Why Special Economic Zones? Using Trade Policy to Discriminate Across Importers [Job Market Paper]

Special Economic Zones (SEZs) are a globally common and economically important policy tool used by governments to lower input tariffs for selected manufacturers. Why would a government want to do this? In contrast to existing models, which assume tariffs are uniform across importers, I show how a government that uses tariffs to protect domestic industries can achieve that goal at lower cost to the government by charging different tariffs to different users of the same good. This motivation is fundamentally different than standard price discrimination, as governments will wish to charge different tariffs even to homogenous importers. Furthermore, even when importers are heterogenous and governments have full latitude to set different tariffs on different importers, optimal policy nevertheless follows a simple two-tiered tariff rule. I argue this policy is implemented in practice through selective permission to produce in SEZs. The model predicts that the size of SEZs will depend on the (endogenous) volume of imports in equilibrium and that the industries prioritized for duty-reduced access to a particular intermediate through SEZs will be politically influential, elastic users of the intermediate, and protected in equilibrium by a low ad-valorem equivalent final goods tariff. Using a novel data set I constructed from public records covering the universe of active SEZs in the United States, I show that the model's predictions about the size and industrial composition of SEZs are consistent with the way they are implemented in practice.

Work in Progress:

Special Economic Zones in Developing Countries

Cutting Out the Middleman: The Structure of Chains of Intermediation (with Meredith Startz)