New Internationalist

Bargaining on the Free Trade Zones

Issue 085

The multinational corporation offers investment and jobs. The host country offers cheap labour and long tax holidays. A deal is struck - for a new free trade zone - the most multinational of multinational operations. More and more countries including India, Indonesia and even China are now signing on the dotted line. Ho Kwon Ping reports from Hong Kong.

Like virtually identical industrial clones, they have been transplanted all over Asia. Brainchildren of the ‘export-orientated industrialisation’ strategy, some are now over 10 years old, and many more are conceived or born each year. Given various names - Investment Promotion Zones, Export Processing Zone, Free Production Zone, or the more commonly used Free Trade Zone (FTZ) - they have multiplied from zero in the early 1960s to more than 80 today with another 40 under construction or being planned. Over half are in Asia in the countries fringing the Pacific Basin.

During their phenomenal proliferation, these artificially inseminated export enclaves fundamentally changed the international division of labour, revolutionised production and processing technology, and are now entering into another significant, new phase of evolution, marked by three major features:

  • A ‘second wave’ of FTZs, as footloose multinationals relocate their industries from the original cheap-labour countries of Northeast Asia, Singapore, SouthKorea, Taiwan to the two huge subcontinents of South Asia and China, the poorer ASEAN countries like Indonesia and Thailand, and even to small islands in the Pacific and Indian oceans.
  • A rise of Asian multinationals from Hong Kong, Taiwan, South Korea and Singapore, as a result of the ‘first wave’; with these companies also investing in the FTZs of their poorer Asian neighbours. *Entirely new patterns of trade and production, and refinements in the international division of labour - none of them advantageous to developing countries - arising from the micro-electronic technological revolution.

At the same time, however, the rising furore over protectionism, multinational foreign investment, technology transfer, and even international trade unionism, all have a common nexus in the free trade zones grafted onto the Asian landscape. It is mostly from these industrial estates that cheap exports flood Western markets, displacing jobs and unleashing protectionist outcries. It is also in these zones that multinational firms allegedly exploit cheap, unskilled labour, practise transfer pricing and other techniques of disguised profiteering.

Free trade zones are like Hilton Hotels,’ raves an enthusiastic American businessman in Seoul. ‘When you’re inside one, you don’t know what country you’re in, and the hassles of the country don’t touch you. It’s the businessman’s dream. And the workers are polite and obedient and almost look alike - sometimes you wonder if they’re Mexicans, Filipinos, Malays or Arabs.’

The alacrity with which developing countries, even those professing self-reliant, socialist policies, have set up FTZs is remarkable, despite the adverse publicity about them. It is not difficult to see why. The ‘gang of four’ - Taiwan, South Korea, Hong Kong and Singapore - are all success stories of export-led industrialisation. But their circumstances were unique and by no means easily emulated. Yet many developing countries still hope that some of this success can rub off on their own FTZs and the ease with which they can be set up makes it all the more attractive. Divorced from the domestic economy, an FTZ does not have to be integrated into national development plans. Any country with a plot of land, a nearby harbour or airport, some tele­communications infrastructure, and a willingness to legislate sweeping investment incentives and hold down, by force if necessary, wage increases, can hope to reap some quick returns on investment. Free trade zones are the ultimate ‘quick fix’ for a developing nation anxious to promote some kind of industrialisation.

In return for their investment, multi­national investors in FTZs get many concessions, including:

  • The ‘five freedoms’ - from corporate income tax, import duties, import quotas, property taxes, and excise taxes.
  • Fiscal incentives such as preferential low interest rates on loans, investment tax credits, subsidised utility rates, rents and other service charges, and subsidised training.
  • Political incentives such as restrictions on, or suspensions of, the political and social rights of the labour forces that works in the zones; including no minimum wages, no trade unionism, no strikes, and exemptions from social security payments.

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When the first Asian FTZs were forged in the late 1960s in a chain of nominal ‘interdependence’ stretching outwards from the US and Japan (the two major investors), the link nations were the East Asian economies. But labour costs in this ,gang of four’ inescapably crept upwards, and multinational investors, together with some new Asian semi-multinationals, have turned their eyes elsewhere. The temptations are great: average wages in Sri Lanka, for example, are $31 per month compared with $140 in Singapore.

China, the erstwhile paragon of socialist self-reliance, is riding the crest of the second wave of FTZs. In its quest for foreign investment, Peking is setting up at least four FTZs, two across the border from Hong Kong, one on a small island off the coast of Fujien province, and another at Tianjin, an industrial city near Beijing (Peking). Foreign and locally-owned firms from Hong Kong have already relocated to China and, to attract more investors, China is offering similar fiscal and investment incentives as FTZs elsewhere.

But winning the most attention is Sri Lanka’s Katunayake investment promotion zone near Colombo, which has become one of the most important prongs of the Jayewardene government’s ‘return to capitalism’ policy. In 18 months, 83 projects have been approved, but they are almost wholly garments manufacturers from Hong Kong and Singapore who came to take advantage of Sri Lanka’s textile quotas to the EEC.

The traditional international division of labour, based on the classical law of comparative advantage, saw developing countries exporting agricultural products or simple finished goods in return for industrial imports. In the new scheme, production and trade are no longer nationally defined but fragmented into a number of partial operations scattered across a global, interlinked system of FTZs. This in turn has given birth to a new production unit, the world-market factory of the multinational corporation in the free trade zone, which produces the partial component or assembles the final goods for global rather than domestic or even regional distribution.

