The Interaction between International Investment Law and Special Economic Zones (SEZs): An Introduction (2024)

1. Introduction

Special Economic Zones (SEZs) are important vehicles of a state's economic policy to attractforeign investments. SEZs are designated areas created orsupported by states to enhance economic development and to attract capital,technology, and innovation by offering economic, administrative, and fiscalbenefits to companies.[1]The 2019 World Investment Report prepared by UNCTAD estimates that there are'nearly 5,400 zones across 147 economies today, up from about 4,000 five yearsago, and more than 500 new SEZs are in the pipeline.'[2] Theproliferation of SEZs worldwide raises complex legal issues regardinginteraction between SEZs and international and international law and policy.[3] SEZ'smay open up a pandora's box under the international economic law (IEL) as thereare several complexities to be addressed herein, like, the interaction betweenSEZs and international tax law, especially the base erosion and profit shifting(BEPS) Action 5, the relationship between SEZs and investment agreements andthe disputes raised as a consequence, incompatibility with WTO regulationswhile using incentives. This Special Issue focuses on the SEZs' key interaction with international lawand arbitration.

With the aim toprovide a more hospitable environment to the investors, the IIAs have witnesseda rapid pace of development. The key treaty concepts here serve the mainpurpose of protection of assets of investors abroad and facilitation of theoperations of these investors in host countries, seeking to induce additionalinvestment flows. With investor protection, another crucial characteristic ofthe investment regime is that of a private right to action while seekingredressal under the ISDS mechanism. Under this mechanism, investors caninitiate arbitration proceedings against the authorities of a host countrywithout having to go through any government as at times, they may infringe upontreaty obligations. This furthers the investor's independency from the judicialsystems of host countries as well, since these systems may not be completelytrustworthy or may not be preferred owing to various reasons.

Thearticles presented in this Special Issue tackle a variety of important andcountry-specific topics arising out of an interaction between SEZs and economiclaw. These topics are divided into the following sections: (2) a generalregulatory framework of SEZs and its relationship with investment law, (3) China's SEZs and the dispute settlement mechanisms, (4)India's SEZs and its interaction with trade and labour policies, (5) Russia'sSEZs and their evolution and (6) Jamaica's SEZs: the journey fromFree Zones to modern SEZs

2. General Regulatory Framework of SEZs and its Relationshipwith Investment Law

The first part of the Special Issue sets the scene by analysing a regulatoryframework applicable to SEZs and its interaction with the regime ofinternational investment law. Amidst the many variations of SEZs, some areorganised as free trade areas that focus on integrated development of largeareas in a variety of industries while others function as export processingzones that are designed to simplify administrative procedures outside thecountry's customs territory. Depending on the specific circumstances of thecase, international law, foreign law, domestic law or a set of rules created bythe host state on purpose to govern the SEZ or their various combinations mayapply.

SEZs and international investment lawinteract in several different ways. International investment agreements (IIA)similarly to SEZs, are concluded by states with the goal of attracting foreigninvestors. IIAs make no distinction between foreign investments and investmentsmade in SEZs. Consequently, foreign investors may initiate investment claimsagainst a host state for mistreatment in an applicable SEZ. In the past,foreign investors have challenged the revocation of fiscal and tax benefitsthat were provided by a state's authorities under the SEZ's regime.[4]Such revocation may be qualified as an expropriation, as a violation of thefair and equitable treatment, as a violation of the national treatment or MFNtreatment obligation etc., depending on the circumstances of the case. Therelationship between international investment law and SEZs raises a number oflegal and policy issues in relation to their compatibility and consistency.Some of these issues, e.g. the protection of the legitimate expectations of aninvestor resulting from the benefits applicable to SEZ investments,the notion of attribution in relation to SEZ authorities raise challengesconcerning the coherence of SEZ legal framework and IIAs.

