Journal of International Economic Law, 2021, 00, 1–22

doi:10.1093/jiel/jgab013

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Original Article

The WTO Agreement on Subsidies and

Countervailing Measures and Unilateralism of
Special Economic Zones
Sherzod Shadikhodjaev*
ABSTRACT
Many governmental incentives unilaterally offered in special economic zones affect com-
petition in international markets and thus fall within the scope of the World Trade Orga-
nization’s Agreement on Subsidies and Countervailing Measures. Until very recently,
products made in such zones could face countervailing duty investigations abroad on
a charge of improper subsidization. In 2019, the World Trade Organization issued its
first ruling focusing on the legality of certain special economic zone subsidies. In par-
ticular, the panel in India—Export Related Measures found fiscal preferences under an
Indian scheme to be prohibited export subsidies. This article examines the status of
special economic zone incentives under the multilateral subsidy regime, discusses the rel-
evant anti-subsidy practice, and identifies ‘risky’ and ‘safe’ types of support measures that
constitute unilateralism of zones in promoting economic activities.

I. INTRODUCTION
Special economic zones (SEZs)—also known as ‘free zones’, ‘free trade zones’, ‘export
processing zones’, or otherwise1 —are a popular scheme of creating a business-friendly
regulatory regime distinct from the rest of the host country. National authorities use
them typically to experiment with new deregulations, promote exports, generate for-
eign exchange earnings, create jobs, attract investment, and encourage technological
transfers and knowledge spillovers.2
In general, governments establish SEZs unilaterally to support various economic
activities often in conjunction with unilateral policy liberalization in trade and
investment on a non-countrywide limited scale.3 As part of such ‘unilateral economic

* Professor, KDI School of Public Policy and Management, Republic of Korea, E-mail:
sherzod1@kdischool.ac.kr. Many thanks go to Julien Chaisse, Georgios Dimitropoulos, and the anonymous
referees for very helpful comments. The author declares that he has no conflict of interest.
1 See FIAS, ‘Special Economic Zones: Performance, Lessons Learned, and Implications for Zone Develop-
ment’ (2008), at 10–11.
2 See UNESCAP, ‘Free Trade Zone and Port Hinterland Development’ (2005), at 7; Michael Engman, Osamu
Onodera, and Enrico Pinali, ‘Export Processing Zones: Past and Future Role in Trade and Development’,
OECD Trade Policy Working Paper No. 53 (2007), at 23–40; Zhongmei Wang, ‘Negative List in the
SHPFTZ and Its Implications for China’s Future FDI Legal System’, 50 Journal of World Trade 117 (2016).
3 At the same time, some zones like cross-border SEZs spanning two or more countries and SEZs jointly
developed under government-to-government partnership can stem from international cooperation rather

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• 1
2 • The SCM Agreement and Special Economic Zones

law’,4 SEZs offer companies fiscal benefits, infrastructure, expedited and simplified

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customs procedures, investment facilitation and protection guarantees, land-use pref-
erences, social amenities, and so on.5
Availability of any of these incentives only to SEZs is what generally makes such
zones unique in terms of attracting companies. This may justify the very presence of
government support in the zones. However, incentives may distort trade by placing
recipients in a more advantageous position in the marketplace than their competi-
tors and thus fall within the jurisdiction of the World Trade Organization (WTO).
The tension between the desire of many governments to maintain SEZs for good pur-
poses and the need to preserve fair, market-based conditions in trade naturally raises
the question of defining appropriate legal boundaries for SEZ policies under WTO
law.
The existing WTO agreements, as a rule, do not treat SEZs differently from the rest
of the host members.6 The WTO accession instruments of 36 members mention SEZs
expressly,7 and most of them lay down member-specific commitments that fall under
any of the following obligation groups: acceptance of the applicability of WTO law to
SEZs, avoidance of discrimination and some performance requirements in SEZs, with-
drawal of fiscal benefits for SEZ products sold domestically, or notification of certain
information on SEZs.8
The aim of this article is to examine the legal status of SEZ incentives under the
WTO Agreement on Subsidies and Countervailing Measures (hereinafter the ‘SCM
Agreement’) by showing the existing legal constraints and flexibilities vis-à-vis SEZs.
Specifically, Part II outlines the WTO subsidy regime and related practice involving
SEZs. Part III discusses the conditions for subjecting SEZ incentives to the provi-
sions of the SCM Agreement. Part IV identifies WTO-tolerable measures and pol-
icy space for unilateral SEZ promotion, followed by Part V concluding this analy-
sis. This article will argue that because of the absence of tailor-made rules in the
SCM Agreement accommodating SEZ subsidies per se, governments should use ‘safe’
types of support measures to preserve uniqueness of SEZs and the related ‘unilateral
economic law’.

