A free port is a port of entry for goods shipped into a country. No duty is imposed while the goods are stored in the port. Ships loading and unloading are likewise exempt of duty. Often the goods are there for transhipment only; cargo from Africa being shipped to the Far East, for example, is often transhipped via free ports in Holland.

Hong Kong is one of the earliest and most famous free port. There custom duties are not payable by the end user, which makes the city an attractive place to shop as imported goods are cheaper for the purchaser. Today there are a number of cities in island nations in ocean cruise areas such St. Maarten which are free ports. Shopping bargains are an added inducement for cruise ships to stop in their ports.

Most international airports are also free ports but can be patronized only by outward bound airline passengers. Goods are not sold until after the passenger has passed through custom control, usually in an area called "Duty Free Shopping".

A large majority of the free ports in the world, however, are not open for shopping. They deal mainly with merchandise intended for importation into the country. The free port is an area where the merchandise can be offloaded and stored while custom declaration and inspection are completed.

In some small third-world countries, where the bulk of the manufactured goods and many basic food products are imported, large wholesale companies are permitted to maintain warehouses in the free port area and to keep these goods in stock for a limited period of time. When retailers buy goods from the wholesaler, often called a trader, the wholesaler must then pay the custom duty before the goods leave the free port area.

In the United States and in many European countries bonded warehouses serve the function of a free port. Marseilles in southern France, for example, is a sea port but its airport is also the point of entry for many cargo flights from other countries. A warehouse area on the airport grounds is the holding area for imported air cargo.

The difference between a true free port and a bonded warehouse is that goods entering the warehouse must be covered with a bond exceeding the amount of the custom duties. In many cases raw materials are brought into a bonded warehouse and are processed there. In such a case the duty is on the raw materials only, which gives a lower cost than if the materials had been processed in their country of origin. Manufacture of imported materials is not permitted in free ports and bonded warehouses in the United States.


Sources:
www.Answers.com
Wikipedia
Personal experience working in a free port in West Africa

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