Free Trade Zones in the United Arab Emirates - Research Paper Example

?Running head: Free Trade Zones in UAE & economic development Free Trade Zones in UAE & economic development A free Trade zone is an area, mostly on airports, seaports or major borders of countries, where goods can be brought in; their form and make up altered to produce other goods, then exported to other countries without the customs authorities of the host countries charging taxes on the goods or be involved in any way. However, the said goods have to be legal goods. Free Trade Zones, abbreviated to FTZ are also known as Foreign-trade zones or exporting Processing zones in some quarters. These zones are usually situated in areas with several advantages to trade like good infrastructure, availability of labor, since they involve a lot of manual laborers and availability of quick and reliable transport. These areas are very advantageous to traders and manufacturers in various industries, since there are fewer barriers to trade in these zones than in areas that are not free trade zones. The first Free Trade Zone was established in a small rural town in Ireland to reduce the rate of unemployment in the town, to utilize the airport that was mostly being underutilized in the town, as well as to generate revenue for the Irish government (Brzuzy and Lind, 2007). This was in the early 20th century, and since then due to its colossal success, many more FTZ’s have cropped up throughout the world, mostly in developing countries. One of the main aims of establishing FTZ’s was to create employment opportunities, especially for locals in the area around the FTZ’s and also to generate income for governments. Toward this end, the employment rules governing the FTZ’s are a little different from those governing those companies that do not fall under FTZ. Firstly, corporations operating in the FTZ’s usually discourage their employees from joining or forming trade unions. Workers who try to do so are usually threatened with dismissals or closure of the companies, hence loss of livelihoods (Perman et al., 2004). FTZ’s are also usually exempt from most countries’ employment laws, mostly using the laws set out by the International Labor Organization, ILO. Most FTZ’s also emphasize that a majority of the workers in the zones be citizens of the host country. However, exceptions are made if there is not enough local labor to be employed by industries in the zone or if there is a need to import people with certain skills that are required by the companies. Furthermore, most corporations in the FTZ’s employ workers on short contract basis of between one and at most 5 years. However, most countries’ legislations require that these companies provide benefits such as medical schemes to their workers despite their contract status. One of the most vibrant FTZ’s in the world is the Dubai Media City free zone. As the name suggests, this FTZ is located in the city of Dubai, in the United Arab Emirates in the Middle East. The zone was established in 2001 and is located a few miles from the Dubai International Airport, which serves as the main infrastructure for the traders that visit the zone (BBC News, 2009). As the name suggests, Dubai Media City is a free zone established wit the media as its main trade. In the zone, there are several media hoses, both local and international which carry on their business. The main media activities in the zone include Music, Public Relations, Broadcasting, Publishing, Advertising, Marketing Consultancy, News Agency, Production and Post-production, Research among other media-related activities. Located in over 30,000 square meters of land, the DMC has enviable infrastructure unrivalled in many areas trying to reach its status. Several advantages have been experienced by the UAE because of the DMC. The first and most obvious is the increase in revenue from the zone; the DMC contributes a substantial amount to the country’s economy. The DMC has promoted the development of infrastructure in Dubai. There has been an influx of media houses from all over the world leading to an increase in the demand for real estate for both personal use and media services. The DMC boasts of a large array of international media and production houses such as CNN and Sony. The DMC has also led to the promotion and recognition of talent and entrepreneurship in the media industry in the region. For instance, within the DMC there are Business Media centers which help small independent media houses and freelancers the opportunity to network with the big media houses, as well as get the exposure they need to establish their presence. In recognition of talent in the media, the DMC has established an annual award called Ibda Media student Award which is awarded to the most promising young and upcoming students. DMC has also attracted attention from various media companies in the world to the extent of holding major festivals in the calendar of media. One of these was the Dubai International Film festival that was held in 2010 and attracted big names in the film industry as well as an increase in the number of tourists, which has created a tourist destination out