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IMPACT OF WTO MEMBERSHIP ON SPECIAL
ECONOMIC ZONES
Voxidova Mehri Khasanovna
Lecture of Tashkent State University of Oriental Studies, PhD
E-mail:
Abstract:
This article examines the benefits of special economic zones (SEZs) under the WTO
and the legal framework for government subsidies. The studied theoretical and methodological data
are analyzed in practice on the example of China.
Keywords:
World Trade Organization (WTO), Special Economic Zone (SEZ), China, subsidies,
tax and customs benefits, exports.
Аннотация
:
Ушбу мақолада ЖСТ доирасида махсус иқтисодий зоналар (МИЗ) учун
қўлланиладиган имтиёзлар ва давлат томонидан тақдим этиладиган субсидияларнинг
ҳуқуқий асослари ўрганилган. Тадқиқ этилган назарий
-
услубий маълумотлар Хитой
мисолида амалий таҳлил қилинган.
Калит сўзлар:
Жаҳон савдо ташкилоти (ЖСТ), махсус иқтисодий зона (МИЗ), Хитой,
субсидия, солиқ ва божхона имтиёзлари, экспорт.
Аннотация
:
В данной статье рассматриваются преимущества особых
экономических
зон (ОЭЗ) в рамках ВТО и правовые рамки для государственных субсидий.
Изученные теоретические и методические данные проанализированы на практике на
примере Китая.
Ключевые слова:
Всемирная торговая организация (ВТО), Особая экономическая зона
(ОЭЗ), Китай, субсидии, налоговые и таможенные льготы, экспорт.
Introduction
Many developing countries set up export-oriented production zones, special
industrial zones or free trade zones in order to attract more foreign investment and increase
the country's export potential. They provide a system of incentives that are different from
the rest of the domestic economy with developed infrastructure, regulatory and fiscal
policies to attract foreign investment, employment and increase exports in these special
economic zones.
Although none of the multilateral agreements sponsored by the World Trade
Organization (WTO) explicitly specifies the names of special zones, some types of incentives,
which are usually part of economic zone policies, are forced to comply with the terms of the
WTO agreement.
The Agreement on Subsidies and Compensation provides a brief overview of the
application of WTO requirements in incentive programs applied by developing countries in
connection with economic zone programs. As with all legal frameworks, individual rules can
be interpreted differently, and the final decision on the legality of a particular measure
remains with the competent interpretation of the WTO and its members.
In this note, SEZs are defined as geographically separated areas located outside the
customs territory of the country, usually physically protected. They can range in size from a
factory to large cities. SEZs will be managed by the public and private sectors. Typically,
enterprises located in the territory of SEZs can enjoy benefits such as customs and tax
benefits, depending on the location of goods in this zone. Different countries have used
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different names for zones with these features. These are the "industrial free zone" and
"export free zone" in Ireland, the "makiladora" in Mexico, the "duty-free export processing
zone" and the "free export zone" in the Republic of Korea, the "export processing zone" in
the Philippines, and "
investment attraction" in Sri Lanka. zone ”,“ foreign trade zone ”in India
and“ free zone ”in the United Arab Emirates,“ development zones ”may also fit the definition
of SEZs [2, Creskoff, Stephen; Walkenhorst, Peter].
Developing countries are increasingly using SEZs as an important tool for economic
development. A recent study noted that there are more than 2,300 SIZs in 119 developing
and transition countries around the world [3, Fabrice Defever, José ‐ Daniel Reyes, Alejandro
Riaño Miguel, Eduardo Sánchez ‐ Martín]. Since the late 1970s, China has used SEZs to
pursue new economic policies, provide modern infrastructure, and attract investment in
export-
oriented industries. According to the World Trade Organization’s 2008 Trade Policy
Package, in 2006 there were 660 free trade zones and development zones and 1,346
development zones approved by local governments. Following the example of China,
Vietnam is also making extensive use of SEZs to pursue new economic policies, improve
infrastructure and attract investment. As of July 2005, Vietnam had 124 industrial and export
processing zones, involving 3,612 investment projects worth more than $ 15 billion.
At a time when the Republic of Uzbekistan is in the process of negotiations on
accession to the WTO, it is important to analyze the state of special economic zones in the
country and the benefits (reduction or increase) for their residents after accession to the
WTO [1, Cabinet Resolution].
