The Asia FDI Forum IV, held on 22-23 March in Hong Kong, addressed three essential questions for the future of Special Economic Zones (SEZs): How to build a successful SEZs attracting inward FDI? Where are Asian SEZs headed? What are the implications of the domestically regulated SEZs on the international law dimension?
Organised by the Faculty of Law of The Chinese University of Hong Kong, the World Economic Forum, the Columbia Center on Sustainable Development, and the Shanghai Jiao Tong University, the Asia FDI Forum IV gathered lawyers, economists, political scientists, policy-makers, and businessmen to discuss how to better design SEZs regulation, with the aim to promote the development of certain territories, while respecting WTO and investment treaties obligations.
Also known as “the Neapolitans of trade and investment law”, SEZs are geographical regions within the territory of state, who benefit from a softened legislation compared to the rest of the country: more relaxed labour or environmental laws, tax holidays, fewer restrictions on foreign ownership are just few of the incentives that government grant to investors who will bring in their business.
SEZs can be sector-specific (such as a high-tech zone or a media city), but they could also be multi-product and multi-service, like light manufacturing Business Process Outsourcing (BPO) and international financial centres. This holiday regime is put in place in order to render the SEZ appealing to investors, who, in turn, will bring jobs and knowhow, and foster the economic development of the area.
The Asia FDI Forum IV unveiled the secrets for an effective SEZ, where fiscal and financial incentives are important but not determinants for its success, and in any case have stronger impact on developed countries compared to developing ones. And within financial incentives, subsidies may prevail over tax holidays both from the point of view of MNEs, States, and BEPS. For those concerned about compatibility with WTO and EU law, it is worthy to recall that tax benefits and subsidies get equivalent treatment. Apart from economic incentives, what elements do investors seriously consider when deciding where to take root? Low-cost location, skilful labour, infrastructure, closeness to major cities, access to European and North-American markets, previous industrialization of the area, good governance, policy coordination: all these factors matter in order to avoid a bright kick-off that desolately ends in ten-year time.
One example of creative and tailor-made incentives can be found in Doha. At the Qatar Financial Centre, a pioneering example of a hybrid model used as a laboratory for policy changes, companies can choose the law regime applicable and whether common law or local courts will have jurisdiction on their disputes. A different dispute settlement mechanism compared to the rest of the country is also applied in the Shanghai FTZ, with distinct arbitration rules, a less restrictive summary procedure, a hybrid model of arbitration/mediation, and an emergency procedure. China is in fact using her SEZs as pilot areas for judicial and arbitral reforms, including the future establishment of an international commercial court in the territory of a Chinese SEZ.
The last ten years have witnessed an unprecedented proliferation of SEZs, especially in Asia: China has established 11 Pilot zones, set up in 2013, 2015 and 2017, and launched cross-border e-commerce pilot zones in 15 cities. Notable, and perhaps too long, is the “negative list” for granting pre-establishment national treatment, as there may be doubts on whether this approach truly fosters inward FDI.
Concerns on the best strategy to adopt are common to Japan, where 387 Special Zones for Structure Reform are currently in operation. While at the beginning the initiative would come from local administrative entities, which would propose special regulation to the central government and negotiate, following a bottom-up approach, 2014 saw a change of wind, with the National Strategic Special Zones adopting a top-down approach. However, currently there are not enough data available to check whether the target value for performance has been attained.
Connecting Asia to Europe, SEZs appear also on the OBOR strategy, together with economic land and maritime corridors, transit corridors and development mobility partnerships, which will be realized through tailor-made international agreements. In particular, the transit route of Budapest-Belgrade-Skopje-Piraeus has tactical significance because it links three major economic corridors and has strong geopolitical connotation.
Even if SEZs may be considered as Toyland by some because of their relaxed regulation, would their status entail that they are shielded from the application of international law? Over 20 investment arbitration cases involving a change of regime of SEZs, and the WTO cases on trade-distorting effects and countervailable subsidies in SEZs indicate the contrary. To mention three of them, Ampal-American and others v Egypt (2016), Lee John Beck v Kyrgyzstan (2013), and Goetz v Burundi I&II (2012) prove that the management acts of SEZs are attributable to the state, and that the withdrawal of SEZ concessions might be paid at a high price, first by the investors in terms of value loss of their investment, and then by the state as damage compensation. What emerges is the need to internalize international obligations at the SEZs management level, either if they are directly governed by a public entity or outsourced.
Finally, UNCITRAL Working Group III on Investor-State Dispute Settlement Reform, whose next meeting is scheduled to take place in New York on 23-27 April 2018, will provide a platform where the UNCITRAL 60 rotating UN member states, and observers such as other UN member states, interested IGOs and invited international NGOs will try and find a consensus-based solution addressing the issues that currently torment both arbitration community and stakeholders.
We can hope that it will serve as inspiration for the government of SEZs: firstly, for its transparent decision-making procedure, and secondly, as it will provide a dispute settlement mechanism aimed at improving the current investment arbitration system. The reform will tackle also some issues key to the resolution of SEZ-related investment cases, such as duration (the Goetz V Burundi case spanned over 20 years), party appointment of arbitrators (in Beck v Kyrgyzstan the state failed to appoint its arbitrator with consequences on the whole procedure), and parallel proceedings (in Ampal-American and others v Egypt the tribunal acknowledged res judicata effect to the previously issued ICC award).
Linking economic, policy, legal, cultural issues, SEZs, may also serve as laboratory for ISDS reform, testing whether procedural innovations are truly beneficial to all the parties involved.
However, while we wait for the publication of the book in 2019, leaving the best for last, we can already wonder whether by that time SEZs will have taken over the non-SEZs territories, and if so, at what conditions and with what success rate.
The conference proceedings will be edited by Professor Julien Chaisse and Professor Hu Jiaxiang and will be published in 2019 by Cambridge University Press.