Special Economic Zones Could Jumpstart the U.S. Recovery
With the economy still in freefall, policymakers should be looking beyond bailouts for ways to jumpstart America’s recovery. Special economic zones (SEZs)—which have different economic and trade regulations than the host state or county—can stimulate trade and attract new investment. Congress needs to help innovators and entrepreneurs create more of them, now.
The pandemic response calls out for a new generation of SEZs. On a scale not seen since the 1930s, large parts of the national and global economies are frozen. Huge numbers of workers are suddenly idle. Small businesses face closure. And even big companies are under threat. Policymakers erect trade barriers and chase short-term relief, avoiding the structural reforms needed to secure long-term growth.
We desperately need new thinking and new ways of doing things—and SEZs are part of the answer. These special jurisdictions provide a way to rebuild institutions and create new ones by starting small and scaling based on effectiveness.
These unique jurisdictions aren’t new. America first deployed them during the Great Depression, when Congress created “foreign trade zones” to relieve exporters from punitive tariffs imposed by the disastrous 1930 Smoot-Hawley Act. From their origins in crisis, SEZs have grown to play a major role in today’s economy. In 2017 there were over 230 foreign-trade zone projects and nearly 400 subzones across America, handling $756 billion worth of imports and exports.
SEZs across the world have various forms and goals, but their collective track record is one of reviving moribund economies. They accomplish this by concentrating talent and labor, cutting taxes and regulation, and providing testing grounds for experimental policies. The resulting growth and innovation can then spill over to benefit the host country’s economy.
Most famously, China’s rise relied on SEZs on a grand scale to provide models for reforms of tax, foreign exchange and investment, finances, land tenure, wages, labor mobility, labor contracts, consumer prices, housing, and more. And SEZs have helped lift people out of poverty in various contexts. One in the Dominican Republic created over 100,000 manufacturing jobs, sharply reducing the country’s dependence on agriculture. Similar successes are found in Mauritius, Taiwan, Honduras, El Salvador, Madagascar, Bangladesh, and Vietnam.
A UN report shows that the nearly 5,400 SEZs worldwide directly employ between 90 to 100 million people and indirectly support tens of millions more jobs. Based on World Bank data, the average economic growth rate for SEZs is 14.7%. A study commissioned by Startup Societies Foundation, run by one of the authors, projects next-generation SEZs can increase a host jurisdiction’s economic growth by up to three percent.
Even before COVID-19, global free trade was on the defensive. The pandemic will only increase pressure in favor of protectionism—but a new global network of SEZs will counteract this trend. Geared to foreign trade and investment and outward-looking by their very nature, they can repair and strengthen supply chains by streamlining customs and eliminating tariffs and non-tariff barriers to trade, stitching the global economy back together in a more durable, resilient framework.
SEZs offer other advantages in responding to the pandemic itself. Spaces where pharmaceutical companies can more easily conduct clinical trials will accelerate development of new cures and treatments. They’re well-suited to handle production of medicines on short notice through promising new techniques like continuous manufacturing. And, as pioneers in remote work on everything from services to software development, they anticipate the new constraints on physical contact that will reshape our post-COVID work lives. Responsible, high-quality medical tourism will offer much-needed price competition to high-cost healthcare systems in America and beyond.
We must carefully design new SEZs to avoid pitfalls that have limited their usefulness in the past—especially here in the United States.
America suffers from a “Zone Gap”, with no success stories as prominent as Shenzhen, Dubai, or certain projects in Latin America. One common mistake has been an overly narrow focus on tax breaks, rather than broader relief from regulatory barriers. To have real impact, SEZs must offer companies a holistically improved environment, with streamlined regulations and procedures. This is especially important for startups and companies in categories with potential for sudden, exponential growth like biomedical or advanced digital technology.
SEZs are what America needs now: an expression of optimism in a troubled time, with renewed commitment to freedom, exchange, and innovation. Congress must embrace this tool for recovery. Only the federal government can provide the right framework to facilitate the establishment and thriving of new and existing SEZs. China and other global players will surely do so. We can’t wait to get things moving again.
