According to the latest World Bank’s “Global Economic Prospects” publication, Covid-19 pandemic will have a negative impact on East Asia causing a -1,2% GDP’s reduction in 2020, that is the region’s first recession since 1998’s Asian financial crisis, while China is expected to slow to 1% this year. Among the various consequences that may materialise, the report highlights the disruption of the global and regional value chains. In addition, as stated by UNCTAD World Investment Report 2020 Foreign Direct Investments’ (FDIs) flows are expected to decrease globally by 40% in 2020 and are projected to decrease by a further 5 to 10% in 2021. This scenario would be detrimental for East Asia’s economies and especially for the network of Special Economic Zones (SEZs) located there, which have had and continue to play a fundamental part in the region’s growth. SEZs are intended as delimited areas within a country’s national borders where businesses enjoy a more favourable regulatory and fiscal regime than that of the national territory, with the aim to draw in FDIs, boost exports, increase trade balance and alleviate unemployment.
Of the 5,400 SEZs existing worldwide, three quarters are located in Asia. This balance can be explained by the historical role that these economic enclaves have played in the continent’s development, and especially in that of East and Southeast Asia. In the late ‘60 ASEAN states inaugurated a series of “Export Processing Zones”, that can be considered the early model of SEZs. The aim was to attract foreign multinational corporations willing to relocate abroad their labor-intensive activities, notably in the textile and electronic sectors. The experience proved to be successful, making the region an important hub within the global value chains.
The true watershed in SEZs’ history, however, is linked to China. In 1979, Chinese authorities designed the first SEZs as a consequence of Deng Xiaoping’s “Open Door” policy. The main rationale was to end political and economic isolation by reforming and opening up the Chinese economy through the attraction of FDIs. In order to foster economic growth and enable the country to compete with both industrialized western powers and emerging regional powers such as Japan and Korea, the government established four coastal SEZs in Shenzhen, Zhuhai, Shantou and Xiamen. SEZs’ special regulatory regime enabled China to experiment with market-oriented reforms in these circumscribed areas. The experiment proved to be a breakthrough. According to a 2015’s World Bank report, national SEZs accounted for 22% of China’s GDP, 45% of total national FDIs and 60% of exports, creating over 30 million jobs and accelerating industrialization, agricultural modernization and urbanization.
Beijing’s successful experience served as example for other economies in Southeast Asia. Starting from the ‘90 the region witnessed a new wave of SEZs based on China’s model, especially in the new ASEAN members (Vietnam, Laos, Myanmar and Cambodia). This novel type of SEZs thrived also in this context, especially due to the ability to catalyse FDIs. In 2018 the region received a record 149 billion $ in investments from abroad, consolidating the growing trend of the previous years. The close link between this FDI inflow and SEZs can be best understood by highlighting the Philippines’ case, where around 74% of FDIs between 2010 and 2017 can be directly linked to its SEZs, with other states in the area having similar numbers. Hence, it comes at no surprise that nowadays the number of SEZs in ASEAN is significant and constantly on the rise. According to the latest data, today the region hosts more than one hundred major SEZs and hundreds more of minor size, with others being established, especially in frontier markets as Myanmar and Laos.
China has been playing a major part in Southeast Asia’s SEZs development. In 2006, Chinese government announced the Overseas Economic Cooperation Zones programme aimed at establishing SEZs abroad through state-supported joint ventures between Chinese companies and local players. Since then, a considerable share of Chinese FDIs in the region has been allocated to these areas, where Chinese enterprises benefit of a favourable environment. Recently, following Chinese economy’s slowdown, weakening consumer demand and growth of unemployment, SEZs have become even more central for Beijing’s strategy of expanding its economic presence abroad within the Belt and Road Initiative’s framework.
Besides fostering China’s business interests, in recent times Southeast Asia’s SEZs have started to play a paramount role in the Great Power geopolitical competition that is unfolding in the region. This is true especially for the growing China-Japan rivalry. Even if the main geoeconomic field of competition is the infrastructure sector, a similar pattern can be observed with SEZs. A case in point is Cambodia. Japanese companies were among the first to invest in the country when in 2005 Phnom Penh’s government introduced these special areas. However, recently Beijing has overtaken Tokyo as the country’s main investor, with Chinese FDIs doubling in 2018 alone. The fact that China is gaining ground can be observed by comparing the cases of the Tokyo-funded Sihanoukville Port SEZ and the Beijing-funded Sihanoukville SEZ. The former can be considered a fiasco, because in 2018 only 3 companies were operating there, while the latter is enjoining a considerable success, with more than one hundred enterprises. This different outcome can be explained by the fact that Sihanoukville SEZ is the first economic area developed following a bilateral deal between Chinese and Cambodian governments, testifying so Beijing's special attention to these areas.
Lastly, SEZs have also a key strategic importance for China. The country faces the so-called “Malacca dilemma”, that is the geopolitical problem caused by the fact that the majority of its imports (especially oil) passes through this chokepoint. Lately, Beijing’s authorities have been trying to reduce the over-dependence from this passage by developing alternative routes. In this context, the role of Myanmar’s Kyaukpyu SEZ is paramount. Situated in the bay of Bengal in the Indian Ocean, the area is set to become the sea terminal of the China-Myanmar economic corridor, that is a series of infrastructures connecting Myanmar to China’s Yunnan province, via the construction of a deep-sea port. Despite some voices that the harbour could be used in the future for military purposes, the real Kyaukpyu’s strategic value lies in its role as a hub for oil and gas pipelines directly connecting it to China, alleviating so Malacca’s issue.
As it is evident, in the last years SEZs’ role in Southeast Asia has started to move away from a mere economic dimension to acquire also a geopolitical one, and the growing competition taking place in the Indo-Pacific will likely have consequences also on these enclaves. Finally, other factors, as the aforementioned disruptions caused by Covid-19, the resulting appearance of emergency trade measures that could result in unfair practices and the trade tensions between US and China, may also have spill-over effects on these SEZs, either reducing or increasing their role in ASEAN’s economic and strategic architecture. All in all, whatever impact these concurrent factors will eventually have on Southeast Asia’s SEZs, one aspect emerges clearly: these enclaves represent a key element of analysis to be considered in order to understand regional dynamics.