of DMC. The DMC has also led to the creation of a well-diversified culture of different people in the heart of Middle East. Due to its attractiveness, the DMC boasts of people from Europe, Africa, America and the Arabs who are native to the region. Employment opportunities have also increased due to the creation of the DMC, for both foreigners and locals. Despite the benefits earned by the DMC, there are several disadvantages to its existence. One of the major drawbacks is that more vices have been introduced into the city. Traditionally, the residents of Dubai are Muslims, hence their religion frowns upon habits such as alcohol drinking and gambling. However, within the DMC and due to mixture of cultures, drinking and gambling are some of the vices that have been introduced to the city of Dubai (Davidson, 2008). Furthermore, the media infrastructure that is the heart of the DMC has led to an increase in cyber crimes, for instance identity theft (Sambidge, 2008). This was as a result of the improved telecommunications infrastructure in the DMC. Destruction of the environment and pollution are other factors that dampen the excitement of the DMC. Another problem facing the UAE government is that some companies are misusing the licenses given to them by operating in different areas, even outside the DMC (Hart, 2010). The strict hand of rule that is characteristic of Arabic countries, the UAE included, has put off some investors. This means that the DMC could have much more potential if the government loosened its grip on the people a little, because foreigners are not spared either. Violations of human rights and treatment of foreigners is also one thing that has led to many organizations shying from investing in the DMC. This denies the government more revenue. Despite all these, there are several advantages to be gained by investors who put their money in the DMC. For instance, it takes a much shorter time to start a company in the DMC than it does in the rest of UAE. Furthermore, foreign companies do not need to be in partnership with local companies to get licenses, they can be fully owned by the owners. The infrastructure in the DMC is enviable and high tech. this means that the zone offers more quality productions, and at less prohibitive costs. This should be attractive to investors, especially those who have limited funds. Another advantage for companies operating in the DMC is that they are not going to pay taxes for the next 50 years they will be in the DMC! This is very advantageous in that it will reduce the financial burden most companies would find themselves in, especially due to start-up business strains. The location of the DMC, which is its proximity to Europe Africa and South Asia, is beneficial to many companies. This means that the media companies can reach wider viewership with few problems. This proximity, great infrastructure and a well-organized transport system makes it easy for business people to travel around with few hitches. Another important Free Trading Zone in the UAE is the Abu Dhabi Airport Free Zone (ADAFZ). Established in 2006, the zone lies in the UAE’s capital Abu Dhabi. The main reason this free trading zone was set up was to improve on the aviation infrastructure of the United Arab Emirates (Abu Dhabi Airports Company, 2010). The greatest advantage that the ADAFZ has is that it is located in the country’s capital city, hence enjoys the convenience of having most of the country’s administration within a convenient proximity, hence making it easy to carry out business with convenience. The ADAFZ is located in a very convenient geographical location; the airport itself is located in a central position between the west and east of the country, as well as being in the heart of the Emirates commercial hub. The AFADZ boasts of a number of corporations engaging in different kinds of businesses and trades within its established boundaries. Some of these businesses include engineering, aviation, aerospace, cargo, logistics, freight, pharmaceutical, foods and beverages, telecommunications, IT, cosmetics, beauty products among others. Some of these products are used within the UAE. However, most of them are exported to other countries. Furthermore, several companies have been established to help with logistical support within the ADAFZ. These are both international and local companies, or through partnerships of international companies with local ones. The zone also has administrative offices within the zone that help ease the set up and running of companies. The UAE government has benefited greatly from the ADAFZ over the years since its inception. First, the zone has led to increased investment in the Emirates, in Abu Dhabi especially. This increases revenue for the government. Secondly, the ADAFZ has led to n improvement of the infrastructure. Better roads, buildings and the airport have been built or improved in order to make it easy to conduct business within the zone. Telecommunications have also been improved in the ADAFZ. Modern communication networks and tools have been set up, including fast internet speeds, telephones and others, making it one of the most convenient