than unilateral initiatives of SEZ-hosting countries. See UNCTAD, ‘World Investment Report 2019: Special
Economic Zones’ (2019), at 154–60.
4 For SEZ-related unilateralism/unilateral economic law, see Julien Chaisse and Georgios Dimitropoulos,
‘Special Economic Zones in International Economic Law: Towards Unilateral Economic Law?’ 24 Journal
of International Economic Law (2021), in this issue.
5 UNCTAD, above n 3, at 163, 166–67.
6 Sherzod Shadikhodjaev, ‘International Regulation of Free Zones: An Analysis of Multilateral Customs and
Trade Rules’, 10 World Trade Review 189 (2011), at 196.
7 See, e.g., WTO, Working Party on the Accession of the Republic of Kazakhstan—Report of the Working
Party on the Accession of the Republic of Kazakhstan, WT/ACC/KAZ/93 (23 June 2015), paras 898–934;
WTO, Working Party on the Accession of Viet Nam—Accession of Viet Nam—Report of the Working Party
on the Accession of Viet Nam, WT/ACC/VNM/48 (27 October 2006), paras 284–85. For a review of SEZ-
related accession commitments of 36 WTO members, see Sherzod Shadikhodjaev, ‘SEZs under the WTO’s
Scrutiny: Defining the Scope of Trade Issues’, in Julien Chaisse and Jiaxiang Hu (eds), International Economic
Law and the Challenges of the Free Zones (Alphen aan den Rijn: Kluwer Law International, 2019), 215–22, at
213–31.
8 See Shadikhodjaev, above n 7, at 217–20.
 The SCM Agreement and Special Economic Zones • 3

II. ANTI-SUBSIDY PRACTICE REGARDING SEZ INCENTIVES

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As part of WTO law on merchandise trade, the SCM Agreement has a direct impact
especially on those SEZs where some manufacturing activity occurs.9 In order to fall
within the SCM Agreement, an SEZ measure must meet certain ‘subsidy’ criteria.
Article 1 of the SCM Agreement defines ‘subsidy’ as a ‘financial contribution’ by a
government or public body (or alternatively ‘any form of income or price support’)
conferring a ‘benefit’. Export subsidies and local content (or import substitution) sub-
sidies are ‘prohibited’ by the SCM Agreement and deemed to be ‘specific’ as such.10
All other subsidies that are ‘specific’ to particular enterprises, industries, or regions
and cause ‘adverse effects’ to the interests of other members are ‘actionable’.11 Mem-
bers may counter foreign subsidies through the WTO dispute settlement procedures
or countervailing duty investigations.12
The SCM Agreement applies to SEZ subsidies and non-SEZ subsidies alike. This
is implicitly reinforced by the WTO accession13 instruments that, albeit mention-
ing SEZs by name, do not create a special subsidy regime for SEZs except providing
some transition periods as discussed in Part IV.E below. Indeed, acceding members
have typically committed themselves to observing the WTO subsidy rules in SEZs
and eliminating/avoiding SEZ-related subsidies linked to local content and exportation
requirements.14 These commitments are of such general nature that their substance
would be pertinent even to any non-committing WTO member in principle.
So far, there have been five SEZ-related WTO disputes brought under the SCM
Agreement.15 While the first two disputes mentioned below were on SEZ subsidies,
the remaining three dealt with countervailing measures linked to SEZ subsidies. Given
the absence of a uniform definition of ‘SEZ’, these include only those disputes where
an SEZ is clearly identifiable from the case records.16
India—Export Related Measures is the first adjudication case that specifically scru-
tinized SEZ incentives under the WTO subsidy rules. In this case, the United States
of America (USA) complained about the Indian SEZ scheme that provided for the
exemption from customs duties on imports and exports, the exemption of imports
from the integrated goods and services tax, and the deduction of export earnings from
the income tax.17 These incentives were granted to eligible enterprises (or ‘units’) oper-
ating in SEZs—distinct geographical regions in India, outside the ‘domestic tariff area’,

