Why Are Those Goods Not in Any Country? A Zone Inside the Border

The zone sits physically within a country while being treated as outside it for customs purposes, so goods brought in are not treated as imported and no duty or import tax falls due. They can be stored indefinitely, sorted, repacked, assembled or manufactured into something else. Duty becomes payable only when goods leave the zone into the domestic market, and if they leave the country instead, no duty is ever paid. Businesses therefore avoid paying duty on goods that were only passing through, and avoid paying it early on goods that will sit in a warehouse for months.

The case made for these zones has several parts:

• •Cash flow, since duty is deferred until goods actually sell
• •No duty at all on goods re-exported, which encourages transit trade
• •Duty paid on the finished article, which can be lower than on the parts
• •Simplified paperwork while goods remain inside
• •Attracting distribution and processing activity to a port or airport
• •Employment in an area that may have lost other industry

The central criticism is that the zones mostly move activity rather than create it, since a business that relocates a warehouse from ten miles away to inside the boundary produces new jobs in the zone and an equal loss outside it, and the tax advantage is then a subsidy for a rearrangement. Evidence on net job creation is genuinely mixed, with some zones showing real gains and others showing displacement. The benefits are largest where duties are high, and in an economy with low tariffs there is much less to defer. The gains also accrue disproportionately to whoever owns the land inside the boundary, which has made designation a politically contested process in several countries.

The arrangement is far older than modern trade policy and its history explains the shape it takes. Ancient Mediterranean ports offered exemptions to attract shipping, with Delos granted such a status in the second century before the common era and growing rapidly on the trade that followed. Medieval and early modern cities including Hamburg, Genoa and Livorno used versions of it to build entrepot trade, receiving goods from one direction and dispatching them in another without either counting as an import. The modern legal form dates from the twentieth century, with the United States creating them from 1934 in response to high tariffs, and several thousand now operate worldwide.

A particular application has attracted attention for reasons unconnected to trade policy. High-security storage facilities in zones at Geneva, Luxembourg, Singapore and elsewhere hold very large quantities of art, wine, gold and collectibles, which can sit there indefinitely without duty or sales tax and can change ownership while remaining in the same room, since a sale inside the zone is not an import anywhere. Estimates of the value held in the Geneva facility alone run into the tens of billions. The secrecy that made the arrangement attractive has drawn regulatory attention, since anonymous ownership of movable high-value assets outside any customs territory is an obvious route for laundering money, and disclosure requirements have tightened considerably.

Treating an area inside a country as outside its customs territory means duty falls due only when goods leave for the domestic market, and never if they are re-exported, which defers cost and encourages transit trade. Economists argue the zones mostly relocate activity rather than create it, with the benefit going to landowners inside the boundary. Art and gold stored in such zones can change hands without leaving the room.