The birth of FTZs was tied to the flowering of multinational corporations. Faster, cheaper transport modes, computerised data systems and telecommunications networks made geographical distances no longer a hindrance either in intro-company transactions or corporate control over factories dispersed over several countries’ FTZs. New processing technologies were also designed to combine automated, capital-intensive production of some components in the developed countries with unskilled or semi-skilled assembly of the components at various stages, in the developing countries. This ‘decomposition’ of complex production processes into basic segments to be joined at various points by unskilled labour has made cheap labour an important commodity in a world of increasingly sophisticated, technologically capital-intensive industries.

Electronics companies were the first to promote decomposed production technology and relocate in FTZs. Because of quickly changing consumer tastes and rapid advances in technology, heavy investments in fixed, inflexible production methods are obsolete, and investments in electronics have therefore been largely limited to high-volume, standardized components - silicon chips, integrated circuits, etc - which can be assembled by unskilled workers into different end­products. ‘The use of manual processing in semi-conductor production,’ says the US Tariff Commission, ‘is important to producers who supply a rapidly increasing market characterized by new technology, product innovation, and swift obsolescence of products.’

In some of the ‘newly industrialising countries’ of East Asia, there has been some forward integration (testing, packaging, direct shipping to customers) and backward integration (production of wires, plastic moulds, etc) but this is rate. Instead, what appears in export statistics as manufacturing of a highly sophisticated technical product consists actually of a few routine operations, mainly soldering and assembling under a microscope by semi-skilled cheap labour.

The implication is that technology or skill-transfer is not necessarily a natural consequence of setting up FTZs. Industries will continue to move towards technological sophistication, with highly automated, capital-intensive production of some standard components in the developed countries, but investors will come to Asian FTZs only for cheap labour in the assembly stages of the production cycle. In fact, the advent of micro-electronics technology indicates not a change but an intensification of this trend. But more unskilled labour in the developing countries will be needed to assemble the electronic equipment for the automated industries in the West.

There is a lot of labour to tap in the Third World: the industrial reserve army of the unemployed and under-employed in the developing world is three and a half times the total labour force engaged in manufacturing in Western Europe, Japan and the US. The labour force in the FTZs is overwhelmingly women in their late teens and early twenties, employed as unskilled production workers. In the FTZs of Malaysia, the Philippines and Taiwan, 80 per cent of the workers are women, and 85 per cent of them are under 25 years old.

While FTZs do generate jobs, they do not attack the main unemployment problem, which is most serious among young male labour. Instead a hitherto small labour market for young female labour is opened up, and existing unemployment is not alleviated. Furthermore, once the young female labour supply tightens and wages begin to rise, firms often relocate elsewhere, rather than hire men or older women. The reason is that young women are not only considered more nimble-fingered - and therefore productive - but are also willing to tolerate boring yet strenuous work without complaint at half the going wages for male labour. And since the capital investment per worker in assembly operations such as the garments or electronics industries is only half that of other manufacturing industries, firms can afford to pack up and leave.

FTZs are also supposed to be invaluable sources of foreign exchange. This has been true for some countries, but with the expensive outlays on capital imports for infrastructure, subsidised services, long tax holidays, duty exemptions and unlimited repatriation of profits, net export earnings may not be significant. Even the World Bank now cautions against the ‘foreign exchange euphoria’ in setting up FTZs, because there may be a net outflow of foreign exchange as a result.

Wages for unskilled and semi-skilled labour in Asian FTZs are between a tenth and an eighth of those in the West, and total working time per year, because of frequent overtime work, fewer holidays and longer vacation hours, are up to 50 per cent higher.

In India, Indonesia, Malaysia, the Philippines, Singapore and South Korea, unauthorized strikes are illegal. Trade unions are usually either not allowed to organise in FTZs or there are special unions for FTZs, to isolate the workers from any general labour malaise in the rest of the country.

The aristocracy of labour

But it would be simplistic to conclude that FTZs exploit Asian labour mercilessly. The complex reality is that in many largely agricultural, undeveloped economies, workers in FTZs are a kind of labour aristocracy, receiving higher wages and better fringe benefits than their counterparts in domestic industry. In many Asian countries, the overwhelming majority of the industrial labour force is engaged in small-scale enterprises employing less than 50 workers, and the worker-management relationship is based on personal, traditional and informal obligations which can be either less alienating or more open to exploitation. The large-scale enterprises, predominantly foreign-owned, have ‘modern’ institutional relationships which are more rigid and alienating, but less feudal. This ‘labour aristocracy’ has the potential for being a true proletariat, unlike workers in small-scale enterprises. Indiscriminate promotion of FTZs, by short-sighted regimes desperate for a ‘quick fix’ and instant route to industrialisation, have produced more problems than solutions to genuine economic development. Only rarely have developing countries been able to use FTZs and multinational investors for their own development; it has too often been the other way round. But until developing countries themselves - through popular pressure against often unresponsive and authoritarian leaderships - set their own priorities and chart their own course to genuine development, FTZs will continue to proliferate.

Ho Kwon Ping is a feature writer on the staff of the Far Eastern Economic Review.

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