The Free Trade and Industrial Zones in the UAE - Research Paper Example

?The Free Trade and Industrial Zones in the UAE The United Arab Emirates is considered as the leading country in the Middle East when it comes to introducing and implementing diverse approaches to the economy. The Middle East has always been known as a region where some of the world’s largest oilfields are concentrated. Because of this, nearly all countries in the region have economies that solely or primarily rely on the production of crude oil. However, the UAE has distinguished itself from the rest because of its willingness to venture into economic programs that are not based on oil production. The establishment of free trade and industrial zones may well be considered as a unique step which other Middle Eastern countries have not yet emulated. The UAE has proven though that there are advantages gained for diversifying through such approach. Two very successful free trade zones, Jabel Ali Free Zone Area (JAFZA) and Dubai Airport Free Zone Area (DAFZA), have contributed significantly to the economy. Indeed, free trade zones are not without its share of problems and these also have negative impact to the economy. Nevertheless, the benefits far outweigh the costs. JAFZA has made very relevant contributions to the UAE’s economy since its establishment. In fact, its share in the Dubai’s economy is very strategic. It accounts for more than 25 per cent of the total trade being conducted in the city. In just 25 years, it saw the establishment of many companies in its vicinity. The year 2010 is considered as its most successful year. By the end of this year, there were 480 companies that set up facilities in the area. 55 of these are multinationals and were draw by JAFZA’s “customer focused value proposition that brings together products, all relevant services as well as value added benefits under one roof to form an ecosystem that is conducive to business” (Banga, 2011). The entry of such investments has, in turn, benefited the UAE in more ways than one. It is one of the entities that continue to fuel the country’s growth, resulting in UAE’s distinction as one of the countries in the region with the most stable economies. JAFZA has been a major factor in increasing the country’s gross domestic product. This is proven by information from the International Monetary Fund and the Dubai Statistics Department which says that “growth over the last 15 years in the number of companies at JAFZA are 3 times that of the UAE GDP, and that it outpaced the rate of growth of Dubai's GDP by nearly one and a half times” (AME Info, 2010). It is not just in the area of investments that the UAE has benefited from the operations of JAFZA. The Free Zone has also created thousands of jobs for the locals and for migrant workers. In 2001, there were about 40,000 people employed in the companies operating in it but this number further increase in meteoric fashion that by 2010, a workforce of 115,000 was achieved (Banga, 2011). JAFZA has definitely been very advantageous to the emirates. Despite the positive contributions though, the existence of JAFZA and free trade zones, in general, has negative repercussions as well. Per free trade zone rules, the companies that operate here are not required to comply with the laws of the UAE regarding visa requirements, employment, and labour market nationalization. With such freedoms, foreign investors can develop flexible labour schemes that may guarantee higher profits without fear of government intervention to protect the workers’ rights. Hence, this puts the workers in the free zones at a disadvantageous position. While the companies within the premises of the free zone earn bigger, they also enjoy tax holidays or exemptions. JAFZA, similar to other free trade zones elsewhere, guarantee that “multinational companies enjoy full ownership and profit repatriation within the confines of the free-trade zones” (Kanna, 2011, p.142). This means that the country does not get any share in the profits generated through the operations of the foreign companies existing in JAFZA. Apparently, the UAE does not benefit much from the operations of JAFZA in terms of taxes. It may have compromised to a certain extent some of its sovereign powers, particularly its laws on labour and taxation in return for influx of foreign investments and the creation of new jobs. It is actually the foreign investors who enjoy more advantages once they set up business facilities in JAFZA. Aside from the exemptions from taxes and tariffs and from the application of labour laws, they also get to have several value-added support services. JAFZA business experts provide advice to business on future expansion and investment. They also assist the companies who are planning to establish themselves in the area or who are already operating here in business matching. JAFZA also organises events meant to provide opportunities for businesses to introduce themselves to each other and explore the possibilities of mutually beneficial linkages. JAFZA’s clients are provided with access to Dubai Trade Portal and JAFZA, which are technological tools meant to make business operations easy. JAFZA distinguishes itself through its customer-centred strategy for growth. While it gives ample attention providing businesses with infrastructure, JAFZA, which is run by Economic Zones World, focuses on establishing long-term customer relationships through many value-added services and incentives (JAFZA, n.d.). It is the manner that it treats its customers that is at the core of the free trade zone’s growth. Dubai Airport Free Zone or DAFZA is located just beside the Dubai International Airport. Established in 1996, it is one of the fastest growing free zones in the UAE (Noack 2007, p. 84). The key advantages that it offers to investors are all primarily related to its proximity to the airport. Cargos are processed faster and more efficiently and logistics support companies are very easy to access. DAFZA has consistently contributed to the trading sector in Dubai and in the economy of UAE in general. In 2010 alone, it provided AED52 billion to the volume of Dubai trade, which accounts to 5.8 per cent of the total volume of trade in the emirate (Dubai Airport Free Zone 2011). In the said year also, Dubai acquired an income of AED355 billion from exports. DAFZA’s contribution to this is 6 per cent or AED21.65 billion. Since DAFZA is solely owned and operated by the government of the UAE, the income that it derives from the trading transactions being conducted within the free zone is