THEHALFBLOODPRINCE

SPECIALIZED ECONOMIC
ZONES
(S.E.Z)

SPECI ALI ZED
ECONOMI C
ZONES
WHAT IS A SPECIALIZED
ECONOMIC ZONE?
If you ask three people to describe
a special economic zone (SEZ),
three
very different images may emerge.
1. A fenced-in industrial estate in a developing
country, populated by footloose multinational
corporations (MNCs) enjoying tax breaks, with
laborers in garment factories working in
substandard conditions.
2. In contrast, the second person may recount
the miracle of Shenzhen, a fishing village
transformed into a cosmopolitan city of 14
million, with per capita gross domestic product
(GDP) growing 100-fold, in the 30 years since it
was designated as an SEZ.
3. A third person may think about places like
Dubai or Singapore, whose ports serve as the
basis for wide range of trade- and logistics-
oriented activities.
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OBJECTIVE
Introduction
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SO, IT CAN BE
BROADLY DEFINED
AS: -
Demarcated geographic areas
contained within a countrys
national boundaries where the
rules of business are different from
those that prevail in the national
territory. These differential rules
principally deal with investment
conditions, international trade and
customs, taxation, and the
regulatory environment; whereby
the zone is given a business
environment that is intended to be
more liberal from a policy
perspective and more effective
from an administrative perspective
than that of the national territory.
 SUMMARY OF TYPES OF ZONES
Types of Development Typical Typical Activities Markets Examples
zones objective size location
Free trade Support trade <50 Port of entry Entrept and Domestic, Colon Free
zone hectares trade-related re-export Zone
(commercial- activity (Panama)
free
Zone)
Traditional Export <100 None Manufacturing Mostly Bangladesh,
EPZ manufacturing hectares or export Vietnam1
other
processing
Free Export No countrywide Manufacturing Mostly Mauritius,
enterprises manufacturing minimum or export Mexico
(single unit other
EPZ)2 processing
Hybrid EPZ Export <100 None Manufacturing Export La Krabang,
manufacturing hectares; or and Thailand
only part other domestic
of area processing
is EPZ
Freeport/SEZ Integrated >1,000 None Multiuse Internal, Aqaba,
development hectares3 domestic, Shenzhen
and
export

Note: EPZ = export-processing zone; SEZ = special economic zone.

1. Bangladesh passed a new Economic Zones Act in 2010 that will open up the potential of
zone activities beyond the traditional EPZs; Vietnam has various forms of economic zones,
among which are EPZs.
2. Many EPZ programs offer licenses for both EPZ industrial parks and single unit EPZs.
Examples include Dominican Republic, Honduras, and Kenya.
3. Some multiuse SEZs, particularly those that do not include a resident population, may be
smaller in scale

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Aim of establishing a Specialized Economic Zone

SEZS NORMALLY ARE ESTABLISHED WITH THE AIM OF ACHIEVING ONE

OR MORE
OF THE FOLLOWING FOUR POLICY OBJECTIVES:

1. TO ATTRACT FOREIGN DIRECT INVESTMENT (FDI): VIRTUALLY ALL ZONES

PROGRAMS, FROM TRADITIONAL EPZ TO CHINAS LARGE-SCALE SEZS AIM, AT
LEAST IN PART, TO ATTRACT FDI.

2. TO SERVE AS PRESSURE VALVES TO ALLEVIATE LARGE-SCALE UNEMPLOYMENT:

THE SEZ PROGRAMS OF TUNISIA AND THE DOMINICAN REPUBLIC ARE FREQUENTLY
CITED AS EXAMPLES OF PROGRAMS THAT HAVE REMAINED ENCLAVES AND HAVE
NOT CATALYZED DRAMATIC STRUCTURAL ECONOMIC CHANGE, BUT THAT
NEVERTHELESS HAVE REMAINED ROBUST, JOB-CREATING PROGRAMS.

3. IN SUPPORT OF A WIDER ECONOMIC REFORM STRATEGY: IN THIS VIEW, SEZS ARE

A SIMPLE TOOL PERMITTING A COUNTRY TO DEVELOP AND DIVERSIFY EXPORTS.
ZONES REDUCE ANTI-EXPORT BIAS WHILE KEEPING PROTECTIVE BARRIERS INTACT.
THE SEZS OF CHINA; THE REPUBLIC OF KOREA; MAURITIUS; AND TAIWAN,
CHINA, FOLLOW THIS PATTERN.

