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

Special economic zones (SEZs) in developing countries are typically structured differently than in rich countries: they usually require firms to move to zones, are export focused, and grant duty-free access to all intermediates, while in rich countries they are generally not place-based, have significant production for the domestic market, and may only provide duty reductions for a subset of input-output pairs. I provide both a theoretical argument and empirical evidence that developing country SEZs are driven by the same cross-importer tariff discrimination as in rich countries, but that cross-country differences in zone design arise from differences in monitoring costs. When the costs of monitoring flows of goods in and out of zones are sufficiently high, governments adopt coarser tariff-discrimination policies.

Special Economic Zones and Capital Tax Competition

In developing countries, a large share of firms in SEZs are foreign-owned.  Policymakers claim this is a goal of their SEZ policies, which in addition to lowering tariffs for selected firms, frequently also relax capital controls. In this paper, I show that discriminatory intermediate tariffs and relaxed capital controls can be understood as a form of competition for internationally-mobile capital.

Note that longer abstracts of all three works can be found in my CV.