Free-trade zones are ‘lightly regulated zones’ facilitating transit of goods by relieving traders of numerous burdensome formalities that would otherwise apply to goods entering a country for consumption. For traders these zones mainly offer savings in taxes and customs duties, greater flexibility in terms of labour and immigration rules, lighter regulation and oversight of corporate activities, fewer restrictions on corporate activities, and the opportunity to reach out to new markets. For host countries, Free-Trade Zones can be an important tool for attracting foreign investment and promoting economic development and growth, creating jobs and boosting exports. For IP practitioners, Free-Trade Zones have been shrouded in suspicion on the basis that they are often abused by criminals for the trade in counterfeit and pirated products.
These suspicions were confirmed by two recent EU IPO/OECD reports. The 2017 EU IPO/OECD report on Mapping the Real Routes of Trade in Fake Goods established that traders of counterfeit and pirated goods tend to ship fakes via complex routes, with many intermediate stops along the way. Transit points can be abused to facilitate falsification of documents in order to disguise the real origin of the fakes. They can also be used to establish clandestine ‘distribution centres’ for counterfeit and pirated goods and serve to repackage and relabel goods.
The second EU IPO/OECD study on Trade in Counterfeit Goods and Free-Trade Zones: Evidence from Recent Trends published in 2018 confirms that Free-Trade Zones are utilised to facilitate trade in counterfeit and pirated products. This is particularly the case when governments do not police these zones adequately. As a matter of fact, these zones are often considered to be ‘foreign entities’ that are outside of the scope of domestic policing activities and goods in transit are often not targeted by local enforcement authorities. Furthermore when Free-Trade Zones are operated by private entities, the latter may have little interest in encouraging law enforcement activities, out of concern that this may negatively impact their business interests by disrupting commercial activities.
The quantitative analysis based on robust results presented in the EU IPO/OECD study on Free-Trade Zones concludes that the existence, number and size of Free-Trade Zones increase the value of counterfeit and pirated products exported by a given economy. The findings indicate that establishing one additional Free-Trade Zone within a given economy significantly increases counterfeiting by 5.9% on average, keeping all other factors constant. The study also led to clear findings with respect to the connections between the value of fake goods exported from an economy on the one hand, and the number of firms operating in Free-Trade Zones and the total value of exports from these zones on the other.
The study thus confirms the long-held suspicion that Free-Trade Zones tend to be exploited by counterfeiters for their illegal operations and advocates increased transparency to promote clean and fair trade in Free-Trade Zones. The report recognises that attaining this objective will only be possible with the involvement of industry members and key stakeholders in the trading chain but lacks any practical measures as to how this objective can be achieved.
So how do we go about it? Whilst Free-Trade Zones are important tools for the economic development of a country, these zones must be properly regulated and adequately monitored by enforcement authorities in order to curb illegal activities including counterfeiting and piracy. Governments must take actions to enable right holders to be empowered to halt the trans-shipment and transit of counterfeit goods through Free-Trade Zones, and to allow customs and police authorities to exercise control not only on goods that enter and leave the Free-Trade Zone, but also on the activities carried out within the zone. National IP legislation should thus extend to Free-Trade Zones, and counterfeiting activities of all kinds must be outlawed. It ought to be illegal to bring in, process, transit or export counterfeit goods to Free-Trade Zones. Customs and police authorities should thus be empowered to take action against counterfeit and pirated goods in transit and trans-shipment. Private operators of Free-Trade Zones should be encouraged to foster free and clean activities within the zone. It is only by setting out clear and comprehensive rules and allowing for their proper enforcement by law authorities that Free-Trade Zones will become counterfeit-free zones.

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