The WTO subsidy regime and Special Economic Zones (SEZs)

What is it about?

Many governmental incentives unilaterally offered in special economic zones affect competition in international markets and thus fall within the scope of the World Trade Organization’s Agreement on Subsidies and Countervailing Measures. Until very recently, products made in such zones could face countervailing duty investigations abroad on a charge of improper subsidization. In 2019, the World Trade Organization issued its first ruling focusing on the legality of certain special economic zone subsidies. In particular, the panel in India—Export Related Measures found fiscal preferences under an Indian scheme to be prohibited export subsidies. This article examines the status of special economic zone incentives under the multilateral subsidy regime, discusses the relevant anti-subsidy practice, and identifies ‘risky’ and ‘safe’ types of support measures that constitute unilateralism of zones in promoting economic activities.

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Why is it important?

Almost all countries have used SEZs - also known as ‘free zones’, ‘free trade zones’, ‘export processing zones’, or otherwise - as a popular scheme of creating a business-friendly regulatory regime distinct from the rest of the host country. National authorities use them typically to experiment with new deregulations, promote exports, generate foreign exchange earnings, create jobs, attract investment, and encourage technological transfers and knowledge spillovers. But WTO law maintains certain constraints and flexibilities for SEZs.

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