The Dominican Republic has one of the largest manufacturing industry in the Caribbean and one of the largest for a small country in the Americas. The manufacturing industry is divided into two camps, one the domestic manufacturing industry and the Free Trade Zones. The two are marked geographically as most Free Trade Zone factories concentrate within designated Free Trade Zone parks or complexes, but they also have a separate set of laws and exceptions that are different from the domestic manufacturing. The most important difference is the tax obligations which are greatly reduced or eliminated for the products produced in the Free Trade Zones, though some taxes such as the ITBIS (by law it will be referred to as VAT starting on January 1, 2022) are not applied as long as the finished products are exported from the country. The other noticeable difference is the greater participation of foreign companies in the Free Trade Zones compared to their participation in the domestic manufacturing sector. In this article we will explore the beginnings, development and the current situation concerning the Free Trade Zones in the Dominican Republic.
The Gulf + Western Corporation and the First Dominican Free Trade Zone
The beginning of the Free Trade Zones in the Dominican Republic is often attributed to Charles Bludhorn, CEO of Gulf + Western Corporation and was based in New York City. For many years it was the owner of the Central Romana and who initiated things such as Casa de Campo and gave to the Dominican Republic superlatives such as Altos de Chavón, one of the best design schools in the world which is Chavón School of Design or one of the world’s top 50 best golf courses and the best in Central America and the Caribbean, Teeth of the Dog, among other things. The love and admiration that Charles Bludhorn had for the Dominican Republic is what impulsed in him ways to help in the economic development of the country beyong the sugar cane industry. This lead to the 1970 creation of the first Free Trade Zone industrial park of the Dominican Republic in La Romana.
The Dominican Government’s Initial Incetives to Create the Free Trade Zones
The constant repetition that the Gulf + Western Corporation open the first Free Trade Zone industrial park in the Dominican Republic has lead to the myth that the sector started with this opening in 1970. In reality, the Free Trade Zones were contemplated to be developed by the incetives offered by the Dominican government through the promulgation of the Industrial Incentive and Protection 299-68 law of April 23, 1968 signed by president Dr Joaquín Balaguer. Once this law was put into affect and its incentives were in existence came the opening of the first Free Trade Zone industrial park in the Dominican Republic.
- 1970: La Romana Free Trade Zone (Gulf + Western Corportation).
- 1971: San Pedro de Macorís Free Trade Industrial Park (Dominican Government).
- 1974: Santiago Free Trade Zone (a mixed partnership of the private sector of Santiago and the Dominican government).
The Role of the United States in Impulsing the Dominican Free Trade Zones
Nevertheless, the role of the United States of indirectly helping promote the development of the Dominican Free Trade Zones is undeniable. Under the presidency of Ronald Reagan, the further indirect promotion of the Free Trade zones was initiated by the Caribbean Basin Economic Recovery Act of August 5, 1983 and came into effect as the Caribbean Basin Initiative (CBI) on January 1, 1984. This law gave preferential tariff and trade agreement to countries in Central America and the Caribbean with an exception included for countries like Cuba who were not beneficiaries. In essence, United States tariffs on many products from these countries would be reduced or eliminated, in addition to other incentives. As a consequence of this, companies based in the United States with manufacturing interests began to relocate some or all of their manufacturing to these countries. Among the beneficiaries was the Dominican Republic who witnessed a boom and the the greatest sustained growth of its Free Trade Zones in the entire history of this sector. In this era, Free Trade Zone direct employment reached the record of around 195,000 in the Dominican Republic alone.
The 8-90 Dominican Law that Further Impulsed the Free Trade Zones
In 1990, the Dominican government under then president Dr Joaquín Balaguer promulgated the 8-90 law which gave Free Trade Zones a further impulse with more defined incentives. Based on data from the Central Bank of the Dominican Republic, the Free Trade Zones in 1991 created less than RD$5.6 billion (US$441 million) or 4.5% of GDP. By 2008, Free Trade Zones economic output had increased to RD$56 billion (US$1.6 billion), but decreased in its size relstive to the GDP to 3.6%. This meant that while the economic output of the sector increased, the economic output of other sectors in the Dominican economy had a greater growth.
The Impact of the 56-07 Law
In 2007 was promulgated by the then President Dr Leonel Fernández the 56-07 law. This law had an impct in the textile subsector if the Free Trade Zones and the Free Trade Zones in general. Due to the importance of the subsector in creating job opportunities for Dominicans and the effects of new changes by the World Trade Organization (WTO), the Dominican government investigation found many jobs related to the manufacturing of leather shoes, the leather itself. other textile chains, accessories, etc would be endanger of being destroyed. This law meant to protect Dominican workers and manufacturers, stipulated that the raw materials should be purchased by Dominican producers. In addition, it encourage further vertical integration between domestic manufacturing firms and those in the Free Trade Zones. It also included other changes such as applying the ITBIS to these textiles products produced in the Free Trade Zone and were sold in the Dominican market and other changes.
