Negotiations between the United States of America (USA) and the European Union (EU) over a new Transatlantic Trade and Investment Partnership (TTIP) have been ongoing since 2013, and after many delays both parties expect them to be finalised in 2017. The TTIP agreement is pertinent in light of Turkey’s free zones and their regulations. Why? Let us assess the matter briefly.
Today free zones have progressed from being a tool for economic progress for developing countries to being a choice place for multinational enterprises (MNEs) to invest. MNEs look to increase competitiveness by moving their production to areas rich in human capital and raw materials and close to target markets. Supply chains have a parallel development trajectory to globalisation of trade and industry, and banking and financial technologies are upgrading rapidly, making more overseas investments possible. The result is firms being able to quickly move their operations to countries with the most favourable conditions.
In terms of investment in free zones, MNEs with a focus on the automotive, defence, chemicals, pharmaceuticals, and electronics sectors are the primary drivers, and they are looking for a competitive advantage with respect to liberal regulatory frameworks, along with political and economic stability and rule of law.
If we look at the USA, we see around 200 free zones and more than 300 subzones which comprise roughly 3,000 companies and 400,000 employees. American free zone trade volume has surpassed $100 billion USD. America’s free zones function very similarly to those in Turkey. They do not offer incentives such as the income tax exemption that Turkey’s zones offer, but unlike Turkey, some companies in the USA with production activities outside free zones can still operate as a free zone company, benefitting from the same fiscal regime as the nearest free zone. These are called subzones, and the model does not yet exist in Turkey.
The establishment of a customs union between the USA and EU would suddenly increase the importance of Turkey’s free zones, as American companies wanting to enter the European market will not find a comparable free zone model in EU member states. Turkey’s free zones have the advantage of being members of the European Customs Union and close to the European market.
TTIP, representing a customs agreement between the USA and EU, may prove to be the most important economic opportunity awaiting Turkey’s free zones in the near future. Turkey should move now to improve its existing regulatory framework for free zones, and establish new free zones which incorporate the subzone model as well. With optimal conditions in place, Turkey stands to gain a lot.
Editor’s note: Protracted negotiations, and the November 2016 election of Donald Trump as President Elect of the United States on a protectionist platform, have cast serious doubt on a timely agreement of TTIP. However, the possibility of successfully concluding a deal remains open.