Free zones could pose challenge to international law

Q: What’s new in the world of special economic zones (SEZs)?

A: SEZs are everywhere. All developing countries have SEZs, as well as most developed countries. And their number is ever growing – there are already 200 to 300 new zones in the pipeline. SEZs are nothing new, but we are observing a real proliferation.

Q: Why is that?

A: First, when we speak about SEZs, we speak about FDI. SEZs are the response to the increasing global competition for very mobile FDI. FDI is moving more easily and faster than before. That forces countries to react quickly [with flexible policy tools like free zones] to get their share if that mobile FDI.

Second, SEZs are relatively inexpensive, they can offer shortcuts for governments to develop their economies. For example, it’s less costly to establish a special tax regime in an SEZ than going for a nationwide fiscal reform.

Third, the trade aspect is important. For many years, trade liberalisation was a key feature of many countries’ trade policy, but things have changed with the rise of Donald Trump in the US and Brexit. We moved from the multilateralism of the 1990s with the growth of the World Trade Organization (WTO) to the bilateralism of the 2000s with the proliferation of country-to-country free trade agreements (FTAs) to the unilateralism of SEZs.

Governments want to use SEZs because they have understood they can’t get anything out of the WTO, and also FTAs don’t deliver on promises.

Q: Do SEZs have any common traits?

They all have three pillars, the ‘SEZ trinity’. First, customs duties and tax reliefs; second, regulatory facilitation; third, streamlined administrative procedures. All SEZs feature these pillars one way or another, and their combination defines the success or failure of many zones.

Q: The EU is not keen on SEZs. What is the attitude of international law towards them?

A: In WTO law, SEZs can be a problem. By definition, they mean preferential treatment, and that can be a breach of WTO law. SEZs are challenging international law; they could lead to WTO dispute, investment disputes or even tax disputes.

I think we are going to see that in the coming years. Some investors may lose money in SEZs and they will then bring the case to the WTO courts, international arbitration courts, or even challenge the SEZs under international taxation treaties.

Q: Do you believe SEZs will continue to proliferate?

A: Only zones with the better level of infrastructure support and greater quality of services are going to deliver the better economic performance. All the other zones are going to disappear.

Julien Chaisse is a professor at the School of Law of the City University of Hong Kong, and editor of the book International economic law and the challenges of the free zones.