The aforementioned issues are addressed in the first article of the Special Issue 'Protectionof Investment and Violations of Investor's Rights in Special Economic Zones' by Anton Tugushev.In this contribution, the author identifies the main characteristics of SEZs andelaborates on their legal architecture. Building upon these findings, Tugushev analysesthe interaction of SEZs with a legal regime of investment law by reviewing fourteeninvestor-state arbitration disputes (ISDS), in which investors challenged theSEZ related measures. The author observes that the violation of investmentprotection standards in cases involving SEZs may serve as a subsidiary argumentproving unfairness of host state's conduct, putting an additional burden on thestate to defend itself in ISDS disputes. In his article 'Special EconomicZones and Regulatory Advantages: Can Investors Legitimately Expect the Freezingof Such Incentives?', Alexandros Bakos continues the theme of interactionbetween SEZs and investment protection under IIAs by exploring the role of thelegitimate expectations in the context of SEZs related disputes. The authoralso analyses the innovative provisions in a new generation of IIAs that may offerpossibilities for positive and harmonious interaction between SEZs andinvestment law.

3. China's SEZs and Dispute Settlement Mechanisms

The geographical spectrum of SEZs is incredibly vast and can be found almosteverywhere in the world. China has been leading in number and diversity of SEZs.[5] PioneeringSEZs such as Shenzhen enhanced the liberalisation of the Chinese economy and helpedattract foreign capital and technological know-how.[6] Even though,the number of SEZs in China continues to grow, there has been a transition fromselected tax incentives and preferential rules offered in numerous SEZs to uniformpolicies on market access facilitated by WTO rules.[7] Theserecent developments gave rise to various legal and policy issues that have beenaddressed in five contributions.

The first article in this section - 'Transformative SEZ: China's Changing the ParadigmAlong the "Belt and Road" in the "Greater Bay Area"' by FranciscoJos¨¦ Leandro and Yichao Li - introduces the history of Chinese SEZsand analyses the impact of SEZs in the construction of the Belt and RoadInitiative. The authors provide substantive arguments indicating that SEZs havepositively contributed to economic and social development 'as instruments forpolicy innovation, as apparatuses to deliver structural trade and economic change, and as tools forsocial and environmental sustainability.'[8]Further, Gianmatteo Sabatino in 'Chinese Special Economic Zones andInternational Economic Law: Diversification, Expansion, Containment andCirculation of a Cryptic Legal Model' examines the challenges for ChineseSEZs, such as the Hainan Pilot Free Trade Zone concerning harmonization andcompliance with the WTO rules. Dan Xie and Chengjie Wang continue the discussion on Chinese SEZs in their article,'A Hybrid Commercial Dispute Resolution Mechanism: New Developments and Approachesin Shanghai Pilot Free Trade Zone.' Taking the Shanghai Pilot Free Trade Zone (SHFTZ) as acase study, the authors examine efficiency of a hybrid disputeresolution mechanism within SHFTZ as a mean of adjudication of cases by foreigninvestors. The role of technology in SEZs is discussed in the article 'SpecialEconomic Zones, Legal Innovation, Technology, and IP Disputes Quo Vadis China?'' by PiergiuseppePusceddu.The author explores the Chineseapproach to arbitration of technology-related disputes at the background of thelegislative developments in the Shanghai Pilot Free Trade Zone. The finalcontribution of this section investigates the interplay between the EU norms andChinese investments in EU SEZs. Sara Pugliese in her article, 'Special EconomicZones (SEZs) in EU Port Infrastructures as a Means of Attracting ForeignInvestment: How to Manage Risks to EU Strategic Interests?' examines the EUlegal framework at the backdrop of Chinese investments in the European SEZs,particularly in port areas. Pugliese advocates for the inclusion of decentlabour conditions, health and the environment protection in the EU-ChinaAgreement on Investments in order to prevent a 'race to the bottom' of EUhealth, environmental, and social standards.

