The zones of free trade

The rapid emergence of Free Trade Zones in the middle of the Arabian desert has fuelled economic growth in Dubai, but are they running out of steam? Amelia Shepherd-Smith reports

In 300BC the economy of the Greek Island of Delos boomed, as did that of the Phoenician city of Tyre. Behind their successes were Free Trade Zones (FTZs) - special hubs set up to attract trade to both regions - which have since proved to be models of sustainability.

By definition, a Free Trade Zone is considered a geographic area into which goods enter duty free for processing and export - a place where an investor is offered a variety of tax, trade, labour or environmental concessions. In practice, however, it is more of an alternative policy framework developed by a government to promote its own objectives. Dubai’s goal is to build a knowledge economy and a solid base for sustained growth, says Sheikh Mohammed Bin Rashid Al Maktoum, the ruler of Dubai, who recently set up the world’s first dedicated higher education FTZ, Dubai International Academic City (DIAC), exactly for this purpose. Its newest tenant is Michigan State University (MSU), a top ranked US university. MSU President, Lou Anna K Simon, explains: ‘This development can significantly advance our strategic priority of internationalising the university. This is one of the most vibrant and growing economic hubs in the Middle East.’

The FTZ commonly functions as a labour intensive manufacturing centre but many of Dubai’s newest FTZs, for example the Dubai Biotech and Research Park and International Media Production Zone, are less about trade and more about investment, research and development, education and the provision of services. Over time, FTZs have grown to represent a major source of income transfer to developing nations. For Dubai, which has minimal oil and gas reserves to rely on, their appeal was therefore obvious.

So committed is Dubai today to the concept of the FTZ, it has expanded their number despite an ongoing WTO agreement, which points to a probable reduction in customs duty as a source of revenue for the Dubai Government. A pending Free Trade Agreement between the European Union and the Gulf countries has also failed to stem the growth of FTZs in Dubai. In fact, statistics reveal that trade liberalisation has increased rather than eliminated their role.

Last year the value of Dubai’s non-oil trade through its eight free zones grew 8.9%. The leading importer to the emirate was China, who sent goods worth £9bn, followed by Japan and the US. The top exporter from Dubai was Iran (£5bn), ahead of Saudi Arabia and Iraq. In total, imports to the region’s FTZs grew 12% to £55bn, compared to exports, which grew 5% to £40bn.

Today, Dubai has more than a dozen FTZs catering to various sectors of the economy. Examples include Dubai Healthcare City, Dubai Maritime City, Dubai International Financial Centre (DIFC) and Dubai Silicon Oasis. In the trade sector, there is also Dubai Airport Free Zone (DAFZ), which last year grew 37% and now houses 1,150 companies.

Dubai’s biggest FTZ will be Dubai World Central (DWC). Located on the emirate’s fringes, the mega project, which is set to cost £16bn, will eventually include Dubai World Central International Airport (JXB), Dubai Logistics City (DLC), DWC Commercial City, DWC Residential City, DWC Aviation City and Dubai Golf City. When completed, DWC will be the world’s biggest passenger and cargo hub, and have a capacity of 120 million passengers. The residential city will house up to 250,000 people. Explains Sheikh Ahmed Bin Saeed Al Maktoum, chairman of Dubai Aviation-Dubai World Central: ‘Dubai World Central will set a global benchmark in urban planning and development. It will be the catalyst for Dubai’s continue tourism, economic and business growth.’

Despite its 25-acre size, market leader Jebel Ali Freezone (JAFZA), which last year earned revenue of £18bn, has a waiting list of 1,000. As a result, the zone has been forced to reclassify as Economic Zones World (EZW), and plan its own specialist zones such as Dubai Auto Zone and JAFZA International, which will be JAFZA’s global consultancy wing. Like entertainment complex Dubailand, which is building ENPARK as a sustainable development hub, JAFZA has set up TechnoPark, an R&D facility designed to foster the growth of new technologies and encourage their application in the business sector. Both initiatives follow the instruction of Sheikh Mohammed Bin Rashid Al Maktoum, who wants Dubai to be a ‘knowledge economy’ by 2015.

Dubai Knowledge Village’s executive director, Dr Ayoub Kazim, predicts that, by 2015, the emirate’s knowledge sector will be responsible for 20% of its GDP. Once just an HR hub, Knowledge Village has since expanded to include 360 international companies from 90 countries, including 20 universities. It was because of this that it launched DIAC, a separate free zone situated on the outskirts of Dubai. Explains Kazim: ‘We only have 1.5 million square feet here so we’ve had to rationalise. Knowledge Village is close to the Central Business District, so it is a better fit for HR and professional development companies. Universities need a larger space, so we’ve decided to set up the first higher education zone in the world.’

The rapid growth of Dubai’s FTZs has stretched the resources of their operators in numerous ways. Representatives for Dubai Airport Free Zone (DAFZA), for example, have acknowledged that dozens of applications remain on hold. EZW’s CFO, Asim Al Abbasi, also worries that JAFZA is falling behind. ‘It’s not been easy,’ he says. ‘No matter how many resources we put in we find demand still outpaces us. I feel there is still a lot more room for specialisation.’ Kazim agrees and blames the rapid growth of other FTZs across the UAE. ‘There has been unnecessary duplication of zones in some cases. This undermines the achievements of those already established.’

Al Abbasi predicts that due diligence will be a challenge for Dubai’s FTZs as long as its chronic skills shortage remains. ‘About 50% of our workforce is Emirati, but within that segment there is a tremendous shortage of good calibre human capital to recruit. There makes for tough competition between all the big players.’ He will not, however, accept that rent increases of up to 40% across Dubai’s FTZs have decreased their competitiveness. ‘The average input costs at JAFZA are still less than 1.5% of the revenue. It’s still competitive.’

Kazim is confident Dubai’s FTZs will expand till at least the end of the decade, but says it is hard to predict. ‘The FTZ industry has to mature, but it must also stay flexible to new ways of thinking. It will continue to achieve success only if it continues to embrace tomorrow’s new trends and technologies.’

Amelia Shepherd-Smith is deputy editor of Gulf Business magazine.