9 Raúl A. Torres, ‘Free Zones and the World Trade Organization Agreement on Subsidies and Countervailing
Measures’, 2 Global Trade and Customs Journal 217 (2007), at 217.
10 Articles 3 and 2.3 of the SCM Agreement.
11 Part III of the SCM Agreement.
12 Articles 4, 7 and Part V of the SCM Agreement.
13 For WTO accession issues, see, e.g., Julien Chaisse and Jamieson Kirkwood, ‘One Stone, Two Birds:
Can China Leverage WTO Accession to Build the BRI?’, 55 Journal of Word Trade 287 (2021); Sherzod
Shadikhodjaev, ‘Russia and Energy Issues under the WTO System’, 50 Journal of World Trade 705 (2016).
14 See Shadikhodjaev, above n 7, at 215–22.
15 For an overview of subsidy and non-subsidy WTO disputes on SEZs, see ibid, at 225–30.
16 See also James J. Nedumpara, Manya Gupta, and Leïla Choukroune, ‘Special Economic Zones, Free Trade
Zones and International Economic Law Adjudication’, 24 Journal of International Economic Law (2021), in
this issue.
17 Panel Report, India—Export Related Measures, WT/DS541/R, circulated 31 October 2019 (under appeal),
para 7.342.
4 • The SCM Agreement and Special Economic Zones

which apply more liberal economic measures as compared to the rest of the coun-

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try.18 According to the United States (US) Trade Representative, SEZs have had a
tremendous impact on India’s trade: exports from Indian SEZs increased over 6000%
from 2000 to 2017 and accounted for 30% of the country’s export volume in 2016.19
In the report issued on 31 October 2019, the WTO panel observed that export pro-
motion was a key reason behind the SEZ scheme while it also noted other rationales
provided by India, such as the generation of additional economic activity, investment
and employment, and the maintenance of national sovereignty.20 Taking into account
this aspect and the fiscal burden borne by comparable taxpayers outside the SEZs in
contrast to SEZ units, the panel concluded that the incentives at issue amounted to
export subsidies prohibited by Article 3 of the SCM Agreement.21 The panel also found
that, as a result of the graduation from Annex VII(b) of the SCM Agreement,22 India
could no longer rely on the exemption from the Article 3 ban.23 Therefore, the panel
recommended that the contested SEZ subsidies be withdrawn.24
Another case is China—Measures Relating to the Production and Exportation of
Apparel and Textile Products. On 15 October 2012, Mexico requested consultations
with China regarding various subsidies, including tax incentives, preferential prices for
land-use rights, and electricity price discounts for qualifying enterprises located in ‘spe-
cial economic zones’ or ‘economic development zones’.25 However, this dispute did not
move beyond the consultation stage.
As for countervailing duty disputes, China in US—Countervailing Measures (China)
contested US findings of regional specificity for provision of land-use rights within an
‘industrial park’ or ‘economic development zone’. For six of seven challenged investi-
gations of the Department of Commerce (DOC), the panel confirmed inconsistency
with Article 2.2 of the SCM Agreement on regionally specific subsidies.26
Finally, two remaining disputes concerned a procedural issue on data collection. In
US—Carbon Steel (India), India complained about US countervailing duty determi-
nations concerning SEZ-related duty-free importation, excise duty exemptions, duty
drawbacks, income tax exemptions, and other benefits.27 Article 12.7 of the SCM
Agreement allows investigating authorities to make determinations on the basis of ‘the

18 Ibid, para 7.144.

19 Office of the US Trade Representative, ‘United States Launches WTO Challenge to Indian Export Sub-
sidy Programs’, 14 March 2018, https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/
march/united-states-launches-wto-challenge (visited 10 February 2021).
20 Panel Report, India—Export Related Measures, above n 17, paras 7.350–7.353, 7.363, 7.367, 7.379, 7.386,
7.402.
21 Ibid, para 7.533.
22 See Part IV.F of this article.
23 Panel Report, India—Export Related Measures, above n 17, paras 7.28, 7.74, 7.76.
24 Ibid, para 9.19.
25 WTO, China—Measures Relating to the Production and Exportation of Apparel and Textile Products—Request
for Consultations by Mexico, WT/DS451/1, G/L/1004, G/SCM/D94/1, G/AG/GEN/103 (18 October
2012).
26 Panel Report, United States—Countervailing Duty Measures on Certain Products from China (US—
Countervailing Measures (China)), WT/DS437/R, adopted 16 January 2015, paras 7.326–7.355. See also
Panel Report, United States—Countervailing Duty Measures on Certain Products from China—Recourse to
Article 21.5 of the DSU by China, WT/DS437/RW, adopted 15 August 2019, paras 7.298–7.318.
27 Panel Report, United States—Countervailing Measures on Certain Hot-Rolled Carbon Steel Flat Products from
India, WT/DS436/R, adopted 19 December 2014, n 803 to para 7.474.
 The SCM Agreement and Special Economic Zones • 5

facts available’ when a target member or party is not cooperative in providing necessary