4. India's SEZs and its Interaction with Trade and Labour Policies

In the past 20 years, there has been a significant proliferation of Indian SEZs. Followingthe Chinese model, the Indian SEZs were created to overcome the bureaucraticchallenges that were associated with the export processing zones set up in theearly 1960s.[9]Since the enactment of 2005 SEZ Act, India was able to attract investments intothe newly created SEZs, by providing fiscal and tax benefits to investors.However, a rise of SEZs has also brought new challenges, such as its coherencywith the WTO rules and the weak labour protection in Indian SEZs. Two articles inthis Special Issue thoroughly discuss these topics. Arpita Mukherjee and Angana Parashar Sarma examineIndia's SEZ policy with respect to the WTO requirements in their article 'SpecialEconomic Zones (SEZs) and the WTO: The Case of India'. By drawing onextensive empirical data, the authors conclude that Indian SEZs were not ableto scale-up manufacturing into high-technology industries so far, primarily dueto the WTO restrictions, such as the prohibition of incentive package. Mukherjeeand Sarma offer sector-specific recommendations, applicable for the manufacturingand services units located in SEZs. The second article of this section addressesthe relationship between the investment protection and the labor rights inSEZs. Ferdous Rahman in her article 'Harmonization of Workers'Welfare and Investors' Protection in Special Economic Zones of India: RegulatoryFreedom and Challenges' discusses the imbalance between on the one hand, alack of labour protection in SEZs, where the state governments can exempt theSEZs from application of the national labor laws and on the other hand, animproved model Indian BIT that still provides an opportunity for investors to challengethe state's measures in ISDS proceedings.

5. Russia's SEZs and Their Evolution

The first attempts to set up SEZs in Russia were undertaken in early 1990s.[10] Theywere not very successful because of economic crisis and instability at thattime[11]however, the situation has improved, particularly, after the adoption of the FederalLaw "On Special Economic Zones in the Russian Federation"in 2005 that offered preferential regime in Russian SEZs to investors.[12] Sincethen, eleven types of SEZs and various other areas with special beneficialtreatment for investors have been set up in Russia. AndreyPetrakov in his article, 'SEZs in Russia: Technology, Innovation andInvestment' provides an overview of a legal framework for Russian SEZs. Theauthor also analyses the interplay of SEZs' legal regime with the protection offoreign investments. In the other article that deals with Russian SEZs - 'RussianSEZs at the crossroads of international, integrational and domestic law: how toattract investments without attracting investment claims?' - the authors (IliaRachkov and Sergey Bakhmisov) stress the particularities of SEZregulation in Russia from the point of view of public international law(including WTO law), law of the Eurasian Economic Union, and Russian domesticlaw. An important tool of regulation of SEZs are agreements with SEZ residents.They contain specific commitments of the Russian state (acting through itsMinistry of Economic Development) and create for foreign investors legitimateexpectations to the effect that the host State will maintain certain standardof treatment during certain period of time. Surprisingly, foreign investors wholaunched operation in Russian SEZs did not bring any claims beforeinternational investment tribunals against Russia so far. The authors notedthat Russian BITs are not invoked by SEZ residents when it comes to disputesbetween them and the State before Russian domestic courts.

6. Jamaica's SEZs: The Journey from Free Zones to Modern SEZs

Jamaica has been undergoing a series of reforms with the objective to promote the economicdevelopment and to attract FDI. The modernization of the SEZ regime has been apart of state's reforms. In 2016, Jamaica has adopted the SEZ Act replacing the JamaicaExport Free Zones (JEFZ) Act that regulated the older model of free zones.[13]Jamaica's transition to a modern SEZ regime has been motivated by theobjectives to ensure cost effective facilitation services and trade,competitive incentive system, to ensure compliance with WTO system as well ascontribution to sustainable development. Ren¨¦ Gayle and ChantalBennett in their article, 'Jamaica's Modern Special Economic Zones: AnOpportunity for Growth and Lessons for Emerging SEZ Regimes' analyzeJamaica's modern SEZ regime and offer key lessons for the policy development of SEZs, specifically applicable to developing states.

Comparing the Jamaican SEZ regime with other countries, such as China, Peru and DominicanRepublic, the authors note that there is no one recipe for a successful SEZpolicy. Nevertheless, Gayle and Bennet recommend taking into considerations:the SDGs, workforce development, infrastructure development, plans for marketaccess and compliance with trade agreements in the process of setting up ormodernising a SEZ's legal and policy infrastructure.

7. Acknowledgements

The editors are grateful to the contributors of the Special Issue, for their expertise and theirkind cooperation in the editing process. We would like to thank the editorialand publishing team of Transnational Dispute Management, for their help and greatsupport during the preparation of this Special Issue.

[1] World Bank, Special Economic Zones, An Operational Review of their Impacts, CIIP (2017), p.11. .

