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Asia-Pacific FDI Forum IV

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In 2015, the world had nearly 4,300 Special Economic Zones (SEZs) in existence and the number is only increasing with the passage of time. China established its first SEZs in 1980. The success of these SEZs, and in particular that of Shenzhen, inspired other countries to follow suit. India set up its first Asian SEZ in Kandla in 1965, followed by Singapore, Malaysia, and the Philippines, all of whom started their SEZs between 1968 and 1972.

Nowadays, ASEAN Member States have widely adopted the SEZs model, establishing more than 1,000 SEZs and recognizing their vital role in the development of the ASEAN Economic Community. In December 2015, Japan adopted the Law on National Strategic Special Zones as a part of the regulatory reform and more generally as part of “Abenomics”, the economic policies advocated by Prime Minister Shinzo Abe in 2012. In 2016, the Dubai Multi Commodities Centre was awarded “Global Free Zones of the Year” for the second year running, thanks to the constant support given by the United Arab Emirates to its investors. In 2017, the Vietnamese Planning and Investment Minister announced the establishment of three ‘outstanding’ SEZs in the north, centre and south of the country. These offered investors greater incentives and fewer restrictions than those available to date in the country. Thus, as more countries in the ASEAN region understood the potential benefits of SEZs to international trade and FDI inflow, the number of SEZs increased substantially. SEZs were increasingly being accepted for their benefits to the development of domestic institutions, policymaking and reform.

As a development strategy, SEZs have benefited not only the advanced economies but also the developing countries and transitional states. The emphasis of SEZs ranges from having relaxed rules relating to export (as in the Export Processing Zones in Bangladesh) to financial liberalization (like in the Shanghai Free Trade Zone) and having industry-specific policies (as in industrial parks for logistics, energy and telecommunications). Over the years, the establishment of SEZs as a policy tool has greatly contributed to the transformation and growth of Asian economies.

However, SEZs are not a cost-free miracle that promote economic growth. In fact, although fiscal incentives can represent a fine start for SEZs, in addition to creating distortions within economies, SEZs are not a sustainable option as they are not in line with the liberalization inherent to the SEZs scheme. At heart, SEZs embody a testing ground, within the territory of states, for trying out bold reforms which look to a more liberal economic policy and a more efficient administrative procedure. It derives that both local and international companies investing in an SEZ will obtain a comparative advantage when compared with companies investing in other areas of the same state. Projections of SEZs are likely to boost the overall competitiveness of a country or a region. It was therefore necessary to elaborate the legal and regulatory framework that guided an SEZs’ development and ensured that they are properly designed, in order to successfully attract businesses and stimulate growth.

From the perspective of international trade and investment law, SEZs are not directly governed by any WTO trade rules. Nevertheless, the incentives may fall under the scope of WTO Agreements. Consequently, the relationship between SEZs and some WTO Agreements, such as the Agreement on Subsidies and Countervailing Measures, the General Agreement on Trade in Services and Agreement on Trade Related Investment Measures, and free trade agreements including provisions on the functions and treatment of SEZs raise important legal issues that require deliberation, not only with respect to their applicability but also their implications on SEZs and liberalization generally.

Furthermore, to attract investment under SEZs, the application of certain state laws can be exempted, or standards can be lowered (for instance, certain taxes can be made inapplicable or the standards of labour and environmental laws can be lowered). These measures nevertheless are seen as contrasting with the current tendency of attributing greater importance to quality rather than quantity of investments. In fact, with this aim, states have introduced some changes in their foreign investment policy. Major examples include issuing new rules to protect the environment and labour rights, and address tax avoidance. These changes contravene specific provisions included in international investment agreements aimed at the protection of foreign investment. It also induces foreign investors to allege breaches of international obligations before investment tribunals. The emergence of such discrepancies is one more reason to rethink the SEZs regulatory framework.

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