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New Report Says Free Trade Zones Are Ripe for Counterfeit Activity

The rapid growth of free trade zones (FTZs) are unintentionally fostering growth in counterfeit goods trafficking, according to a new report by the Organization for Economic Cooperation and Development (OECD) and the European Union’s Intellectual Property Office (EUIPO).

The report, “Trade in Counterfeit Goods and Free Trade Zones,” released Thursday, found that exports of counterfeit and pirated goods from a country or economic zone increase in ratio with the amount and size of free trade zones it has.

The report said while FTZs–areas used by importers and exporters usually near key ports that offer reduced taxes and often lax customs controls–“bring clear economic benefits to their host countries, there is the possibility that they can be misused by criminal organizations to traffic and smuggle counterfeit and pirated goods. This raises the double concern of the impact of crime and illicit trade activities on good governance, public safety and the rule of law, as well as the negative effect that counterfeit trade has on legitimate competitive advantage of rights holders, and consequently on innovation, employment and long-term economic growth.”

In comparing growth in FTZs, measured by the number of firms and employees in them and customs seizure data from around the world, the report shows they are associated with a 5.9% rise in the value of counterfeit exports from the host economy.

“This is clear evidence that free trade zones are being used by criminals to traffic fake goods,” OECD public governance director Marcos Bonturi said.

In launching the joint report with EUIPO executive director António Campinos at a meeting of the OECD Task Force on Countering Illicit Trade, Bonturi said, “We want this to be a call for action and we will be working in the months ahead to help free trade zones step up their efforts to stop illicit trade, while at the same time maintaining their role as facilitators of legal trade.”

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There are more than 3,500 FTZs in 130 countries or economies in North and South America, the Asia-Pacific region, Europe and Africa, compared to 79 FTZs spread across 25 countries or economies in 1975.

The FTZ zones facilitate trade by offering businesses advantageous tariffs and lighter regulation on financing, ownership, labor and immigration, and taxes, OECD noted. They have helped emerging economies to attract foreign investment and generate jobs and growth, although they have also benefitted wealthier economies such as the U.S., Singapore and Hong Kong. There are several hundred FTZs in the U.S., according to the report.

For the host countries, FTZs usually attract foreign investment, create jobs and enhance export activity, but they also don’t offer any government revenue on duties. The report noted that the illegal activities are aggravated by inadequate policing of the zones, since they are often operated as private entities.

International trade in counterfeit and pirated goods represented up to 25 percent of world trade in 2013, or about $461 billion, and according to the report, Asian economies are the largest exporters of fake goods, with an estimated value of $310 billion.

What’s more, the report noted, the larger number of companies and employees in a country’s FTZs, the greater the value of exports and the larger the value of counterfeit and pirated products exported from their economies. Higher levels of corruption in an economy creates conditions for illegal activities and, as OECD noted, “it would be expected that the value of imports of counterfeit or pirated products from a given… economy would increase as a function of its control of corruption indication,” a measure created by the World Bank.

Another OECD report published earlier this month, “Governance Frameworks to Counter Illicit Trade,” pointed to poor oversight of FTZs, insufficient screening of small parcels and inconsistent penalties on shippers of fake goods as key areas where lax policy is facilitating trafficking of fake goods.

As FTZs have been “a particularly useful tool for counterfeiters,” according to the report, there’s an “urgent” need for more effective actions and coordination at both the national and international levels to help ensure zones aren’t engaged in illegal activities, which could serve to undermine them.