In terms of cost structure and management, what is the significance of free trade zones for firms involved in global trade?

This question has many legs involving not only free trade but trade finance which are inseparable from international trade in general.

In order to address the issues involved in these complex parts of trade some definitions are necessary to assemble the puzzle into a clear picture.

Special Economic Zones as defined by The World Bank: “A free-trade zone (FTZ) is a specific class of special economic zone. It is a geographic area where goods may be landed, stored, handled, manufactured, or reconfigured, and re-exported under specific customs regulation and generally not subject to customs duty. Free trade zones are generally organized around major seaports, international airports, and national frontiers—areas with many geographic advantages for trade.”

The historical record shows that Shannon, Ireland has claimed to be the first "modern" free trade zone that was established in 1959. It follows that the Shannon Zone was started to help the city airport adjust to a radical change in aircraft technology that permitted longer range aircraft to avoid a required refueling stops at Shannon. The Irish Government saw it as a way to maintain employment around the airport and continue generating revenue for the Irish economy. The gamble turned out to be a huge success which still is in operation today.

Special economic zones (SEZs) have been established in many countries for the purpose of trial and error on the implementation of liberal market economy principles. The change in terminology has been driven by the trade rules of the World Trade Organization (WTO) which prohibits members from offering certain types of fiscal incentives to promote the exports of goods.

Many a times the domestic governments pay part of the initial cost of industrial parks for factory setup which critics contend that it loosens environmental protections and any rules regarding treatment of workers, and in exchange not demand payment of taxes for the next few years. However, when the taxation-free honeymoon years are over, the corporation that set up the factory will just pack up and leave. Starting over an operations elsewhere would be less expensive than paying owed taxes. In most cases, it results in taking the host government to the bargaining table with more demands, while parent companies in the United States are rarely held accountable.

Political writer Naomi Klein has also criticized the transient nature of FTZs and has made the factory closures connection to the 1997 Asian financial crisis.

There are several other operations that take place in many countries for the fiscal benefit of trading corporations. For instance this type of fiscal advantage takes place in what is known as a Bonded Logistics Park which is a type of special economic zone. Customs arrangements are similar to that of a bonded warehouse but over a specific geographic area such as a seaport, airport, or park.

Under this fiscal regime goods may be stored, repackage or undergo manufacturing operations without payment of duty.

An entrepôt in French means a transshipment port, city, or trading post where merchandise may be imported, stored or traded, usually to be exported again. Entrepôts were especially significant in the Middle Ages, when mercantile shipping grew exponentially between Europe and its colonial empires in the Americas and Asia. The spice trade for instance had long trade routes, which led to a much higher market price than the original purchase price after transportation, handling, waste and pilferage were added. For these reasons many traders did not want to travel the whole route, relying more on the entrepôts between the shipping lanes to sell their goods. Amsterdam is a good example of an Entrepôt in the early trading routes existing in the 17th-century.

There is still another (illegal in most cases) method employed even today for completing a commercial transaction and is called triangular trades which are not uncommon in global commerce today. In many a case, importers who purchase goods from an enterprise, might not be purchasing those goods from the manufacture but rather from a trader who might be located elsewhere in the world. Therefore, the actual movement of the goods does not accurately represent the transaction taking place. Although, the goods may be moving directly from the factory to the importer, the financial transactions tracks on a different route. Here is where the commercial transaction can cross illegality because the shipping documentation must also match all the commercial transactions within the shipment and where corruption sets in false claims.

For example, a simple triangular trade takes place when a factory sells goods to a trader, who in turn sells the same goods to an importer. In this case, a bill of lading needs to be issued for every transaction taking place, so a second set, or switch bill of lading, needs to be issued for this shipment. In this second set of bills of lading the trader becomes the shipper and the importer the consignee.

Generally, a switch bill of lading is used to conceal the identity of the manufacturer for the trader is selling the goods to an importer adding a commission and so, does not want to reveal the identity of the enterprise from which they are procuring the goods. This type of transaction is commonly legal but it can become illegal when the trader is handling a controlled trade where the final consignee is not revealed to Customs.

There are three kinds of bills of lading:

• A straight bill of lading means the carrier received payment in advance.
• An order bill of lading means the goods will ship before payment is received.
• An endorsed bill of lading is signed by the shipper and transfers title of the goods upon delivery. (Bl’s titles are financial instruments which can be traded during transit of the shipment).
• An endorsed bill of lading is a document of title, and a very important financial instrument and a security trade able in transit. This issue enters into another area of international trade referred to as Trade Finance.

https://tradefinanceanalytics.co...

Trade finance is applicable when financing is needed by buyers and sellers to complete a trade cycle that has a funding gap but it can also be used as a form of risk mitigation.

Trade finance helps settle the conflicting commercial transaction needs of the exporter and the importer. For instance, an exporter might wish to mitigate the risk of not getting paid a pre-sale agreement by the importer. By the same measure the importer wants to mitigate a supply risk from the exporter shipping sub-standard goods. Therefore, the function of trade finance is to act as a risk mediator of purchase or supply of merchandise in a commercial transaction while providing the seller with prompt receivables and the buyer with extended credit.

When the importer is another manufacturer using parts for the assembly of a finish product the commercial transaction becomes a supply chain financial mechanism.

A typical financial mediator service offering from a bank will include:

Letters of credit (LC)

Bills for collection

Shipping Insurance

Import financing

Performance bonds

Export LC advising

LC confirmation

LC release against documentation

Export finance

Export financing

Over the years the—terms of trade finance—has been shifting away from this weighty method of conducting international trade business. Today, it is estimated that over 80% of global trade is conducted on an open account basis because the largest amount of trade volume and value takes place among transnational corporations.

Open account transactions are common among large corporations that trade in supply chain manufacturing for a continuing flow of goods rather than specific transactions. This extension of payment terms is much cheaper for the corporates and offers mutual benefits where payment-supply risk is minimized to one shipment.

Factoring, receivables factor happens when a company buys a debt obligation or invoice from another company. Factoring is a form of invoice discounting for cash in many financial markets. Accounts receivable are discounted by a risk factor of profit upon the settlement of the debt.

Structured commodity finance (SCF) is split into three main commodity groups:

• Metals & mining
• Energy
• Soft commodities such agricultural crops

SCF provides liquidity management and risk mitigation for the production, purchase and sale of commodities and materials. This is done by isolating assets, which have relatively predictable cash flow attached to them through pricing prediction, from the corporate borrower and using them to mitigate risk and secure credit from a lender. A corporation might also borrow against a commodity’s expected worth at the landing destination.

Export credit agencies (ECA’s) can be governmental or private institutions that provide international trade finance, credit insurance guarantees, or both. Most developed countries have ECA’s available for traders. Traditionally, in order to approve a transaction ECA’s would require a large percentage of domestically produced content to guarantee a loan; nonetheless, as financial crisis affect jobs ECA’s reduce content limits. For example: Export Development Canada requires just 20% of content to be produced domestically, compared to UK Export Finance which requires 30-70% and the USA requirements short-term transactions for eligible goods and services that must include more than 50 percent U.S. content.