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Despite perceptions, SEZs don’t exist in a vacuum and aren’t always a safe harbour from global politics | Jacopo Dettoni
Special economic zones (SEZs) are often perceived as policy exceptions. They thrive on different fiscal and customs rules, as well as a streamlined governance. They’re the result of a deliberate policy decision chasing a specific outcome in the form of more inbound investment, foreign trade, diversification and governance upgrade. As such, they are more policy boosters than exceptions — a distinction that exposes them to the ebbs and flows of policy making at a time of rising dirigisme and protectionism.
The idea that SEZs can be safe harbours of trade and investment for multinationals navigating the increasingly choppy waters of the global economy is a romantic one, but the reality on the ground is different.
Free trade zones (FTZ) in the US are a case in point.
“FTZs can cushion the impact of the US–China trade war, depending on the relative size of the tariffs on intermediates compared with those on final goods,” according to an analysis published by the European Central Bank in the early days of 2019.
Things turned out differently though, as the White House has been determined in closing loopholes that could weaken its use of foreign trade policies to antagonise China.
The United States Trade Representative (USTR) recently finalised modifications to Section 301 of the Trade Act of 1974 announced earlier this year which, among other things, introduce a a 100% duty on Chinese electric vehicles (EVs), 50% duty on solar cells and 25% duty on steel and aluminium products, EV batteries, key minerals and permanent magnets.
It also details that the goods subject to the tariff modification are to be admitted within foreign trade zones as ‘privileged foreign status’ — meaning they will be subject to the tariff rate applicable for that good. In other words, Section 301 eliminates the ability to use an inverted tariff for imports, where the FTZ user benefits from the fact that the rate on the final product it introduced into the US market is lower than the rates on the imports of its production inputs.
For the opposite reasons, FTZs in Serbia are a case in point too.
The country’s leadership has spent much political capital to strengthen relations with China. Back in May, president Xi Jinping visited Belgrade as part of a European tour that only took him to Serbia, Hungary and France. “The reverence and love he encounters in our Serbia will not be found anywhere else,” Politico quoted president Aleksandar Vučić as saying during a welcoming ceremony on May 8.
Serbian free zones have been on the receiving end of these efforts. Among others, Chinese tyre producer Shandong Linglong Tyre first invested about $1bn to set up a factory in a free zone in Zrenjanin, 80km north of Belgrade. That facility opened in 2023. Just over a year later, the company announced a $640m expansion of the same facility. Overall, Chinese investors announced foreign direct investment (FDI) projects worth $6.5bn in Serbia in 2023 alone — a historic high that made the Balkan country the ninth-largest recipient of announced greenfield FDI from China in 2023.
With the global economy adjusting to the new geopolitical fault lines opened by the US–China trade war, free zone operators and authorities have emphasised the need for political support on the sidelines of this week’s World Free Zones Organisation’s (WFZO) congress in Dubai. This emphasis is rooted in the political headwinds many of them had to face over the past few years, in the US as elsewhere.
Take Colombia, where leftist president Gustavo Petro tried to align the corporate income rate paid by free zone tenants to the national rate of 35% to increase fiscal revenues and fund its redistribution programmes. After an intense dispute with the country’s 124 free zones that made its way to the supreme court, the current 20% rate remains for the existing tenants, while new tenants must demonstrate they intend to use the free zones benefits to generate exports. If they can’t, a 35% rate applies.
Free zones may be an exception to certain rules, but they are not exceptions to national policy. Rather, they are one cog in the bigger policy machine and, as such, they are still exposed to the ebbs and flows of foreign trade policy. But the good results of the most successful free zone programmes gain them a seat at the negotiating table. Their hand is strengthened by regional and international associations like WFZO that have grown exponentially in recent years and built bridges with multilateral organisations like the UN and the World Customs Union. Ultimately, being at the table and having a chance to influence policy-making is always better than not being in the room at all.
Fonte: FDI Intelligence
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