It is worthwhile to study the topic on the example of the benefits provided by SEZs to
SEZs after the accession of developed countries to the WTO.
Level of study of the topic
The topic is covered in theoretical and practical research by scientists from various
developed and developing countries. In particular, Creskoff, Stephen's research highlights
the legal basis for bringing the activities of special economic zones of developing countries
in line with WTO requirements [2, Creskoff, Stephen; Walkenhorst, Peter].
The research of Fabrice Defever José ‐ Daniel Reyes Alejandro Riaño Miguel Eduardo
Sánchez ‐ Martín on the example of the Dominican Republic explores the possibility of
adapting SIZ activities to WTO requirements. According to this article, there is a proposal
and program for the gradual abolition of subsidies and compensations applied in the SIZs of
the Dominican Republic in 2006-
2014 [3, Fabrice Defever, José ‐ Daniel Reyes, Alejandro
Riaño Miguel, Eduardo Sánchez ‐ Martín].
According to Sherzod Shadikhodjaev, the WTO does not provide a special preferential
system for SEZs, and membership in the WTO will lead to the abandonment of opportunities
and benefits created by SEZs for SEZs. The study also proposes to provide special benefits
for SEZs of WTO member states [4, Shadikhodjaev Sherzod].
It should be noted that Uzbek scientists have not yet studied the opportunities or
losses of Uzbekistan's accession to the WTO. Therefore, the study of this topic by the author
is relevant.
Research methodology
The WTO's approach to SEZs and the benefits, preferences and subsidies provided to
them by the state, as well as the analysis and synthesis of its legal framework, provides a
practical analysis of the potential of WTO membership for SEZs in developing countries.
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Analysis and results
With regard to seemingly legitimate measures, the WTO Agreement on Subsidies and
Compensation Measures exempts from the definition of “subsidy” the basic tax exemption
provided by SEZs, i.e. taxes and duties on goods exported from SEZs. Thus, the following
measures related to SEZ are considered legitimate for WTO:
Exemption of exported products from import duties;
Exemption of exported products from indirect taxes;
Exemption from import duties and indirect taxes on the import of consumer goods in
the production process;
Exemption from import duties and indirect taxes during the removal or removal of
industrial waste;
Exemption of goods stored in SEZs from customs duties and indirect taxes;
non-military subsidies, including tax rates applied by national, regional and local
public authorities.
There are two measures related to FEZ programs that are inconsistent with WTO
discipline. They are:
Prohibited subsidies set out in Article 3 of the Agreement on Subsidies and
Compensation Measures pose the greatest problems: export subsidies and subsidies for
import substitution. Export subsidies are subsidies that result from the performance of an
export under this law or in practice. Subsidies of local content are subsidies related to the
use of local goods instead of imports. In particular, government subsidies prohibited by the
WHO under SEZ programs include [2, Creskoff, Stephen; Walkenhorst, Peter]:
- subsidies directly related to exports;
- transport and freight preferences for export;
- provision of local products and services for export on favorable terms with local
goods;
- exemptions or deferrals from direct taxes or social payments, if they are related to
exports;
- Allowing direct special tax deductions for exports in respect of taxes paid on
domestic consumer goods;
- exemption or payment of indirect taxes on exports in respect of goods sold for
domestic consumption;
- payment, exemption or delay of excess taxes on goods sold for domestic
consumption of goods or services used in the production of exported goods;
- provision of export loans or insurance programs at inappropriate premium rates to
cover long-term costs;
- export loans at rates lower than the rates paid for them or market prices, or full or
partial payment of the cost of obtaining a loan;
- Subsidies arising from domestic consumption in respect of imported goods.
While the establishment of free economic zones in China was a trend that began in
the 1980s, the country reconsidered the privileges and preferences in FEZ activities after
joining the WTO in 2001.
In the newly industrialized countries of Asia, including China, regional policy has
become a key mechanism for industrial development and has allowed for the formation of
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“industrial enclaves” of economic growth. Export and science and technology free economic
zones have become widespread in China.
Within the framework of the WTO, various international agreements aimed at
promoting fair competition in the field of foreign trade regulation are applied. The main
contracts include:
Agricultural Agreement;
General Agreement on Trade in Services;
Agreement on Intellectual Property Rights;
Agreement on subsidies and countermeasures;
Agreement on Technical Trade Barriers;
Agreement on sanitary and phytosanitary control measures;
dispute resolution agreement.
