Principal investigator: Eduarda Miller Figueiredo
Original title: Why Special Economic Zones? Using Trade Policy to Discriminate across Importers
Author Matthew Grant
Location of the Intervention: United States
Sample Size: 553 approvals
Sector: Public sector
Primary Variable of Interest: Approvals
Type of Intervention: Special Economic Zone
Methodology: MQO
Summary
Special Economic Zones (SEZs) are areas located outside a country's customs border where tariffs on selected intermediate goods are reduced or eliminated for industrial companies operating within the zone. Present in many countries, these zones generate $7,5 billion in gross production annually. The main objective of this article is to evaluate this policy in the United States, analyzing whether the government can discriminate tariffs among importers. Using an Ordinary Least Squares (OLS) model with multiple controls, the results suggest that SEZs can influence government decisions regarding tariffs.
- Policy Problem
Special Economic Zones (SEZs) are areas outside a country's customs border, although located within sovereign territory, where companies require government permission to operate. These zones offer reduced or eliminated tariffs on selected intermediate goods for industrial companies operating within the zone.
SEZs are present in many countries (almost of the total number of countries) and produce $7,5 billion annually in gross output (Boyenge, 2007). In the United States, the SEZs are home to approximately
of the entire production. More than
of the taxable imports that enter the U.S. through these zones, leading to the deferral or non-collection of $17 million in tax duties from 2011 to 2015.
SEZs are beginning to attract attention as potential catalysts for development and are actively promoted by the World Bank (Alder, Shao, and Zilibotti, 2016). Despite this, they are still not very well understood. And it is this lack of understanding that the article studied here focuses on: answering the most fundamental questions, among them: “Why do special economic zones exist?".
There is great variation in the rules between countries and in the specifics of the policy and its actual implementation. The central idea of the article evaluating this policy in the United States is that the government may prefer to charge different tariffs to different users of the same good – a tariff discrimination between importers.
- Implementation and Evaluation Context
In the United States, special economic zones involve only tariff reductions, creating a two-tiered tariff system: a company in an SEZ may face a lower tariff on a given product than the prevailing tariff faced by other buyers of the same product. Granting selective tariff reductions to a subset of consumers allows the government to achieve a certain transfer of surpluses to producers with less distortion than would be possible under a uniform tariff.
The author provides an example to aid in a better understanding of what SZE (Single-Zero Equilibrium) would be. Knowing that tariffs are used by the government to increase the prices of domestic producers of intermediate goods, if imports are in equilibrium at a given tariff level, then the government can exempt some buyers from the tariff without altering the price received by domestic producers. By not exempting a large number of buyers, the domestic market will remain stable at the same price as before. This makes the tariff a more efficient redistributive instrument, that is, ideal from the point of view of the policymaker.
- Policy/Program Details
The Special Economic Zones program in the United States is economically very important. There are over 300 SZZs in the US, as can be seen in Figure 1. All permits granted to companies located in these zones are public information, which has allowed for the construction of a comprehensive dataset. An important detail is that the zones in the US are not location-based, which allowed the author to separate tariff-related motivations from issues concerning location or other policies that are grouped under the same name.
Figure 1: Active Manufacturers in Special Economic Zones (SEZs) in the United States, 2011-2014
Source: Grant (2020) – Data compiled by the author; Puerto Rico was excluded.
The production of companies located in these zones is concentrated in oil refining and closely related petrochemical products, vehicle production, pharmaceuticals, and machinery. Registration for manufacturing in a zone is a complicated process that can take a year or more, due to the need to justify the products and inputs for which tariff reductions are desired and which products will be produced using those inputs.
- Method
The data used by the author consists of two partially overlapping components:
- The first covers the complete history of applications that were approved for companies active in a SZEs between 2011 and 2015;
- The second category covers approved applications submitted between 2000 and 2015 for companies that were active at some point during that period.
Therefore, there are 553 approvals. Some calculations and supplementary data were also used to investigate the characteristics of the sector, such as political influence (Ossa, 2014; Grossman and Helpman, 1955).
where the variable of interest is , which indicates whether a company active in any year between 2011-2015 is permitted to use the input-output in a Special Economic Zone. The rest of the model consists of variables that control the price elasticity of demand, the political power of the final goods industry, and the tariff rule that protects the final goods industry.
Another analysis examined whether exogenous increases in the volume of imports of a given intermediate good should lead to subsequent increases in the volume of use of that intermediate good, with a reduction in tax duties permitted through the SZEs (Special Economic Zones).
Main results
The results suggest that industries that are politically strong and are users of a particular intermediate product relative to other users are more likely to obtain tariff reductions for that intermediate product through a ZEI (Zero Equivalent Tariff). While users protected by a tariff on equivalent final goods... ad valorem Relatively low rates are less likely to obtain reductions. The results are robust to the inclusion of controls that capture the effects of manipulating terms of trade or outsourcing considerations on SZE approvals.
For the second analysis, the results suggest that the coefficients of lagged import volumes are positive and significant. In other words, this reflects an important institutional detail of the SZE program in the United States, where almost all approvals are permanent. Therefore, policymakers will avoid expanding SZEs in response to temporary shocks – for example, drops in world prices resulting from economic cycles – but will expand them in response to permanent changes in imports.
- Lessons in Public Policy
The use of Special Economic Zones can affect the government's choices regarding tariffs. These changes could have major consequences for welfare, since SEZs can alter the level of tax rates, as well as exempt some users.
References
Alder, Simon, Lin Shao, and Fabrizio Zilibotti. 2016. “Economic Reforms and Industrial Policy in a Panel of Chinese Cities.” Journal of Economic Growth 21 (4): 305-49.
Boyenge, Jean-Pierre Singa. 2007. “ILO Database on Export Processing Zones (Revised).” Unpublished.
Grossman, Gene M., and Elhanan Helpman. 1995b. “Trade Wars and Trade Talks.” Journal of Political Economy 103 (4): 675-708.
Wow, Ralph. 2014. “Trade Wars and Trade Talks with Data.” American Economic Review 104 (12): 4104-46.