4. AS EXPERIMENTAL LABORATORIES FOR THE APPLICATION OF NEW POLICIES AND

APPROACHES: CHINAS LARGE-SCALE SEZS ARE CLASSIC EXAMPLES. FDI, LEGAL,
LAND, LABOR, AND EVEN PRICING POLICIES WERE INTRODUCED AND TESTED FIRST
WITHIN THE SEZS BEFORE BEING EXTENDED TO THE REST OF THE ECONOMY.

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 SEZs in the Context of Regional Integration:
Creating Synergies for Trade and Investment
Naoko Koyama

Paralleling the rapid development of SEZs in recent decades has been the development of regional
trade agreements (RTAs)1 to promote trade and economic integration. As of February 2010, a total
of 457 RTAs have been notified to the WTO, out of which 266 are already in force. These numbers are
expected to continue to rise.

SEZs and RTAs are policy tools that promote trade and investment of countries and regions. When
successful, SEZs generate significant local employment, increase exports, and accelerate economic
growth. Meanwhile, successful RTAs contribute to increased trade among member countries and
promote regional integration more broadly. When the two initiatives exist simultaneously, they have
the potential to generate significant synergies. Specifically, by lowering barriers to regional trade and
facilitating the potential for realizing scale economies in regional production, RTAs stimulate
investment by both domestic and foreign firms. By providing serviced land, infrastructure, and an
improved regulatory environment, SEZs lower the cost and risk to firms in undertaking such
investments. In addition, the growth of intraregional trade may create opportunities for specialized
zones, for example, focusing on logistics or cross-border trade.

Although SEZs have the potential to facilitate regional synergies, RTAs often face challenges in
incorporating SEZs into their regulatory frameworks. This is particularly true in the case of traditional
EPZs. This challenge stems from the fact that although RTAs represent bilateral or multilateral
instruments, SEZs are, in all cases to date, instruments by which an individual country promotes
investment and exports, the former potentially in competition with their RTA partners.
In particular, when SEZ programs provide enterprises with tariff-related incentives, they trigger various
issues in the context of RTAs.

For example, they may create an incentive for tariff-jumpingthat is, when a foreign firm decides
to jump over the tariff wall to avoid trade costs (tariffs). This tariff-jumping might happen through
investment of a physical presence in a member country (the traditional definition of tariff jumping),
although in this case, the investment would be in an SEZ and not necessarily within the member
countrys customs territory. But it also might happen without any physical presence at all, by using the
SEZ as a bulwark to enter the customs territory. Specifically, because many SEZs allow duty-free
entrance of inputs imported from outside of a territory, foreign (extra-RTA) goods could potentially
enter the RTA free of duty through an SEZ, and then leak into the customs territory of other RTA
member states.

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If a newly established RTA disallows exports from a member countrys SEZ to the territory of other RTA
member countries, however, the operation of existing SEZ investors may be affected substantially.
Consequently, this may necessitate a reform of SEZ programs in member countries to prevent a large
loss of investment. Furthermore, excluding SEZ investors from taking advantage of the RTA prevents
member countries from realizing the full potential of these two trade and investment generating
instruments and achieving effective regional integration. To leverage fully both of these policy tools,
RTA member countries need to take a collaborative approach to harmonize their SEZ programs.

Despite the growing significance of both SEZs and RTAs, research on the connection between these
two instruments of trade and investment has been limited. In practice, most RTAs take measures to
prevent tariff jumping through SEZs. Yet, few efforts have been made to harmonize SEZ programs
across member countries in some RTAs. Such collaboration could generate considerable benefits
by creating synergy between SEZs in the Context of Regional Integration 129 SEZ and RTA and by
acting as a step toward greater economic integration. This chapter aims to fill part of the research
gap. In particular, the objectives of this chapter are (1) to discuss the implication of RTAs on SEZs
and review experiences in various RTAs, including country-specific cases; and (2) to outline the
potential opportunities that a harmonized approach toward SEZ initiatives might generate.
In the above framework, this chapter first reviews briefly the role, trend, and impact of RTAs, with
particular attention to those of Sub-Saharan Africa. Then, after laying out various types of issues
arising from overlap of RTAs and SEZs with preferential tariff treatment, it reviews how RTAs have
been managing these issues and draws lessons from case examples. Finally, it discusses how
harmonizing SEZ programs, including but not limited to duty-free imports and fiscal incentives, within
RTA member countries can help realize synergies between the two policy instruments and
contribute to greater trade and investment generation and deeper economic integration.