The Transformation of the Free Trade Zones
This era also presented changes in the composition of the Free Trade Zones. In 1991, textile companies in the Free Trade Zones had an economic production of RD$3.5 billion (US$275 million) compared to RD$2.1 million (US$165 million) from the rest of the Free Trade Zones. By 2008, textiles were producing RD$13.8 billion (US$398.6 million), no doubt an increase from textile production in 1991. However, the rest of the Free Trade Zones produced RD$42.3 billion (US$1.2 billion). The production from the rest of the Free Trade Zones was 3 times more than textiles in 2008 and 2.7 times what the entire Free Trade Zones produced in 1991. Textiles went from being 62% of all the Free Trade Zones production in 1991 to 25% in 2008. In 2020, Free Trade Zones exports amounted to approximately RD$342.6 billion (US$5.9 billion).
Today, the Free Trade Zones groups 724 companies from the Dominican Republic, the United States, South Korea and elsewhere in over 75 Free Trade Zones industrial parks throughout the country, but mostly concentrated in Greater Santo Domingo and in the Cibao Valley. In 2021, 41 permits has been approved for the instalation of new companies. These new companies are expected to create over 6,000 new jobs.
Products Produced by the Free Trade Zones
The Free Trade Zones produce many products, some of which the Dominican Republic is leader such as the export of dental floss or of medical instruments to the United States. The diversity of the products is quite remarkable if it is taken into account that during the first couple of decades and a good chunk of the 1990’s textiles dominated the industry. Today, the products that are made by the Free Trade Zones can be resumed as follows.
- Pharmaceutical and Medical Products: 30.7%
- Electronic Products: 18.7%
- Tabacco and Derivatives: 15.2%
- Textiles and Confections: 11.7%
- Jewelry: 7.3%
- Shoes and Components: 3.4%
Map of the Free Trade Zones in the Dominican Republic
The Free Trade Zones industrial parks and Special Free Trade Zones are not equally distributed in the Dominican territory. Instead they are placed in the geographic areas with the highest population concentrations. This ensures several things, among them that the jobs created by the Free Trade Zones are close to the areas where the people live. With this thinking, most Free Trade Zones are found in the Greater Santo Domingo and Santiago de los Caballeros and vicinity. This also mimics the geographic concentrations of the domestic manufacturing sector, albeit the factories aren’t located in Free Trade Zones industrial parks.
Dominican Free Trade Zones vs Latin America + Spain
According to the Asociación de Zonas Francas de Las Américas (AZFA), in Latin America there are Free Trade Zones in 25 countries with 10,200 companies. These entities has created almost 1 million direct jobs and produced over US$38 billion in exports.
The growth of Free Trade Zone industrial parks and the Special Free Trade Zones in the Dominican Republic has been so great, that as recent as 2018 the Dominican Republic was and still is the leading Latin American country with Free Trade Zones and Special Free Trade Zones. In terms of just Special Free Trade Zones, Puerto Rico is the leader with Dominican Republic in second place and Colombia in a distant third place.
The Empowerment of Dominican Women via the Development of the Free Trade Zones
The development of the Free Trade Zones implied the creation of thousands of jobs that otherwise would had never existed. Around 51% of all Free Trade Zone job positions are held by women including almost 11,500 in technical positions and another 6,300 women in administrative positions. Usually, these positions require degrees from universities and/or other institutions of higher learning. These are remarkable amounts considering that traditionally the Dominican Republic has been a very male dominated society, referred as machismo in all the countries that emerged from the Spanish Empire. Women were relegated to a second position where household chores and taking care of the family was meant to define her life, in addition to being subservient to men. Such a high presence of women with jobs implies that the role of women has been changing in traditional Dominican society. These women earn their own money and through that are able to influence their husband-wife or boyfriend-girlfriend relationship. It also implies that young women that choose to get an education beyond high school are given opportunities in putting to use their technical or professional degrees. Plus, the fact that these women need to be outside their houses for reasons that are not pertaining buying food in a supermarket, picking up the kids at a school meant or attending church means that the family relationship goes through changes too.
The Future of the Dominican Free Trade Zones
The Dominican Republic has found success in the creation of its Free Trade Zome sector. From having none in the middle of the XX century to becoming one iof the leaders in Latin America with the second most Free Trade Zones industrial parks. Creating thousands of jobs that would had never been created. Giving greater empowerment to Dominican women and helping weaken the centuries lasting tradition of making women dependent on men for their entire livelihood. Certainly that the creation of the Free Trade Zones has given to Dominican society a great help in its leap forward.
However, there are some issues surrounding the Free Trade Zones that merits attention. These issues are concerning the following.
- Economic recession due to the Covid-19 pandemic.
- Modifications of national legislation.
- Reduction of the incentives to further impulse the development of the sector.
- Deficient of permission process.
- Costs of internal operations.
- Market concentration
- Energy costs
- Insufficient supply of a highly educated workforce.
- Lack of proper chaining of operations with local producers.
The Dominican Republic went from having no Free Trade Zone industrial parks in the 1960’s to becoming the leading country with the number of combined Special Free Trade Zones and Free Trade Zones industrial parks in all of Latin America. It has created hundreds of thousands of jobs that otherwise would had never existed, it has greatly diversified the products it produces and now exports amounts to US$5.9 billion. The Free Trade Zones of the Dominican Republic seem to have a bright future, if maybe a few issues that must be resolved in order to guarantee smooth sailing.