places to conduct business. Employment rates have also gone up due to the building of the AFADZ. Because of rural-urban migration, and Abu Dhabi being a capital city, there have been cases of unemployment, standing at 14% in 2009 (Kawach, 2010) in the UAE. However, with the AFADZ up and operating, many jobs have been created for local residents. These include technical jobs, consulting, in IT and other areas (Gara, 2009). On the flip side, the AFADZ has also led to a lot of disadvantages to the government of UAE. For instance, a lot of money was used to set up this free trade zone. This money could have been used in other more productive areas, for instance agriculture. UAE is a desert country, an the more land put under agriculture through irrigation projects, the better the food security for the country, especially in light of its growing population. Furthermore, Agriculture is a cleaner method to the environment than the manufacturing industry that is the main core of business in the free zone. Here, a lot of pollution to the environment takes place due to the industries operating here by mean of dangerous fumes released into the air, hence increasing the carbon emissions to the atmosphere and the increase of respiratory diseases to residents. Some of the materials used in production and also some by-products of the manufacturing plants are also non-biodegradable, further increasing the exposure of the environment to destruction. Because of the lack of interference by the host countries’ customs officials, free zones tend to attract a breed of dishonest companies and counterfeit goods. The ADAFTZ is no exception. There are companies which take advantage of the laws in the ADAFTZ to hide the real origins of products, while using known brand names to create their own similar but sub standard goods. This does not reflect well on the ADAFTZ. Despite these challenges faced by the government of the UAE, investors willing to invest their money in the ADAFTZ can enjoy a host of benefits. One is the exemption of taxes for goods produced in the free trade zone and exported to other countries. However, if the goods were to be sold in the UAE, then it will be taxed as usual imports. The government has also expedited the process of starting companies in the ADAFTZ. There are fewer regulations and the process takes fewer days than trying to do the same in areas outside the free trade zone. Investors will also enjoy importing machinery and raw material which are exempted from tax (Govers and Go, 2009). This reduces the cost of production, meaning that this benefit will be passed on to consumers who will buy the goods at more competitive prices than from other companies not operating in ADAFTZ. Companies operating in the ADAFTZ also have the advantage of the proximity of the Abu Dhabi International Airport which expedites the export of goods from the companies and also reduces the need for long-distance road travel to take finished goods to the airport or raw materials to the manufacturing plants. The airport authorities have also ensured that companies in the ADAFTZ are given priority in specific hangers and are given priority when it comes to loading and off-loading cargo. This greatly reduces the amount of time taken to get raw materials or goods to their destination (International Business Publications, USA, 2007). In conclusion, the two free trading zones in the UAE offer opportunities that could be profitably exploited by investors, if they think the benefits outweigh the cost and that the downsides can be mitigated. References Abu Dhabi Airports Company (2010). Abu Dhabi Business Park. Retrieved from http://www.adafz.ae/about_adafza.html BBC News (2009). Country profile: United Arab Emirates. Retrieved from http://news.bbc.co.uk/2/hi/middle_east/country_profiles/737620.stm. Brzuzy, S. and Lind, A., (2007). Battleground: women and gender. Westport, Conn.: Greenwood Press. Gara, T. (2009). UAE leads region in IT. The National. Retrieved from http://www.thenational.ae/article/20090416/BUSINESS/448045865/-1/ART. Govers, R., and Go, F. M. (2009). Place branding: glocal, virtual and physical identities, constructed, imagined and experienced. Basingstoke: Palgrave Macmillan, 2009. Hart, K. (2010). Licenses misused may be revoked: RAK FTZ: Companies with RAK free trade zone licenses are not allowed to operate in other emirates. Retrieved from http://www.emirates247.com/business/corporate/licences-misused-may-be-revoked-rak-ftz-2010-08-03-1.274213 International Business Publications, USA (2007). Doing Business and Investing in United Arab Emirates Guide. USA, Intl Business Pubns. New York: Columbia University Press. Kawach, N. (2010). National jobless rate peaks at 14% in 2009. Retrieved from http://www.emirates247.com/news/emirates/national-jobless-rate-peaks-at-14-in-2009-2010-08-12-1.278241. Perman, et al. (2004). Working conditions and labour rights in export processing zones. Retrieved http://www.icftu.org/www/PDF/EPZreportE.pdf Sambidge, A. (2008). Dubai's e-police probe 222 internet crime cases. Arabian Business. Retrieved from http://www.arabianbusiness.com/536556-dubais-e-police-probe-222-internet. Read More