According to WHO rules, domestic aid is divided into three baskets: green, black and
blue. The basic principle of basket measurement depends on the impact of international
trade.
Supportive measures that can be applied without restrictions on the green basket. If
these rules are not followed, these measures should be reported to the WTO. In this case,
the WTO Member State must justify that these notified measures meet the green basket
criteria set out in the Agriculture Treaty. There are two main criteria for such compliance: 1)
funding should be provided from the state budget under the state program; 2) support
should not be focused on monitoring the prices of agricultural goods.
Unlike the green basket, the black basket is a measure that has a disruptive effect on
trade in size. Such measures are limited by clearly defined limits, the number of which is
recorded in the list of obligations of each country in absolute terms, in the form of measures
to be supported, called the general measure of support. Member States are required to
coordinate support from that State with WTO members, and commitments on the amount
of assistance they coordinate are included in the list of entry documents. If the overall size
of the support is not included in the list, then only minimal support can be provided within
the basket. Minimum measures for the yellow basket should include a share of support for
the gross value of the product produced: for developed countries - 5%, for developing
countries - 10%.
Custom product support is focused on supporting a specific product or network. Non-
specific product support is provided without reference to a specific product. The measures
allocated by the third basket under the agricultural agreement are aimed at limiting
production.
The main regulation governing export restrictions is the article XI GATT-1994 on the
total abolition of quantitative restrictions. The lack of individualization of the rules governing
the introduction of restrictions allows countries to circumvent a number of rules in
restricting export operations. During the Uruguay Round negotiations, it was agreed that
under the agricultural agreement, import restrictions on agricultural products could only be
in the form of limited tariffs. Thus, there are legal inconsistencies in the regulatory
documents of the WTO in the regulation of export and import restrictions.
After joining the WTO, China was forced to move to liberalize its foreign trade regime
by reducing tariffs and customs controls. In the course of market reforms, the Chinese
government has significantly reconsidered the conditions for attracting foreign investment
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to economic zones, as it has begun to outweigh the incentive effect of budget losses from
providing financial incentives to foreign investors. It should be noted that the program to
reduce the benefits of the Chinese Free Economic Zone was developed in 1990, 11 years
before the country's accession to the WTO. Today, the package of tax benefits in the FEZ
includes only the right to receive preferential rates of corporate income tax. The previous
importance of China's free economic zones for the country's economy depends on the
following facts:
First, the level of market economy in China and the peculiarities of the economic
policy pursued by the Chinese government do not allow for the abandonment of SEZs in the
near future;
Second, strong political forces at the local government level and their lobbyists in
Beijing are interested in the functioning of existing SEZs and the creation of new ones. The
implementation of such a policy towards the SIZ is due to the struggle for economic
resources between the upper and lower governing bodies. This mechanism is based on the
traditions of the collective economy, which were formed over decades and were genetically
pre-reform.
The Protocol on China's accession to the WTO sets the following requirements for the
activities of the SEZ:
Mandatory notification of the competent structures of the WTO on all established
zones, existing legal documents and economic policy measures in relation to these
territories;
The same customs control should be applied to the import of goods into China
through these zones in respect of goods imported into another customs territory of the PRC;
For MIXs to work, all preferential regimes must be based on the principles of national
treatment and non-discrimination, except in exceptional cases.
Thus, the fulfillment of the obligation to abolish subsidies for the export of products
agreed with the WTO. However, there are no export duties at all to promote exports for
many goods in the country. China has also actively used such a tool to encourage exports as
a VAT refund to exporters. Export-oriented Chinese and foreign companies enjoy these
benefits. Upon completion of the export agreement, such enterprises have the right to
submit documents for VAT refund to the Chinese tax authorities. This situation persisted
until 2007, when, according to the decision on VAT refund rates, they were significantly
reduced and some goods were completely abolished. The Chinese government has managed
to reduce imports of agricultural products due to falling domestic prices. In the process of
implementing economic policy, the Chinese government has managed to protect the
domestic market from importers through a number of protective measures aimed at
improving the quality of goods.
The first free economic zones in the Republic of Uzbekistan were established in 2008.
