In the grand theatre of industrial policy, few ideas shine as brightly on paper as Free Trade Zones (FTZs).
Touted as engines of growth, magnets for foreign direct investment, and islands of efficiency in seas of bureaucracy, Nigeria’s FTZs promise much: over $200 billion in FDI, more than 500,000 jobs created, and a new reputation as an export hub.
From Alaro City to the Lekki Free Zone, the government’s narrative is clear: FTZs are transforming Nigeria into a global manufacturing contender. Multinationals like Kellogg’s, Colgate, Ariel Foods, and Power Oil are assembling world-class production lines and, in some cases, turning Nigeria into a net exporter. For a country desperate to diversify beyond crude oil, these gains are nothing short of seductive.
But dig beneath the headlines and a more nuanced story emerges—one that pits shiny new enclaves of global capital against struggling local manufacturers barely keeping the lights on. The unspoken question: Are Nigeria’s Free Trade Zones building the economy, or slowly breaking it?
A Two-Tiered Industrial Economy
The problem isn’t that FTZs exist—it’s how they operate. Firms inside these zones enjoy near-perfect conditions:
- Zero corporate tax
- Duty-free import of raw materials
- Tax holidays on profit repatriation
- Government-subsidized infrastructure
- Exemptions from Value Added Tax (VAT) and local levies
All of this is justified under the banner of export promotion. In reality, however, many FTZ-based firms sell 100% of their products into Nigeria’s domestic market—competing directly with indigenous companies that receive none of the same incentives.
This is not competition. It is cannibalisation.
A soap manufacturer outside the FTZ pays 35% import duty on raw palm oil. His rival inside the FTZ pays nothing—and sells at lower prices, backed by tax breaks and uninterrupted power. Over time, the result is predictable: one thrives, the other folds. And with every closure, the “Made in Nigeria” dream loses another gear.
Asymmetry in the Name of Reform
It’s easy to see how we got here. Nigeria, hungry for investment and keen to burnish its reformist credentials, has leaned into the global playbook of investment zones. The logic is familiar: FTZs help bypass regulatory bottlenecks, reduce the cost of doing business, and create export-driven industrial clusters. It’s worked—in China, in Vietnam, even in Ethiopia.
But Nigeria is not China. And the lines between its export zones and domestic economy are porous, both institutionally and politically. Without strict enforcement of trade protocols, the promise of “export promotion” becomes a loophole for domestic tax evasion and regulatory arbitrage.
Domestic Industry: The Forgotten Engine
Local manufacturers are fighting a war of attrition—one they are not equipped to win. They face:
- Over 30 separate taxes and levies across tiers of government
- Poor logistics and unreliable electricity
- Limited access to foreign exchange
- High interest rates and credit constraints
In contrast, their FTZ-based counterparts glide on duty exemptions and tax-free profits.
This policy asymmetry is unsustainable. It violates the principle of competitive neutrality—the idea that government policy should not distort the market in favor of one group over another. It also disincentivizes domestic investment, discourages import substitution, and reinforces Nigeria’s structural dependence on foreign capital.
As COVID-19 so painfully revealed, domestic capital is the most resilient and sustainable source of growth. When global supply chains froze, it was local producers—flawed and fragile as they were—who held the line. Today, however, many of those firms are being slowly asphyxiated by the policy designed to grow the industry.
Tax Reform or Policy U-turn?
Recognizing the imbalance, the Nigerian government has proposed a 25% Company Income Tax on FTZ-based firms through the 2024 Finance Bill. The idea is simple: level the playing field without dismantling the zones.
But here lies the dilemma. Taxing FTZs could scare off future FDI, undermine investor confidence, and risk unravelling years of diplomatic and commercial goodwill. Do nothing, and domestic industry continues its slide into irrelevance.
This is not just a tax question. It is a fundamental test of Nigeria’s industrial philosophy. Should growth be driven by enclaves of foreign investment, isolated from the rest of the economy? Or should policy incentivize broad-based, inclusive industrial development?
The Case for Smart Integration
The goal should not be to tear down FTZs, but to rewire them. Nigeria must:
- Enforce export thresholds for FTZ firms—only allow domestic sales under strict conditions.
- Link FTZs with domestic value chains—encouraging backward integration and local sourcing.
- Extend infrastructure and tax reforms to outside-the-zone manufacturers.
- Offer scale-based or productivity-linked incentives—not just location-based privileges.
Above all, Nigeria must move from exceptionalism to ecosystem thinking. FTZs should not be exceptions to the rule of dysfunction. They should be models for broader reform—laboratories of efficiency, not islands of inequity.
Conclusion: Growth That Doesn’t Divide
Free Trade Zones are not inherently bad. When properly structured, they can attract capital, generate jobs, and spark innovation. But if they undermine the rest of the economy, they become policy pyrite—shiny but ultimately corrosive.
Nigeria needs a cohesive industrial strategy, one that balances attraction with retention, foreign capital with domestic dynamism. FTZs cannot be free rides; they must be bound by rules, responsibility, and reciprocity.
If left unchecked, the current model will not create a modern economy—it will carve one in two: a privileged, protected economy behind gates, and a collapsing industrial base outside of them.
In the end, the true measure of reform is not the number of factories built in FTZs—but the number of factories that survive outside of them. (BusinessDay)