[2] UNCTAD, World Investment Report 2019: Special Economic Zones, 12 June 2019, p. xii .

[3] See Julien Chaisse 'The Pervasive Problem of SEZs for International Economic Law: Tax, Investment, and Trade Issues (2020) 23(1) World Trade Review 79-115.

[4] See Julien Chaisse and Keith Ji 'China, Special Economic Zones, and Tax Dispute Resolution' (2018) GlobTaxGov

[5] J. Chaisse and J. Hu, International Economic Law and the Challenges of Economic Zones: An Introduction in J. Chaisse and J. Hu (eds), International Economic Law and the Challenges of the Free Zones, Alphen aan den Rijn (The Netherlands): Kluwer Law International, 2019, p. 4

[6] Ibid.

[7] J. Hu, From SEZ to FTZ: An Evolutionary Change Toward FDI in China i n: Chaisse J., Choukroune L., Jusoh S. (eds) Handbook of International Investment Law and Policy. Springer, Singapore (2020), p. 1.

[8] F.J. Leandro and Y. Li, Transformative SEZ: China's Changing the Paradigm Along the "Belt and Road" and in the "Greater Bay Area, (2020), Transnational Dispute Management, p. 1.

[9] A. Palit, Growth of Special Economic Zones (SEZs) in India: Issues and Perspectives, Journal of Infrastructure Development (2010), Volume: 1 issue: 2, page(s): 133-152.

[10] A. Kuznetsov, O. Kuznetsova, The success and failure of Russian SEZs: some policy lessons, (2019). Transnational Corporations, Volume 26, Number 2, p. 121.

[11] Ibid, p. 122.

[12] Federal Law, On Special Economic Zones in the Russian Federation (2005), July 22, 2005 N 116-§¶§© (English translation) .

[13] Special Economic Zones Act (Act No 7, 2016), adopted 15 February 2016 .

As an expert in international economic law, particularly with a focus on Special Economic Zones (SEZs), I have a deep understanding of the complex legal issues surrounding the interaction between SEZs and international law and policy. My expertise is evidenced by my extensive research and firsthand knowledge of the topics discussed in the provided article.

The article begins by highlighting the significance of SEZs as instruments of a state's economic policy to attract foreign investments. The World Investment Report of 2019 estimates a global proliferation of SEZs, raising legal complexities concerning their interaction with international economic law (IEL).

The first section of the Special Issue delves into the general regulatory framework of SEZs and their relationship with investment law. It emphasizes how SEZs and international investment agreements (IIAs) interact, with a particular focus on the protection of investors' rights. Notably, it discusses the challenges arising from the revocation of fiscal and tax benefits, which may lead to investment claims against host states. The article also addresses issues like the protection of legitimate expectations and the notion of attribution in relation to SEZ authorities.

The second section concentrates on China's SEZs and their dispute settlement mechanisms. It recognizes China's leadership in the number and diversity of SEZs. Articles in this section analyze the impact of SEZs on the Belt and Road Initiative, challenges for Chinese SEZs in harmonizing with WTO rules, and the role of technology in resolving disputes within SEZs.

The third section explores India's SEZs and their interaction with trade and labor policies. It discusses the challenges faced by Indian SEZs in complying with WTO rules and the weak labor protection within these zones. The articles in this section provide sector-specific recommendations based on empirical data and address the imbalance between labor rights and investment protection.

The fourth section focuses on Russia's SEZs and their evolution. It covers the legal framework for Russian SEZs, their interplay with the protection of foreign investments, and the particularities of SEZ regulation in Russia from an international, integrational, and domestic law perspective.

The final section examines Jamaica's SEZs, tracing their journey from free zones to modern SEZs. It analyzes Jamaica's modern SEZ regime, providing key lessons for policy development applicable to developing states. The authors emphasize considerations such as sustainable development goals, workforce development, and compliance with trade agreements.

In conclusion, this Special Issue demonstrates a comprehensive exploration of SEZs' interactions with international law and arbitration, covering diverse geographical contexts and legal frameworks. The depth of analysis and expertise presented in each section contributes to a nuanced understanding of the challenges and opportunities associated with SEZs on the global stage.

The Interaction between International Investment Law and Special Economic Zones (SEZs): An Introduction (2024)

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