SUSTAINING THE BOOM

Colombia 2017 | INDUSTRY | FOCUS: FREE TRADE ZONES

Colombia has prioritized the development of free trade zones to boost exports, FDI, and employment, but stakeholders must ensure this growth is sustainable, making sure the boom does not become a bust.

From 11 active free trade zones (FTZs) in 2004, Colombia's industry exploded to 108 FTZs today, indicating the government's keen interest in the zones as a tool to revitalize the economy. FTZs offer advantages to enterprises, such as an income tax rate of 20% (compared to 34% in non-free trade zone areas), exemption from payroll taxes and VAT in certain cases, and dispensation from custom duties on productive imports. Governmental policies have been focusing on FTZ development in the last decade, easing bureaucratic processes and setting up a special tax framework. The goal of FTZs is to foster development in and around the region of establishment, generating employment and attracting investments in order for Colombia to be internationally competitive in both production and FDI attraction. So far, the strategy is working: in the last 10 years, FTZs received more than USD50 billion in investment.

Additionally, FTZs are vital to the Colombian economy as they are a strong driver of employment. Colombia has a large and well-educated labor pool with an unemployment rate sitting at 9.4%. In the last 10 years, FTZs generated 250,000 direct jobs; 65,000 of those jobs were created in 2016 alone. Exports from FTZs also went up by 35% between October 2015 and October 2016, reaching USD244.1 million. By every measure—job creation, FDI generation, and exports—the impact of FTZs on the Colombian economy is accelerating, promoting further investment in infrastructure. More generally, FTZs are creating a shift toward economic and financial stabilization at a moment where newfound stability in the country is fragile and needs to be strengthened.
On the other hand, some argue that FTZs are creating economic distortion rather than economic stabilization. FTZs favor enterprises created after 2012 and create unfair competition for local SMEs that don't meet the standards for being granted FTZ status. The special border tax regime creates smuggling, and tax avoidance has become more common through manipulation of transfer prices. The FTZ regime is also a difficult one to monitor for the tax administration. FTZs are both limited by and contribute to Colombia's transportation infrastructure imbalance. Transportation infrastructure near the coast is more developed and more reliable. While this makes utilization of these FTZs more expensive, investing in the inner parts of the country can create risks of delay due to the underdevelopment of the road network.

In the last decade, FTZs have become more common throughout Latin America, with Colombia setting the pace for growth and hosting 25% of FTZs in Latin America. However, FTZs in smaller countries with smaller economies, which are more highly dependent on FTZs, are sometimes more attractive to companies and investors as they offer better financial incentives. Colombia must use other means to attract investors, such as more reliable energy supply, larger and more highly skilled workforce, and capability to support bigger projects, to provide more added value. The Bogotá free trade zone, or Zona Franca Bogotá (ZFB), is one of the most prominent FTZs and the most competitive service and industrial park. ZFB hosts companies across several sectors including industry, logistics, trade, services, and technology.

With this added value, expectations for the future are high. The government is expected to continue investing in FTZs and to create new ones across the country. Employment in FTZs could double in the next three years and grow exponentially from there. The government predicts USD20 billion of foreign investments in FTZs in the next three years. As Colombia continues signing free trade agreements, developing its infrastructure, and increasing its production destined for export, the future shines bright for FTZs.