acquired in full by the emirates. This means that the UAE government itself directly benefits from DAFZA in financial terms. Aside from this, the establishment of businesses in its premises also creates thousands of jobs. Since its establishment, DAFZA has attracted more than 1,450 companies and in 2010 alone, 102 companies were actually established. These companies hire hundreds of employees but a great number of their workforces also came from other countries, which proves of UAE’s apparent lack of labour force. Due to the fact that the free trade zones in Dubai are areas where certain laws and normal government processes are not being implemented, it has also become convenient for illegal operations to be conducted. There are some media reports that suggest that “Dubai has become a home for Indian, Iranian, and Russian mafia kingpins, who use the free trade zone to launder their profits” (Finlay 2011, p.17). Apparently, DAFZA also has to contend with the said problem. Its dilemma, however, is that while it allows law enforcement agencies to run after such criminals, it should remain liberal in providing opportunities for companies, removing all potential roadblocks to the easy establishment of businesses in the area. Unlike other free zones in the UAE, the government earns through DAFZA although not in the form of taxes. However, it is the government itself also that compromises its stand for the good of labour. It is through the DAFZA administration that the UAE government plays an active role in reducing certain workers’ rights as a means of attracting more investments. The incentives that are made available to them what makes DAFZA very attractive to investors, especially those that are multinational or transnational. Foreign businesses that are established in the free zone can remain 100 per cent foreign-owned. This means that there is to be no intervention at all from the part of the UAE government or participation of any local investor. At the same time, these have the absolute freedom to repatriate both capital and profits (Terterov 2006, p. 152). Such freedom is considered as one of the most cherished by investors as it essentially means that they can enjoy the maximum results of their production or business operation. Businesses that are operating within the premises of DAFZA also privileged with tax exemptions. These include a corporate tax holiday for 15 years, which is renewable for another 15 years if a business wishes to extend its operation in the free zone. Businesses are also granted full exemption of import duties. The strategy for growth being applied in DAFZA is not much different from that of the other free zones in the country. However, since DAFZA itself is controlled by the government of the UAE. It is here that the actual attitude of the state towards economic growth very obvious. The government’s policy of liberalisation and deregulation are twin concepts that are at the core of DAFZA’s strategy for growth. Liberalisation is implemented through the removal of state restrictions regarding the operation and ownership of foreign businesses inside the free zone. Deregulation, on the other hand is noticeable in the manner that the government implements tax exemptions and holidays, as well as the permission for the absolute repatriation of capital and profit. All these policies and strategies have definitely encouraged investors to come to Dubai and set up businesses in the premises of DAFZA. Virtually removing all potential obstacles to the influx of investments, even if these result in losses of revenues through taxation, have succeeded in luring foreign businesses. As a result, DAFZA has seen significant growth through the years. The employment laws within both JAFZA and DAFZA are also the reasons why these free zones have become very attractive to foreign and domestic investors. Even as the general policy of the protecting the interests of the works is still being adhered to, there are certain specific conditions in the implementation of labour laws that are unique only to the said free zones. One example of this is that workers are basically discouraged from setting trade unions. While the rules do not explicitly state that trade unions are banned, in reality there are no such organisations that are existing in the free zones. Strikes and lockouts are strictly not allowed but there is a mechanism for resolving labour disputes. The free zone employment rules say that “in the case of a dispute between employer and employee, or a dispute in the interpretation of the Labour Law, the Ministry of Labour and Social Affairs will initially act as an adjudicator” (Baker Tilly International 2008, p. 11). At the moment, there are no specific rules on minimum wages. It is clear that with very liberal economic policies in the free zones, the UAE has seen its growth and have benefited from it. This only proves that the establishment of JAFZA and DAFZA are correct decisions that have spurred the growth of the economy and created jobs for thousands of locals and foreigners as well. At the same time, this has contributed much to the modernisation of the country. References AME Info. (n.d.) Growth Outpaces UAE’s by Three Times. Retrieved November 11, 2011, from AME Info: http://www.ameinfo.com/232569.html Baker Tilly International. (2008) Doing Business with the United Arab Emirates. Retrieved November 13, 2011. from Baker Tilly International: http://www.bakertillyinternational.com/media/36896/doing_business_in_the_united_arab_emirates-aug08.pdf Banga, K. (2011, March). JAFZA Companies Generate Trade Worth over US$60 Billion in 2010. Retrieved November 11, 2011, from SMEA Advisor: http://www.smeadvisor.com/2011/03/jafza-companies-generate-trade-worth-over-us60-billion-in-2010/ Dubai Airport Free Zone. (2011, May 19). DAFZA Contributes AED52 Billion to Total Trade Volume in Dubai. Retrieved November 13, 2011, from Dubai Airport Free Zone website: http://www.dafz.ae/pr190511.html Finlay, B. (2011). Beyond Boundaries in the Middle East: Leveraging Non-Proliferation Assistance to Address Security/Development Needs with Resolution 1540. Darby, PA: DIANE Publishing. JAFZA. (n.d.). JAFZA at a Glance. Retrieved November 12, 2011, from JAFZA website: http://www.jafza.ae/en/about-us/jafza-facts-at-a-glance.html Kanna, A. (2011). Dubai, the City as Corporation. Minneapolis: University of Minnesota Press. Noack, S. (2007). Doing Business in Dubai and the United Arab Emirates. Munchen: GRIN Verlag GmbH. Terterov, M. et al. (2006). Doing Business with the United Arab Emirates. London: GMB. Read More