and international joint ventures are needed first. There are two choices, the first one is to rely on outsourcing and the second is to have all of these actions done inside the cluster zoning by organizing resources appropriately. The UAE needs to create linkages between the free zones and the local economy to improve socio-economic conditions and eliminate regional disparities. Innovative incentives (facilities in R&D and training...) can be introduced rather than relying only on classical customs incentives. Greater involvement of the private sector in the development of zones can be achieved by outsourcing and training programs. The UAE will continue to have success in its established sectors: chemicals, agribusiness, and food processing. The UAE can still develop these sectors by merging more technologies within their industrial processes. 5. Conclusion In recent years, the UAE recovered from the 2009 global recession with a strong growth in tourism, trade, transport, and manufacturing while the real estate and construction sectors also recovered. The UAE free zones have been one of the strongest pillars of the country s economic performance, the combined output of the country s free zones accounts for more than half of its non-oil exports and underpin the UAE s ranking as the third most important re-export centre in the world. In this article, I discussed the general concept of free zones with a special emphasis placed on the UAE free zones, their state at present and what are the trends for the future. Currently, approximately 80 percent of the UAE s non-oil exports originate from the free zones. Consequently, I believe the UAE can continue its economic plans by the adoption of 293

10 an export-led growth strategy targeting larger markets which can be achieved by developing the existing free zones within the country. References Akinci, G., & Crittle, J 2008, Special economic zones: Performance, lessons learned, and implications for zone development, The World Bank, Washington DC. De Armas, E. B., & Jallab, M. S 2002, A Review of the Role and Impact of Export Processing Zones in World Trade: the Case of Mexico. HAL. Haouas, I., & Soto, R 2012, Has the UAE Escaped the Oil Curse? (No. 412). Mina, W (51810). 2013, United Arab Emirates FDI Outlook, MPRA Paper working paper, no Nyarko, Y 2010, the United Arab Emirates: Some Lessons in Economic Development, No. 2010, 11, working paper/world Institute for Development Economics Research. Ramady, M. A 2013, Economic and Financial Country Risk: Analysis of the Gulf Cooperation Council, Springer Science & Business. Ramady, M. A 2012, The GCC economies: Stepping up to future challenges. Springer. Samen, S. S. (2010). Export development, diversification, and competitiveness: How some developing countries got it right. World Bank Institute. The UAE Vision Retrieved from [5May 2014] Yahia, A. F 2013, An Empirical Examination of Feedback Effect in the Trade Relationship Between UAE and Trading Partners. International Journal of Trade, Economics and Finance vol. 3, no. 6, pp View publication stats