Prospects and challenges for North African free trade zones
Amid global economic shifts, the Maghreb’s free trade areas aim for innovation and integration, yet struggle amid fragmentation, competition and structural challenges.
In a nutshell
- Independent strategies prevail over collaboration, limiting development
- Logistics, skill gaps and regulatory hurdles deter high-tech industry growth
- Free trade zones risk marginalization if not integrated into local economies
As part of the ongoing global geoeconomic transformation into a multipolar order, countries and regions worldwide are looking to boost their economic prospects and security outlooks. On Europe’s doorstep, the highly competitive Mediterranean and North African region is a prime contender for growth driven by foreign investment.
Countries in the Maghreb, in particular, are creating free trade zones (FTZs) to lure multinational corporations seeking favorable taxation arrangements and regulatory frameworks with assurances of transparency and security in locations adjacent to centers of global demand. However, low labor costs, geographical proximity to the European Union and malleable trade unions, while appealing, are not yet sufficient to transform North Africa into an attractive economic area.
In a region where inter-state collaboration is weak, each country typically attracts as much foreign investment as possible and asserts regional superiority while trying to rid itself of the Maghreb’s old demons: corruption, money laundering and political insecurity. Promoted as islands of economic security, free trade zones are as heterogeneous as their host countries.
Local dynamics remain a sword of Damocles for investors, as does the issue of recruitment. The labor pool here is of uneven quality, between the abilities of Algerian workers, who require extensive training programs to upgrade their skills, and Moroccans, who are too often relegated to perform repetitive tasks and are not inclined to the relocation requirements of high-tech companies. Tensions and rivalries between states can quickly complicate investment conditions, for example, in terms of profit repatriation or currency transfers.
What North Africa offers multinationals
In the absence of political and economic cohesion, let alone tax harmonization, North Africa is a region of contrasting conditions. With 12 industrial acceleration zones dedicated respectively to the automotive, aeronautics, offshoring, green energy, defense and fisheries sectors, Morocco is a leader in North Africa. While these zones securing tenants testifies to Morocco’s dynamic policy of integration into the global economy, they do not shield the country from substantial variations in performance: Foreign direct investment inflows to Morocco fell by nearly 50 percent in 2023, and unemployment is currently close to 14 percent, a level not seen for two decades.
In addition, foreign companies operating in Morocco still find it challenging to fill managerial positions that bridge the gap between production lines and plant management. The staffing is available, but it is a long and tortuous road to fill key positions.
For foreign companies, the complex bureaucracy and frequent regulatory changes create challenges.
Tunisia is keen to attract investments in high-value-added sectors but faces significant obstacles in this pursuit. Its two free trade zones lack adequate infrastructure, particularly in transport and logistics, reducing their competitiveness. The FTZ Zarzis Park suffers from considerable logistical shortcomings despite its proximity to a port. Local economic operators point to a heavy administrative burden and criticize the opacity of procedures and the inflexibility of Tunisian regulations. These factors hamper the country’s ability to attract cutting-edge industries despite ambitions to diversify the economy.
Algeria is approaching the development of free trade zones with an ideology inherited from the post-Soviet era, meaning inflexibility and pesky local ownership rules. The Bellara free zone (in the wilaya, or administrative district, of Jijel) is specialized in the steel industry as part of the country’s effort to diversify its economy, which is mainly dependent on hydrocarbons. New free zones are planned at the port of Djen Djen, in Bouchebka, and in the wilaya of El Tarf. Nonetheless, the country’s structural challenges remain enormous.
For foreign companies in Algeria, the complex bureaucracy and frequent regulatory changes create challenges such as import quotas, restrictions on access to foreign currency, and the 51/49 rule, which requires 51 percent Algerian ownership of projects. One of the difficulties for foreign companies is to retain the employees they have trained, who are often tempted to resign to earn double their salaries outside the free trade zone. Some headhunting firms specialize in recruiting these highly sought-after talents on the local market, cannibalizing the country’s human resources pool.
The search for an economic model for the Maghreb
Contemporary business in the Maghreb is characterized by different types of economic zones: free trade zones, industrial acceleration zones and special economic zones. In the absence of a coordinated regional strategy, each country has developed its own model, enabling each to capitalize on its comparative assets and attract investments according to its priorities. However, the lack of harmonization of fiscal, customs and regulatory frameworks between Maghreb countries hampers the fluidity of intra-regional trade crucial to North Africa’s attractiveness.
This absence also hinders the creation of an interconnected labor market that could benefit the entire region. The notion of talent mobility and what Europeans or North Americans would call the entrepreneurial spirit, however, remains alien to local habits.
Facts & figures
Free trade and related economic zones in North Africa
The Maghreb’s free trade zones face intense global competition from places such as China or Central and Eastern Europe. The Shenzhen FTZ in China generates prodigious amounts of foreign direct investment – around $140 billion in 2023 alone. Its lure is based on advanced infrastructure and high-tech expertise available locally, creating an attractive environment for innovative companies. By comparison, the economic zones in the Maghreb have limited high-tech capabilities, and industries that require highly skilled labor often look elsewhere.
In the EU’s eastern regions, countries such as Poland have created more than 14 special economic zones with the support of the bloc’s subsidies, attracting nearly $15 billion of investment in the technology and automotive sectors. This is in direct competition with the ambitions of the Maghreb, particularly in the automotive industry, in which Morocco and Tunisia are trying to make their mark.