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information. Citing such lack of cooperation, the DOC used the facts available on
record and found that the above measures were subsidizing India’s company Tata. But
the panel concluded that contrary to Article 12.7, the USA had actually failed to identify
any evidence on the record that would constitute a ‘factual foundation’ for the DOC’s
determination against Tata.28
Further, Article 12.7 of the SCM Agreement was also invoked in US—Facts Avail-
able. In response to the DOC’s questionnaire, Korean company POSCO denied having
any facilities in a ‘free economic zone’ and receiving any subsidies there, but the DOC
subsequently verified this information and discovered the POSCO Global R&D Cen-
tre in Incheon’s zone. The Korean government’s questionnaire response in the record
did not concern whether POSCO maintained a facility in a zone, but instead clearly
stated that none of the investigated parties including POSCO received ‘tax reductions
or exemptions, lease fee reductions or exemptions, or grants or financial support due
to their location in a free economic zone’. The panel found that the DOC had acted
inconsistently with Article 12.7 by resorting to facts available with respect to informa-
tion regarding POSCO’s facility in question because it had erroneously disregarded the
Korean government’s response on this issue.29
Compared to the WTO dispute settlement procedures, countervailing duty inves-
tigations30 have a longer history of scrutinizing SEZ incentives. For instance, the US
DOC’s investigation records dating back to the 1980s made some references to cer-
tain SEZ schemes in Colombia, Costa Rica, Malaysia, Thailand, and Indonesia, among
others.31
Table 1 provides some investigation examples concerning SEZ measures by Iran,
India, China, Korea, Turkey, the United Arab Emirates (UAE), Viet Nam, Pakistan, and
Oman. There, the investigated incentives took the form of preferential charges, financial
support, and provision of goods, with the majority found to be countervailable subsi-
dies. Being exposed to the WTO judicial review,32 the subsidy determinations made
by national authorities are not necessarily legally correct under the SCM Agreement.
However, these and other relevant domestic cases—surpassing the number of WTO
subsidy disputes involving SEZs—deserve special attention as they supplement WTO

28 Ibid, paras 7.474–7.475.

29 Panel Report, United States—Anti-Dumping and Countervailing Duties on Certain Products and the Use of Facts
Available, WT/DS539/R, circulated 21 January 2021, paras 7.280–7.291; see also paras 7.358–7.363.
30 For countervailing measures in general, see, e.g., Alan Sykes, ‘Countervailing Duty Law: An Economic
Perspective’, 89 Columbia Law Review 199 (1989).
31 See US DOC: ‘Roses and Other Cut Flowers From Colombia; Final Results of Countervailing Duty Admin-
istrative Review’ [C-301-003], 28 December 1987, 52 FR 48846; ‘Preliminary Affirmative Countervailing
Duty Determination; Portland Hydraulic Cement From Costa Rica’ [C-233-410], 21 September 1984, 49
FR 37134; ‘Final Negative Countervailing Duty Determinations; Certain Textile Mill Products and Apparel
From Malaysia’ [C-557-401], 12 March 1985, 50 FR 9852; ‘Final Affirmative Countervailing Duty Determi-
nation and Countervailing Duty Order; Certain Apparel From Thailand’ [C-549-401], 12 March 1985, 50
FR 9818; ‘Preliminary Affirmative Countervailing Duty Determinations; Certain Textile Mill Products and
Apparel From Indonesia’ [C-560-401], 21 December 1984, 49 FR 49672.
32 See Article 30 of the SCM Agreement; the Declaration on Dispute Settlement Pursuant to the Agreement on
Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 or Part V of the Agreement
on Subsidies and Countervailing Measures.
 6 •

Table 1. Examples of countervailing duty investigations involving SEZs

SEZ-
hosting
Investigating targeted
jurisdiction Investigation type Targeted product country SEZ/Scheme Incentives Findings Source

