Why Start a Business in a Free Trade Zone in Latin America?

Business today in Latin America is broadening with investors seeking a chance to start businesses in these regions. However, taking the leap and starting investments in a different country can be a difficult decision regardless of extensive independent research.

Realistically, some businesses are successful, and some fail due to the lack of knowledge on whether their goods and services impact the market and location. All it takes is a bit of help from an external market specialising in business expansion to new markets and to guide an entrepreneur through the steps of forming a company abroad. Developing regions such as Latin America have a lot to offer.

Ultimately, regional governments understand the gamble of starting a project of investments abroad is difficult. Several countries in Latin America have therefore created a liberation of trades in goods and service through international relations agreements and what are known as ‘Free Trade Zones.

Latin America – What is a Free Trade Zone?

FTZs are secure geographical areas that help boost foreign trade by attracting investors to thanks to the simplified government restrictions within their territories.

Firstly, it is important to address the different names that Foreign Trade Zones (FTZ) come under. They can also be referred to as foreign free zones, free ports or bonded warehouses.

The point of an FTZ is to enable foreign and domestic goods without having to pay out custom duties, like quotas and tariffs. Research has proven that FTZs have are an effective strategy to cut down increasing supply chain costs. Additionally, FTZ is the ideal method to enhance international business.

FTZs are secure geographical areas that help boost business and foreign trade by attracting investors thanks to the openness and simplified government restrictions within their territories. The main purpose of an FTZ is to remove high tariffs and complicated custom rules and regulations from seaport, airport and borders. The FTZ promotes an area where goods can be landed, stored, handled, manufactured and re-exported within the regulations without the intervention of the then authorities.

Common FTZ features

Each country has different free-trade regulations, yet the commonality is the lower taxes on income; 0% value-added tax and 0% on tariffs. Improving the movement of goods between individual countries indeed creates the possibility of securing imports from third countries or even excluding them.

The FTZ is expected to facilitate open trade anchored in liberalized provisions on foreign exchange management, tax policies, and customs supervision, to name a few. This can also create more jobs, thus reducing unemployment, and receive new capital investment. This is because these areas are used by multinational companies that set up factories to produce their material.

Supporting development in Latin America

International Expansion Latin America?
Research has shown that FTZ practices are likely to help more than hurt the world economy, merely because they increase the size of markets.

FTZs in Latin America date back to the early decades of the 20th century with the regulations enacted with Uruguay and Argentina in the 1920s. Now, in 2019, under the Asociación de Zonas Francas de las Américas, 16 countries in this continent have signed FTZ agreements. This is the majority share of the 23 FTZs located in the world, making Latin America a hub for lower-cost commercial activity.

In no particular order, the countries offering FTZs for business include: Chile, Costa Rica, El Salvador, Mexico, Panama, Peru, Venezuela, Argentina, Brazil, Colombia, Ecuador, Guatemala, Honduras, Nicaragua, Paraguay, Puerto Rico, Dominican Republic and Uruguay. All of these countries provide special regions that allow free transit for mechanised goods and manufacturing goods.

Research has shown that this practice is likely to help more than hurt the world economy, because they increase the size of markets. Larger markets lead to greater productive efficiency and competitiveness. This would suggest that FTZ creates more trade than the diversion of business investing in their domestic regions.

Realistically, countries trade goods and services with neighbouring countries to avoid huge costs of transportation. Countries in Latin America – and in the nearby Caribbean – are in the ideal position to trade since they are in such close perimeters, and house the majority of the world’s free trading areas.

Job growth statistics

Panama, located in Central America, bordering Costa Rica to the west and Colombia to the southeast, has 20 FTZs in its territory. This has enabled 154 companies to be embedded in this country, creating 5,115 positions for direct jobs. Additionally, the income tax in the FTZ is 0%, with dividends at the rate of 5% of shareholders profits.

Colombia, situated in the northwest of South America, is in a prime strategic position to access both the southern and northern markets in the Americas. There are 109 FTZs in this country, which has encouraged the installment of 845 companies and created 65,22 positions for direct jobs. The income tax in this trade zone is at a high rate of 20%, but 0% of dividends.

Costa Rica offers 39 FTZs with 331 companies taking advantage of them in 2018, generating a whopping 82,086 direct jobs for the population. Once again, there is a 0% dividend rate for shareholders.

Freedom of movement

Considering the sheer number of these zones in Latin America, expanding into one of these local zones is an intelligent strategic move. If your business is looking at expansion potential in more than one country, the freer flow of goods between these and other areas means your business can enjoy relatively low fees levied on trade and through tax.

Look at the future of Latin America’s international connections: the historical MERCOSUR-European Union deal is just the beginning. The region is developing faster than ever before, and countries are facing economic uncertainty due to global trade disputes between major trading partners. As others look to diversify their trade relations, Latin America is stepping up to the plate with an unambiguously high level of trade potential. Your business could be part of the early-mover wave taking advantage of yet-undiscovered or unsaturated markets, with a bright future for export opportunities.

Contact Biz Latin Hub

Ideally, if you are looking to set a business in Latin America but you are not sure how to go about it, contact Biz Latin Hub here at Biz Latin Hub.

We can help you make the most of these FTZs. Our back-office service experts specialise in Latin American market entry and corporate compliance. We can help ensure your business completes its due diligence and capitalizes on its success through providing market entry and back-office solutions tailored to your needs.

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