Duty Free Zones Explained

Cite this article as:"Duty Free Zones Explained," in The Business Professor, updated November 24, 2018, last accessed October 19, 2020, https://thebusinessprofessor.com/lesson/duty-free-zones-explained/.


What is a Duty Free Zone?

The Duty Free zone is an area where products are sold without the import, sales, value-added or other taxes. These products are sold to the international travelers with an understanding that they will take these products outside of the country to use. The products are tax exempted to entice the international customers in buying the products.

A Little More on Duty Free Zones

The stores selling duty free products are typically situated at international airports, sea terminals, and international train stations. Duty free products are also available on-board cruise ships and international flights.

Some countries impose a tax on good brought to the country from a duty free zone. Also, there is an upper limit imposed on the volume of the product you can bring into a country from a duty free zone.

The duty free shops offer branded upmarket luxury goods at a low price as you do not have to pay the taxes attached to in the domestic market. In European Union, you need to pay the duties for the goods while traveling between EU countries but the goods are duty free when you take it outside the Europe.

Duty free shops are not generally available on the roads or trains but there are several duty free shops at U.S.- Canada and U.S.-Mexico border.

The applicable duty free regulation depends on the country of residence, destination country and length of stay. It also depends on the item, cost of the item and country of its manufacturing.

References for Duty Free Zones

Academic Research on Duty-Free Zones

  • ‚󏬆¬†¬†¬†¬† An economic analysis of the¬†dutyfree zone, Hamada, K. (1974). Journal of International Economics,¬†4(3), 225-241. This paper analyzes the economic implication of a duty-free zone, where duties are exempted in order to attract foreign investments. The objective is to show that the involvement of foreign investment does not affect consumption is a duty free zone, and its absence does not affect production. This objective can be achieved by the use of the two factor, two consumption model.
  • ‚󏬆¬†¬†¬†¬† On the welfare effects of a ‘dutyfree zone, Hamilton, C., & Svensson, L. E. (1982). Journal of international Economics,¬†13(1-2), 45-64. This paper explores the welfare of a duty-free zone by expanding on former research by Hamada (1974). Its main objective is to show the factors that lead to diminishing welfare in a duty-free zone.
  • ‚󏬆¬†¬†¬†¬† A note on the economics of the¬†duty free zone, Rodriguez, C. A. (1976). Journal of International Economics,¬†6(4), 385-388. This note extends some of the results of Hamada (1974) on the economic effects of a duty-free zone. It shows that when further studies is made into the trade pattern of a duty-free zone and the rest of the economy, the results are the same with the patterns of the free zone only.
  • ‚󏬆¬†¬†¬†¬† Unemployment and the formation of¬†dutyfree¬†zones, Young, L., & Miyagiwa, K. F. (1987). Journal of Development Economics,¬†26(2), 397-405. This research explores the impact of a duty-free zone on its host country in terms of unemployment. The objective is to show that the formation of duty-free zones in a country with high unemployment rate has a positive effect on the prices of their outputs.
  • ‚󏬆¬†¬†¬†¬† Dutyfree zone, unemployment, and welfare a note, Gupta, M. R. (1994).¬†Journal of Economics,¬†59(2), 217-236. This research examines the effects of shifting a duty free zone through reduction of import duty in an urban sector.
  • ‚󏬆¬†¬†¬†¬† The gains from¬†duty free¬†zones, Facchini, G., & Willmann, G. (1999).¬†Journal of International Economics,¬†49(2), 403-412. This paper aims to show that the introduction of duty-free zones in a country would lead to Pareto gains over autarky using the Dixit-Norman Tax Scheme approach.
  • ‚󏬆¬†¬†¬†¬† Intermediate goods and the formation of¬†dutyfree¬†zones, Young, L. (1987). Journal of Development Economics,¬†25(2), 369-384. This research examines the effect of creating a new duty-free zone zone in a country by reduction of tax and tariffs on intermediate goods. Results show that new formation of duty-free zones might lead to a worse economic situation of the host country.
  • ‚󏬆¬†¬†¬†¬† Foreign capital and protectionism, Beladi, H., & Marjit, S. (1992).¬†Canadian Journal of Economics, 233-238. This research shows that the growth of an export area with foreign-owned capital leads to the decline of an area that imports capital-intensive goods and follows a protectionary policy. The main objective of this research is to show the impact of protectionism on an area with regards to imports and exports processing
  • ‚󏬆¬†¬†¬†¬† Export processing zones: The economics of enclave manufacturing, Warr, P. G. (1989). The World Bank Research Observer,¬†4(1), 65-88. This research examines the benefits and costs of EPZs in certain countries. The objective is to show the welfare effect of these EPZs on their host country’s economic policy. To achieve this, emphasis is placed on countries such as Malaysia, the Republic of Korea, Indonesia and the Philippines.
  • ‚󏬆¬†¬†¬†¬† The normative theory of international trade, Corden, W. M. (1984). The normative theory of international trade.¬†Handbook of international economics,¬†1, 63-130. This paper discusses the normative theory of international trade, where emphasis is placed on government policies.
  • ‚󏬆¬†¬†¬†¬† Emergence of a new neotropical malaria vector facilitated by human migration and changes in land use., Conn, J. E., Wilkerson, R. C., Segura, M. N. O., de Souza, R. T., Schlichting, C. D., Wirtz, R. A., & P√≥voa, M. M. (2002). The American journal of tropical medicine and hygiene,¬†66(1), 18-22. The paper investigates the effect of human interaction on locally important vectors. To analyse this, the An. Marajora is used as a case study, were this specie was found to have grown to a dominant number from what they were before due to interaction with human immigrants in their local breeding sites. The objective of this paper is to show that one of the challenges of the Netropolical malaria control holds.
  • ‚󏬆¬†¬†¬†¬† ¬†Dutyfree zone¬†in a Harris-Todaro economy: a note, Gupta, M. R. (1994).¬†Keio economic studies,¬†31(2), 63-75. Emphasis is placed on a small Harris-Todaro economy with an urban sector which consist of duty and non-duty free zones as case study. The primary purpose of this article is to show that the expansion of a duty-free zone by reduction of tariffs would lead to lower output in an urban sector.
  • ‚󏬆¬†¬†¬†¬† The economics of¬†dutyfree¬†shopping, Christiansen, V., & Smith, S. (2001). This research analyses the effects that duty-free shopping has on consumption, revenue and price-setting in a nation. The objective of this paper is to show that duty-free shopping does not affect the global welfare economy of a nation in any way.

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