Eliminate Free Trade Zones: A Legal and Economic Mistake?

For a long time, economic policies have had to find a balance between the immediate needs of the State and the long-term development of the nation. In that regard, free trade zones (FTZs) have emerged as a strategic solution in many countries. For decades, these zones have been the basis of multiple economic and legal debates, but their value in attracting investment and fostering development has been indisputable. 

Free trade zones, conceived as geographical areas in which special tax and customs regimes apply, have become magnets for domestic and often foreign companies. The benefits are not only limited to tax exemptions; they also provide smoother operations, fewer bureaucratic obstacles, and a more direct connection to international markets. Therefore, beyond being just free trade areas, they represent ecosystems of opportunities where companies can grow and strengthen the local economy through job creation, technical training, and the strengthening of production chains. 

Guatemala recognized the potential of these zones and incorporated them into its economic structure in the hope they would become an attractive investment destination. However, in a turn of events motivated by the intention to increase tax collection, the country made the decision to eliminate such zones. The logic behind this decision was that eliminating these benefits would fully integrate the exempt businesses into the ordinary tax regime, thus increasing state revenue. 

But the economy, with its inherent complexity, rarely moves in straight lines. The consequences of this action were not as expected. Instead of accepting integration, many companies took stock of the situation, determining that relocating to other countries that did offer these incentives was more beneficial to them. Thus, a measure intended to strengthen public finances resulted in decreased investment, loss of jobs, and an economy that had to readjust to a new reality, demonstrating that economic policy decisions require a thorough analysis and forecasting of their long-term effects. 

Immediate effects of removal 

Retreating companies 

A decision of the magnitude of eliminating free trade zones could not have had a silent impact on the country’s business world. Indeed, the first blow was felt in the departure of companies that had previously chosen Guatemala as their operational home, thanks to the advantages of the FTZs. Many of these companies, finding themselves without the benefits that attracted them to the country initially, began reevaluating their localization strategies. Comparing the new Guatemalan scenario with offerings in other countries, they quickly found alternatives that better aligned with their objectives and financial needs. 

This corporate retreat was not a simple change of address on a corporate map. Behind every company that closed its doors or moved its operations were stories of investments cut short, contracts suspended and business alliances unraveled. And perhaps the sharpest blow was felt by the personnel who lost their jobs. Many of them had acquired specialized skills and technical training to meet the demands of such businesses. Now, with the abrupt departure of these companies, they found themselves in a shrinking job market, with fewer opportunities and more uncertainty of what would come next. 

Furthermore, this was not just a quantitative loss of jobs and revenue. It was also a qualitative loss of confidence and reputation in the international arena. Foreign investments are not only looking for tax benefits but also stability and predictability in government policies. This decision sent a clear message to global investors about the abrupt and unplanned changes they could expect in the country, causing many to reconsider Guatemala as a viable destination for future investment. 

Unemployment and loss of opportunities 

The withdrawal of companies from Guatemala was not an isolated event. It was a phenomenon that triggered a domino effect on the local economy, with unemployment being one of the most forceful impacts. Thousands of workers, from rank-and-file employees to executives and specialists, found themselves overnight without a sustainable means of income. These companies were not only sources of employment but also centers of training and skills development. Thus, with their departure, years of training and developed expertise that had benefited local communities were lost. 

But beyond the numbers and figures, eliminating free trade zones left a profound and lasting mark on the country’s social fabric. Entire families were affected since employment in these companies was often the primary source of income. A lack of opportunities forced many to seek work in unstable sectors or the informal economy. This pursuit, often frustrating, led to a diminished quality of life without access to health and education services and a lowering of hope for the families affected. 

The paralysis in the arrival of new investments further amplified this problem. Previously, Guatemala was a pole of attraction for international investors, who saw the FTZs a guarantee of stability and growth. With their elimination, the country lost competitiveness vis-à-vis its neighbors, many of which maintained or strengthened their free zone policies. Thus, the opportunities that could have materialized in Guatemala were transferred to other latitudes, taking with them the possibilities of employment, training and development the nation desperately needed. 

The importance of free zones for Guatemala 

Stimulus to investment and employment 

Free trade zones not only offer tax benefits to companies. They also represent an opportunity for countries to strengthen specific economic sectors, diversify their economies and generate quality employment. Establishing zones where companies can operate with suitable logistical, administrative, and accounting facilities stimulates local and foreign investment. 

Economic injection and technological development 

Although FTZs are synonymous with tax savings and investment attraction, they also represent windows to the world of technical progress and modernization. When an international company decides to establish itself in a free zone, it not only brings goods and capital but also advanced practices, international quality standards, and new technologies. This technology transfer translates into training and training for local personnel, raising the standards of specialization and expertise in the country’s labor force. 

In addition, the presence of these corporations often encourages the creation and consolidation of local supply chains. Their example leads domestic companies to strive to improve their processes and adapt to more advanced technologies to meet the demands of these large corporations. In this way, the benefit extends beyond the borders of the free trade zone, promoting modernization and technological development in various sectors of the country. This dynamic, in turn, prepares the domestic market to compete internationally, raising the competitive profile of the nation as a whole. 

Towards a future with more effective free trade zones 

The idea of ​​reincorporating free zones in Guatemala is not simply returning to the past but looking towards a promising future with a renewed strategy. To this end, it is imperative to maintain a robust and transparent regulatory framework that offers certainty and confidence to investors. Attraction should not only be based on tax advantages but also on the promise of an environment conducive to doing business with stability and predictability. 

In addition, closer collaboration between the public and private sectors could be the key to ensuring that free trade zones benefit both businesses and the Guatemalan population. This goal is achievable by establishing clear criteria for investment in education and training of local talent, as well as in initiatives that promote research and development in the country. In this way, beyond serving merely as spaces for tax exemption, the free trade zones would become true centers of progress and innovation, positioning Guatemala as a regional leader in attracting quality foreign investment. 

When free trade zones are well-regulated and managed, they transform a host country’s economy. With its rich history, culture and human potential, Guatemala is attractive to companies worldwide. 

Fortunately, Guatemala seeks to attract investment by returning to a free trade zone system.  In recent years, amended legislation has sought to reestablish FTZs in Guatemala for previously eliminated and new activities that offer investment opportunities. 

In this sense, the Santo Tomás de Castilla Industry and Commerce Free Zone (ZOLIC) has played a crucial role. ZOLIC is a Guatemalan free trade area located in the port of Santo Tomás de Castilla. At the end of 2019, ZOLIC modified its regulations to make possible the investment and establishment to invest and establish of Special Public Economic Development Zones (ZDEEP) in Guatemala. 

ZDEEPs are areas designated by the government in which special tax and customs regimes encourage investment, both local and foreign, stimulate the country’s economic development. These zones will generate employment, attract foreign direct investment, increase exports and, eventually, contribute to the country’s socioeconomic development. 

With these tools, Guatemala’s ability to attract investment shows signs of life. However, new capital injection from abroad depends upon continuing all efforts to advance FTZ restoration.