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  he penultimate stage in the journey of international cargoes to minor ports is to be first sent to a regional hub such as a large airport or seaport. It is here that ¡°bulk is broken¡± before being shipped to its final destination. In their efforts to compete with each other in attracting this lucrative transshipment business, individual countries constantly invest in their social infrastructure. Furthermore, they designate certain of their air- and seaports as customs-free zones.

  In Korea, the relevant piece of legislation dealing with such special areas is the rather long-windedly titled, ¡°Act on Designation and Operation of Customs-free Zones for the Promotion of International Commercial Logistics Centers.¡± As the title indicates, the purpose of establishing customs-free zones is the promotion of international logistical centers of commerce in Korea. In other words, the whole system is geared to fostering certain designated areas such as airports and seaports as logistical centers to serve as transshipment hubs for international cargoes.

  By creating zones that are exempt from the normal collection of import duties, the government aims to sharpen the competitive edge of the Republic of Korea and its companies in facilitating the international flow of goods and services to the benefit of the national economy as a whole.

  The customs-free system is designed to encourage the re-export of products after post-importation processing. In short, the purpose of customs-free zones is to promote the international flow of products by guaranteeing the maximum level of freedom to multinational cargo transportation companies in handling these products. Nonetheless, customs-free privileges are not extended to products imported through the zones for distribution into the domestic market. In this case, imported products must go through the regular customs procedure.

  In most cases, a nation¡¯s border is the demarcation line at which customs duties are imposed on in-coming goods. When goods enter a free trade zone, customs union, or customs-free zone, however, the distinction between the two lines begins to blur. Within a customs-free zone, however, national tariff laws and regulations are not enforced. Therefore, the zone is legally located outside the national borderline in terms of taxation. Due to its unique status, privileges such as exemption from customs procedures, taxation and fees are granted. In addition, a zone is usually vested with legal and locational advantages to facilitate freedom of business activities regarding the import and export of cargo, and its processing.

  The Customs-free Zones Act, (the ¡°act¡±) defines a customs-free zone as an area designated by the Minister of Finance and Economy upon request from a mayor or a governor to allow various special tax treatments in terms of tariffs, plus value-added, special consumption and local taxes.

  Under the act, three types of business are allowed to operate in a customs free zone. By function, they are:
 Loading, transportation, storage, exhibition, sale and simple processing of
   products
 Repair and maintenance of vessels (i.e., ships, aircraft) and logistical
   equipment
 Trade in ships and other business activities related to international
   logistics. Includes all business entities necessary for support and operation
   of this trade, such as financial institutions, insurance companies, and the
   like.

  Qualifying entities that are permitted to settle in a zone are duly registered and are then entitled to receive generous benefits. (See box, above). Above all, they are deemed, for the purpose of customs duties, to be located beyond the writ of the Korean authorities. Thus, goods imported into the zone can be used or consumed without the need to pay any tax on them, or report them to the authorities. This privilege, however, is granted only if a registered company imports the products and that they are for purposes closely related to its business.

  If a foreign investor sets up a company in a zone with a total investment that exceeds $30 million, even Korean corporate tax and income tax are waived. Specifically, an eligible company will be granted a 100-percent exemption for the first seven years following the year in which profits are first generated, and a 50-percent reduction for the next three years. In addition, it could also obtain a 100-percent waiver on rental by the expedient of borrowing land owned by the central government.

  Four customs-free zones were established from the act coming into force in March 2000 to January 2003: Busan Port, Gwangyang Port, Incheon Port, and Incheon International Airport.

  Busan Port is located at the southeastern tip of the Korean peninsula. In its role as a connecting point between the Pacific and the Asian Continent, it ranks as the thirdbusiest container-processing port in the world. Busan Port stands out among Korean ports and harbors in terms of volume of cargo processed. For example, it processes 40 percent of all Korean sea-borne export cargo and 85 percent of container traffic. It comprises four operational areas: North Port, South Port, Gamcheon Port and Dadaepo Port.

