The Free Trade Zone Regime in El Salvador: A Gateway to Investment and Industrial Growth

El Salvador, a Central American nation increasingly positioning itself as a strategic investment destination, currently boasts over 150 companies operating under a robust and evolving free trade zone framework. These zones offer tax incentives, streamlined regulatory conditions, and favorable logistics for manufacturing and export-oriented businesses.

At the heart of this transformation is the free trade zone regime in El Salvador, a model that has evolved steadily since the 1970s and now plays a pivotal role in the country’s economic landscape.

A Brief History of Free Trade Zones in El Salvador

The first free trade zone in El Salvador was established in 1974 in San Bartolo as a government-owned project, marking the beginning of a vision to integrate the country more deeply into global manufacturing and trade networks. By 1998, the government enacted a comprehensive law to regulate these zones, establishing a modern legal framework for businesses seeking to benefit from special tax and customs advantages.

This regulation enabled a wide range of industries to flourish, including textile and apparel manufacturing, agro-industrial processing, plastics, pharmaceuticals, paper products, and more. Today, the free trade zone regime in El Salvador plays a central role in the nation’s industrial output and export performance.

Overview of the Current Free Trade Zone Infrastructure

According to Miguel Ángel Chévez, president of MACH Consultores, there are 17 designated industrial parks in El Salvador under this regime. Fourteen of them are currently operational, while three are in various stages of development. In total, 155 companies operate within these zones, highlighting the appeal of this model for both domestic and foreign investors.

This positions El Salvador as the second most active country in the region in terms of the number of businesses using this model, surpassing nations like Guatemala (100 companies in 14 zones) and trailing only Costa Rica in scale.

Costa Rica operates 48 free trade zones, which house 430 businesses. Panama’s 16 zones, although fewer in number, include the massive Colón Free Trade Zone, which alone accommodates more than 1,800 facilities. Nicaragua, meanwhile, has 50 parks with 221 companies, and Honduras supports 39 sites hosting 318 firms.

The Value Proposition of the Free Trade Zone Regime in El Salvador

The free trade zone regime in El Salvador offers a suite of incentives designed to attract and retain investment. These include:

• Full exemption from import duties on raw materials, machinery, and intermediate goods used in production.
• Tax exemptions on corporate income for up to 15 years, depending on the type and location of investment.
• Simplified customs procedures, allowing for faster processing and reduced bureaucratic hurdles.
• Freedom to repatriate capital and profits, which is essential for international investors.
• Access to an adaptable labor force at competitive regional wages.

These advantages, combined with El Salvador’s dollarized economy, proximity to major U.S. ports, and improving security conditions, have made the country increasingly attractive to nearshoring strategies.

The Infrastructure Challenge: A Limiting Factor

Despite the regime’s attractiveness, infrastructure limitations continue to be a bottleneck. As Chévez pointed out, the total industrial roofing space in El Salvador stands at just 2.6 million square meters—a figure dwarfed by Mexico’s 60 million square meters and the United States’ 1 billion square meters.

“Just one industrial park in Mexico—Telmex’s in Mexico City—is larger than all of El Salvador’s industrial parks combined,” Chévez noted, highlighting the urgent need to expand physical infrastructure if El Salvador is to remain competitive in attracting manufacturing relocations.

With global companies seeking to diversify supply chains and capitalize on nearshoring, the lack of space could mean missed opportunities unless addressed quickly. For instance, if a Chinese company were to consider relocating to El Salvador, the lack of adequate facilities might prevent the investment from materializing, regardless of the incentives.

Regional Comparison: Competitive But Constrained

While the free trade zone regime in El Salvador has outpaced some regional peers in terms of company count, it lags in total industrial capacity and geographic diversification. For comparison:

• Costa Rica has emphasized high-tech and medical device manufacturing, supported by world-class logistics and training programs.
• Panama, with its strategic canal and Colón Free Trade Zone, serves as a hub for transshipment and re-export.
• Nicaragua and Honduras have invested heavily in expanding their industrial parks, providing a broader base for growth.

To maintain momentum and attract diversified industries—particularly those involved in electronics, automotive components, and value-added agro-industries—El Salvador will need to keep pace not just in quantity but also in quality and infrastructure scale.

A Strategic Plan for Industrial Expansion

Recognizing these challenges, the Industrial Council of El Salvador unveiled a five-year strategic plan in June. A key pillar of the plan is expanding industrial roofing capacity and developing new parks, especially in the eastern departments of San Miguel, Usulután, and La Unión.

These areas are particularly well-positioned to benefit from improved connectivity via:

• The Pacific Airport project, which aims to become a logistics hub for exports.
• Infrastructure upgrades at the El Amatillo border crossing, which connects El Salvador with Honduras and the broader CA-5 highway system.

The plan also envisions developing industrial clusters that complement local economic strengths. For example, San Miguel’s growing service sector could support logistics operations, while La Unión’s proximity to the coast could facilitate port-related manufacturing and assembly operations.

Current Industrial Hotspots

At present, most industrial parks in El Salvador are concentrated in the central region, including:

• Boulevard del Ejército
• Plan de la Laguna
• Valle de San Andrés
• San Juan Opico
• Nejapa
• Apopa
• The road to Puerto de La Libertad
• The Comalapa Highway corridor

While these areas offer solid access to labor markets and existing infrastructure, the congestion and limits on land availability underscore the need for geographical diversification.

Seizing the Nearshoring Opportunity

The rise of nearshoring—the relocation of manufacturing closer to major markets, such as the U.S.—represents a generational opportunity for countries like El Salvador. Global disruptions during the COVID-19 pandemic exposed vulnerabilities in extended supply chains, prompting many firms to seek new production hubs in Latin America.

The free trade zone regime in El Salvador positions the country well to capitalize on this trend, particularly if its infrastructure challenges are addressed. By promoting its business-friendly policies, skilled labor force, and strategic location, El Salvador can become a preferred destination for industries looking to establish new regional bases.

Conclusion: A Strong Foundation with Room to Grow

The free trade zone regime in El Salvador has proven to be a vital tool for attracting foreign direct investment and fostering industrial development. With 155 companies already operating under the model, the country is clearly on the right path. However, for El Salvador to unlock its full potential, significant investments in industrial space and logistics infrastructure will be necessary.

By combining incentive-driven policies with forward-looking development plans—particularly in underutilized eastern regions—the country can build on its momentum and emerge as a competitive manufacturing hub in Central America.

If El Salvador can rise to meet the demands of modern manufacturing and logistics, the free trade zone regime in El Salvador may well become one of the country’s most powerful levers for long-term economic transformation.