By 2020, the number of free economic zones operating in the country was 22. These include
complex, technological, agro and special farm zones. The benefits provided for in paragraph
3 of the Decree of the President of the Republic of Uzbekistan dated October 26, 2016 No.
PF-4853 "On additional measures to accelerate and expand the activities of free economic
zones" are granted for a period of 3 to 10 years, including the equivalent:
When investing from 300 thousand US dollars to 3 million US dollars - for a period of
3 years;
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When investing from USD 3 million to USD 5 million - for a period of 5 years;
When investing from USD 5 million to USD 10 million - for a period of 7 years;
1. For investments of 10 million US dollars and more - for a period of 10 years, for the
next 5 years the rates of income tax and single tax are applied at a rate 50% lower than the
current rates [5, “Tax and customs exemptions in free economic zones” on the order of
application ”.
In accordance with paragraph 4 of the Decree of the President of the Republic of
Uzbekistan dated December 2, 2008 No. PF-4059 "On the establishment of a free economic
zone in Navoi region" [7, Decree of the President of the Republic of Uzbekistan], business
entities registered in FEZ are exempt from customs duties for raw materials, supplies and
components (excluding customs clearance fees) for the production of goods for export
during the period.
In accordance with paragraph 5 of the Decree of the President of the Republic of
Uzbekistan "On additional measures to activate and expand the activities of free economic
zones" PF-4853 dated October 26, 2016, participants of SEZ "Angren" and SEZ "Jizzakh" are
exempt from customs duties for imported raw materials, supplies and components (except
for customs clearance fees) [8, Decree of the President of the Republic of Uzbekistan].
Conclusion and suggestions
But what will change if Uzbekistan becomes a member of the World Trade
Organization?
profit tax and single tax rates will have to be changed in accordance with WTO
requirements;
Goods transported through the customs territory of SEZs will be subject to the same
requirements as in other regions, ie customs equipment for imported equipment, as well as
raw materials, materials and components for the production of goods for export throughout
the FEZ. will have to pay their fees in the same way as in other parts of the country.
In order to increase the opportunities for the country's SEZs to join the WTO, we offer
the following:
- active use of such a tool in the SIZs of the country, based on the experience of China,
to stimulate exports, a system of VAT refund to exporters;
- Retention of benefits from income or profit tax rates on the territory of SEZs (around
50%);
- Based on the requirements of the WTO, it is necessary to introduce a special product
or network support system and promote this position during the negotiations with the WTO.
It will be possible to introduce a special product or network support system in the activities
of SIZs. That is, if the export of pharmaceutical products is selected as a targeted and
privileged sector in the process of accession to the WTO, it will be possible to support
pharmacies;
- Taking into account the activities of agro-zones in Uzbekistan, it is proposed to
implement the support of agro-zones of the country on the basis of the state program.
However, it should be noted that the opportunities provided to agro-zones should not lead
to lower prices and the use of dumping prices in exports.
It should be noted that while the country's membership in the WTO leads to a
reduction in benefits for SEZs, Uzbekistan's strategic location, raw material reserves, low
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labor costs relative to the world market increase the attractiveness of SEZs and increase
export opportunities and import of high-tech equipment. The process is accelerated.
References
1.
Resolution of the Cabinet of Ministers No. 339 of 28.05.2020 "On approval of the
Regulations on the Interdepartmental Commission for Work with the World Trade
Organization". https://lex.uz/docs/4831763
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Creskoff, Stephen; Walkenhorst, Peter. 2009. Achieving WTO compliance for
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D.C
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World
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Group.
http://documents.worldbank.org/curated/en/155141468337481040/Achieving-WTO-
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ice Defever, José ‐ Daniel Reyes, Alejandro Riaño Miguel, Eduardo Sánchez ‐
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Zs Under the WTO’s Scrutiny: Defining the Scope of
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Netherlands): Kluwer Law International, 2019, Chapter 11, pp. 213-231. Available at SSRN:
https://ssrn.com/abstract=3380893
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"Regulations on the procedure for application of privileges on taxes and customs
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of Ministers No. 196 of April 10, 2017
6.
Decree of the President of the Republic of Uzbekistan "On the establishment of a
free economic zone in Navoi region" dated December 2, 2008 No PF-4059. www.lex.uz
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