  Busan Port¡¯s customsfree zone was opened in January 2002 on 1,277,000 square meters of Sinseondae Wharf in both North Port and Gamcheon Port. The zone was expanded by an additional 23,000 square meters. Of particular note is that the wharf was chosen by the London Metal Exchange (LME) for the location of its warehouse and was, in fact, Busan Port¡¯s first tenant since it was awarded duty-free status. The decision by LME to locate on the wharf indicates the perceived potential of the Busan not only as a central container port in the region, but also a base for trading nonferrous metals.

  So far, 18 international companies, including as world¡¯s no. 3 chemical company, Akzo Nobel have expressed interest in setting up their Asian logistics centers in zone but are constrained by the lack of available land. Aware of this problem, the South Korean government and the Busan local government have decided to acquire 132,000 square meters around Gamcheon Port and lease it to interested companies, free of charge, to for up to 50 years.

  Gwangyang Port occupies a central point in Northeast Asia, and has been emerging, along with Busan Port, as the focus of regional logistical activity. Thorough planning has made this port the success it is, and due to its location it is considered the optimal storage site for cargo heading to China.

  The Gwangyang Port customs-free zone upon its designation covered an area of 1,388,000 square meters, which was later augmented by a further 52,000 square meters in March of 2003. As a result, it now covers a total area of 1,440,000 square meters. The expanded area will be used solely to house LME warehouses that can accommodate up to 100,000 tons each of nonferrous metals such as aluminum, copper, nickel and tin. The current status of the port points to its likely development as the center of nonferrous metal transshipment in the Asian Northeast. The customs-free area at Gwangyang Port will undergo three further expansions between now and 2011 to encompass a number of container wharves in its immediate vicinity.

  Incheon Port lies just 32 kilometers to the west of the capital Seoul. It is also close to the major cities of northeast China. Thus, it serves as an outpost for exchange between Korea and China. Moreover, with relations between the two Koreas improving, it will play a pivotal role in trade with the North.

  Incheon Port was designated as a customs-free zone in January 2003, one year later than Gwangyang and Busan Ports. Nonetheless, at 1,700,000 square meters, it is the largest among them. Certain parts of Incheon City have already been designated as the country¡¯s first Free Economic Zone (see ¡°Interview¡±). If the synergy between the two types of zones is maximized, the city and its port will be well positioned to become a central hub in this part of Asia.

  Incheon International Airport was conceived with the aim of becoming an aviation hub for Northeast Asia. It began operations on March 29th 2001 and now handles 30 million passengers and 2.7 million tons of cargo per year. Once all major phases of construction are completed by 2020, it will be able to process 530,000 flights, 100 million passengers and 7 million tons of cargo annually.

  Some 992,000 square meters to the left of the airport¡¯s cargo terminal was first designated as a custom-free zone in February of 2002, and will be complemented by a further 1,984,000 square meters.

  Since the customs-free zone is intended to foster the logistical industries, most companies in the zone are engaged in this line of business. From next year, however, manufacturing investment will be allowed.

  Customs-free zones and free trade zones confuse investors because of the similarities in the way they function. Broadly speaking, whereas free trade zones are designed to attract manufacturing, the goal of customs-free zones is to encourage cargo carriers to use them as transshipment points and for their various logistical activities. However, progressively more manufacturers wish to move into free trade zones since they are situated around large-scale seaports as well as airports. To match this new demand, the Korean government plans to merge the two types of zone into one and create a new type of zone.

  Thus, the arrival of this hybrid will serve to promote the environment for manufacturers in the customs-free zones (i.e., Busan Port, Gwangyang Port, Incheon Port and Incheon International Airport) and encourage the settlement of logistical operators at the manufacturing-intense free trade zones (e.g. Masan, Iksan, Kunsan and Daebul). The result will be to promote the competitive hub capability of Korea¡¯s major sea and airports to an unparalleled height in Northeast Asia.

by Shin Seung-Hoon (shshin@kotra.or.kr)