Source: Adapted from Lavissière, A. and J-P Rodrigue (2017) “Free Ports: Towards a Network of Trade Gateways“, Journal of Shipping and Trade, Vol 2, No. 7.
Free zones (or free ports or free trade zones) have a wide variety of settings, roles, and functions. They can be seen as an evolution of factors related to their jurisdiction, function, and flow orientation.
The first factor is customs extraterritoriality, which is a core characteristic of free ports. Customs extraterritoriality is a juridical factor linking the structure of the free port and its transactional environment. The free port is an entity outside the jurisdiction of its surrounding nation-state. This factor alone is not sufficient to explain the evolution of free ports and their wide variety. Moreover, the reduction of customs rules and duties, while free ports were growing in number, underlines that customs extraterritoriality does not fully explain the issue. Free ports can be single entities acting completely outside their surrounding areas, or act as an intermediary between domestic and external customs areas. An emerging trend is their insertion within logistics corridors, connecting other free ports in a sequence allowing the generation of added value at the most suitable locations.
The adaptation of free ports to a wider range of services in order to cope with the evolution of supply chains is another factor. The logistics functions of free ports have become more complex to cope with global supply chains and incorporate free ports into the international trade system, which helps explain their evolution. While conventionally, free ports tended to be storage facilities, holding inventory to be distributed to nearby areas, contemporary free ports assume an impressive variety of manufacturing and logistics functions. More recently, free ports are assuming service functions in the realm of banking, finance, insurance, and marketing).
The functional distinction between trade orientation concerns the involved trade flows. Simpler free ports support sequential trade flows, either as imports or exports. However, free ports can support a wide variety of flows depending on their position within global supply chains. Developing economies tend to have free ports that are at the origin of supply chains, implying a more market export orientation while developed economies have free ports with a more salient import orientation.