To attract multinationals for the longer haul, the Maghreb’s economic zones must offer not only favorable taxation schemes but also an innovation-friendly ecosystem that enables companies to benefit from local expertise. So far, Maghreb countries have not developed a technological environment comparable to other global or African regions, which limits their attractiveness for cutting-edge industries. A lack of high-tech infrastructure and advanced skills, particularly in areas such as Artificial Intelligence, reduces the ability of these areas to develop into technology hubs.
Tactical options for North African trade
For investors seeking access to national markets in the Maghreb, a critical question is whether the use of free trade zones can unlock local demand. Are these zones merely links in global production chains, or can they play a strategic role in facilitating deeper penetration of local and regional economies? As multinationals consider accessing domestic and regional markets from this perspective, several obstacles are worth noting.
Free trade zones in the Maghreb struggle to integrate their activities into the local economy and contribute to sustainable development. They often operate in isolation from the local economic fabric, with workers mainly assigned to basic tasks such as assembly. The standardization of tasks limits the need for higher skill sets, for example in engineering or research and development. This, in turn, reduces skills development in the local workforce and limits the reach of multinationals beyond the special zones.
The current situation in North Africa presents a significant challenge for investors seeking to enter industrial activities such as new materials chemistry or electromagnetics. The highly specialized nature of these fields makes it challenging for new entrants to gain the expertise needed to succeed, as there is a limited pool of individuals with the requisite skills.
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International corporations seeking to utilize the region to complement operations in nearby areas, such as Europe, can develop local capacity by transferring expertise and know-how to local companies. However, local small and medium-sized enterprises, often organized on an informal basis, have few links with multinationals and gain little from their presence.
For multinationals seeking access to local markets from the vantage point of free economic zones, the issues are complex. In many cases, access depends on the ability to mobilize political support. For Renault in Morocco, the support of the government in Rabat was crucial in raising the brand’s profile and facilitating its integration into the national market. The importance of political intervention underlines the business climate that international corporations must adapt to for their investments to pay off.
The dark side of the Maghreb’s free zones
As logistical hubs for the import and export of goods, free trade zones in the Maghreb face problems of smuggling and counterfeiting. Tax incentives attract unscrupulous operators who see an opportunity to engage in illegal activities, a scourge in the textile and consumer goods sectors. Large fast-fashion clothing chains suffer from the theft of products later found in local souks at bargain-basement prices, still with their original labels.
It is difficult to estimate the percentage of products smuggled out and sold locally. A French car manufacturer discovered that spare parts were disappearing from assembly lines to be resold locally. Site security is entrusted to local companies that pay low wages and impose difficult working conditions – so untoward that some less scrupulous employees become corrupted and look the other way.
Free trade zones in the Maghreb face problems of smuggling, counterfeiting and industrial espionage.
North Africa’s free trade zones are also facing a growing problem of industrial espionage, affecting roughly 15 percent of companies. Although the percentage is approximate and varies from zone to zone, it underlines a serious threat to companies located in these areas. Espionage techniques use sophisticated cyber attacks such as Trojans and man-in-the-middle attacks to gain access to sensitive corporate data.
The weakness of security systems and anti-corruption measures exposes companies to the risk of undetected intrusions, compromising the confidentiality of their know-how. This lack of protection is a problem, especially in an environment of increasing global competition and digitalization. Reports by industrial security consultancies such as Control Risks, PwC and Deloitte, highlight these structural weaknesses in North African special economic zones, pointing to recurring threats of cyber espionage and infrastructure vulnerabilities.
Scenarios
Less likely: Regional enterprise zones modernize and harmonize
Faced with global competition, a less likely scenario entails the Maghreb countries regularly undertaking reforms to bolster the potential of their free trade zones. Steps to be taken include improving administrative transparency, strengthening tax incentives and positioning the broader area as an attractive economic bloc. Morocco, Tunisia and Algeria implement technology transfer policies enabling the local workforce to acquire skills in cutting-edge sectors such as AI, renewable energy and advanced engineering.
Thanks to these efforts, the Maghreb’s centers of excellence could become legitimate technology hubs, attracting not only manufacturing companies but also digital multinationals keen to benefit from local talent, low labor costs and proximity to Europe. Maghreb cooperation intensifies, creating an integrated value chain that strengthens intra-Maghreb trade.
While this may not be the most realistic scenario in the current market, it is a potential future scenario that should be considered. There will likely be an increased demand for foreign investment in the Maghreb in the future, which will provide potential investors with the opportunity to establish themselves on more favorable terms. Destinations currently perceived as riskiest, such as Libya, or as most complex, such as Algeria, can be considered high-yield investments with substantial room for improvement.
More likely: Maghreb economies remain fragmented
A more likely outcome in the foreseeable future is that despite their enormous potential (proximity to the EU, political stability, competitive labor costs), the Maghreb free trade zones do not develop into centers of innovation; rather, they remain isolated production islands with few links to local economies. The multinationals present will continue to be export-driven and not integrated into the local economic tapestry, which ultimately limits their impact on employment and the development of skills.
Tunisia and Algeria, having failed to modernize their infrastructure and administrative apparatus, will struggle to attract high-value-added companies. The potential for regional value chain growth remains untapped, and North African economic zones will gradually be marginalized in the face of competition from Asia and Europe.
For the investor, two principal avenues of geoeconomic engagement are worth consideration. The first is to capitalize on the robust government support by investing robustly, thereby placing a wager on the durability of the local regime. This is the approach adopted by Renault. The second is to limit the engagement to niche manufacturing sectors that involve advanced technology. This strategy allows investors to position themselves for future openings, with the expectation that the Maghreb will eventually embrace a regional free-market economy in order to prevent stagnation and economic decline.
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