Free Trade Zones in Latin America - a (very) quick guide to three countries

Free Trade Zones can save you a headache or two, and a lot of money, particularly in Latin America. They are not, however, for everyone, and they won’t solve every problem. They won’t make Brazil suddenly abandon its protectionist flare, for example, or mean that your goods can wonder round Latin America free of tax. There’s also not that much “free” in a free trade zone.

So what are the FTZs? Encyclopaedia Britannica explains: “free-trade zone, also called foreign-trade zone, formerly free port , an area within which goods may be landed, handled, manufactured or reconfigured, and reexported without the intervention of the customs authorities. Only when the goods are moved to consumers within the country in which the zone is located do they become subject to the prevailing customs duties”

We promised you three countries, so let’s start with Uruguay, where I’m based, to put this definition to good use. Take leading Uruguayan FTZ, Zonamerica, for example. Within Zonamerica, there are logistics operators such as Costa Oriental that provide a regional service for clients in consumer goods, electronics, cars, machinery, pharma, spare parts, raw materials and much more. What’s the point? Roughly speaking: your goods arrive in bulk at one of these deposits and stay there without paying taxes until they leave for whatever destination you allocate them. That means that your clients can have stock (including spare parts) within hours rather than waiting for goods to come from, say, China or the EU. It also means that you can control your cashflow better since you are not paying for tax until you make a sale. Life’s not perfect and there are exclusions about re-exporting to other Mercosur countries such as Brazil and Argentina. However, benefits of FTZs in Uruguay extend beyond not paying duty, and include (from Inalog, see below): “free capital movement and repatriation, unrestricted length of stay of the goods in the zone, engagement of up to 25% of foreign staff and state-owned monopolies do not apply within the free zone”. So plenty of reasons to look at FTZs in Uruguay for your operations...

Uruguay has been historically a business and logistics hub, and this is especially true nowadays given the difficulties in trading with Argentina and Brazil – many companies see Uruguay as a safer country for their regional operations than its  larger, more complex and often unstable Mercosur neighbours. More recently, Uruguay has consolidated its position as a logistic hub through the creation of Inalog, the national institute for logistics. Its useful website in English contains some interesting information on FTZs, free port and free airport (HERE).

Now, when we discuss FTZs in Latin America, we just can’t help mentioning Panama. Strategically situated between the Pacific and the Atlantic, between South and Central America, and with the famous canal, the Colon Free Trade zone is almost like a city in itself. Vast and busy, “imports and exports registered in the Colon Free Trade Zone surpass 5 billion dollars annually, directed towards a market of more than 525 million consumers” (from the Colon Free Trade Zone website). The operators remind us of the benefits: “ 0% taxation on profit from reexportations, 0% duties and quotas on importation and exportation, 0% taxation on billings, highly competitive costs, and migratory facilities for foreign executives”.

The US International Trade Administration summarises the advantages and disadvantages of trading through the FTZ in Panama. On the plus side, you can save time and efforts dealing with just one buyer in one location (who then re distributes to the rest of the continent). These buyers also buy in bulk, so you will have large orders. However, there’s no free lunch, and margins are very high, so you must price your goods very competitively. The FTZ is for example no good at all for perishables and large machinery, the article explains. I would add that its good is questionable for those B2B products that require a technical sale. The article also explains that the FTZ in Panama will have a strong presence from cheap Asian brands and that therefore you should be prepared to sell on price and in bulk (there will be niche buyers, though). Last, but no less important, this FTZ is of little use when targeting for example Brazil or Mexico (they are very different to deal with).

Which leads us nicely into the last country to explore in this article: Brazil. Now, instead of focusing on logistics as we have done before, let’s focus on manufacturing. A FTZ doesn’t need to be all about logistics (goods in, no tax, goods out, yes tax) or about tax-free services. A FTZ can also give you the right platform to manufacture under good fiscal conditions to serve Latin American markets.

Take the Manaus FTZ in Brazil’s Amazon, for example. There are 600 industrial companies established in this area including Nokia, Siemens, Harley Davidson, LG Electronics and Coca Cola. To give you an idea of scale, this FTZ now employs 120,000 people directly and 500,000 indirectly (FT, 2011). So what’s the fuss all about? Well, it surely doesn’t mean that suddenly all your worries about Brazil’s protectionism are over, but, as the FT points out, the Manaus Free Trade Zone “produces most of Brazil’s motorcycles and bicycles, and a large number of its electronics. The tax breaks make manufacturing 35 per cent cheaper here than in the rest of the country, according to Ernst & Young, the professional services firm. These benefits include a reduction of up to an 88 per cent on import tax, depending on the product; an exemption from the federal government’s excise duty, which can reach 35 per cent; and reductions of 55-100 per cent in value added tax, again according to the product. “Aside from these tax breaks, there is an extra incentive in terms of land,” says Oldemar Iank, acting superintendent for Suframa, the Manaus free-trade zone. The government runs schemes to provide land to manufacturers at virtually no cost.”

I always recommend lateral thinking when dealing with Latin America. Free Trade Zones are one of these “lateral” options that might just be perfect for you.

 

Based in Uruguay but with 13 years in the UK, Gabriela Castro-Fontoura specialises in making it easier for British businesses to do business with Latin America. Since she established Sunny Sky Solutions (www.sunnyskysolutions.co.uk) over two years ago, Gabriela has helped many UK companies (from nursery products to electrical engineering, from food and drink to marine engineering) understand and make the most of opportunities in her native Latin America. Her key services include market intelligence and partner recruitment. We invite you to sign up for the free monthly Sunny Sky Solutions newsletter to keep up-to-date with what’s going on in Latin America HERE.

 

Written on 10th October  2013 by Gabriela Castro - Fontoura, S&H LLP Associate Director at Sunny Sky Solutions (http://sunnyskysolutions.co.uk/)

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