European Original Polyethylene Iran, UAE Petrochemical SEZ Duty-free imports Countervailable Commission
Union (EU) investigation terephthalate (Iran) and Free of inputs and subsidy in the Regulation (EU)
(preliminary and Trade Zone of capital goods form of govern- No 473/2010
final results) Ras Al Khaimah (Iran) and duty- ment revenue (31 May
(UAE) free imports of foregone 2010); Council
capital goods Implementing
(UAE) Regulation (EU)
No 857/2010 (27
September 2010)
The SCM Agreement and Special Economic Zones

EU Original Stainless steel wires India SEZs/Export- N/A De minimis subsidy, Commission
investigation oriented units so no further Regulation (EU)
(preliminary analysis needed No 419/2013 (3
results) May 2013)
USA Administrative Hot-rolled steel flat Korea Free economic Tax reduc- Determined not DOC,
review (final products zones tions/exemptions, to be used or Memorandum
results) grants and finan- not to confer on C-580-884,
cial support, and a measurable 84 FR 28461 (19
lease fee exemp- benefit June 2019)
tion/reduction
(continued)

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Table 1. (Continued)
SEZ-
hosting
Investigating targeted
jurisdiction Investigation type Targeted product country SEZ/Scheme Incentives Findings Source

USA Administrative Circular welded Turkey Organized Provision of free Countervailable DOC,
review (pre- carbon steel pipes industrial zones land and property subsidies in the Memorandum
liminary and tubes tax exemption form of provision on C-489-502,
results) of goods, gov- 84 FR 21327 (14
ernment revenue May 2019)
foregone
USA Original inves- Laminated woven Viet Nam Special zones and Land rent exemp- Countervailable DOC,
tigation (final sacks industrial zones tion, provision of subsidies in the Memorandum
results) utilities (water, form of govern- on C-552-824,
power, etc.) ment revenue 84 FR 14647 (11
at preferential foregone and April 2019)
rates, income provision of
tax preferences, goods
and import duty
exemption
USA Original inves- Circular welded Pakistan Export processing Import duty Countervailable DOC,
tigation (final carbon-quality zones exemptions for subsidies in the Memorandum
results) steel pipe input materials, form of govern- on C-535-904,
plant equipment, ment revenue 81 FR 75045 (28
and machinery foregone October 2016)
The SCM Agreement and Special Economic Zones

(continued)
7 •

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 8

Table 1. (Continued)
•

SEZ-
hosting
Investigating targeted
jurisdiction Investigation type Targeted product country SEZ/Scheme Incentives Findings Source

Canada Original inves- Thermoelectric China SEZs Income tax Countervailable Canada Border
tigation (final coolers and reduction subsidies in the Services Agency
results) warmers form of govern- (CBSA), State-
ment revenue ment of Reasons
foregone on 4214–21
AD/1372,
4218–25 CV/121
(25 November
2008)
Canada Original inves- Aluminium China Coastal economic Income tax Countervailable CBSA, Statement
tigation (final extrusions open areas and reduction subsidies in the of Reasons
The SCM Agreement and Special Economic Zones

results) economic and form of govern- on 4214–22

technological ment revenue AD/1379,
development foregone 4218–26 CV/124
zones (3 March 2009)
Canada Original inves- Carbon steel Oman, Sohar Indus- Provision of land No countervailable CBSA, Statement
tigation (final welded pipe UAE trial Estate or buildings benefit conferred of Reasons
results) (Oman), free on 4214–36
trade zones, or AD/1396,
special industrial 4218–34 CV/132
areas (UAE) (26 November
2012)
Source: Compiled by the author from the EU, USA, and Canadian databases on countervailing duty investigations.

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 The SCM Agreement and Special Economic Zones • 9

disputes in providing a more complete picture of the worldwide anti-subsidy prac-

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tice with ensuing implications for SEZ policies. Indeed, while WTO disputes typically
strive to outlaw contested subsidies, countervailing duty investigations aim to neu-
tralize subsidized imports’ injury to domestic industry rather than stopping foreign
subsidies per se. But such multilateral and domestic tracks may commonly make tar-
geted governments revisit controversial parts of their SEZ policies to settle and/or
avoid trade frictions.33
Part II has shown that trade-distorting subsidies stemming from SEZ unilater-
alism are exposed to external legal challenges. Although SEZs generally facilitate
pro-liberalist unilateral market openings, this does not immunize the associated gov-
ernment favours against WTO subsidy control if they meet certain conditions34 as
discussed in the following analysis.

III. SEZ INCENTIVES FALLING UNDER THE SCM AGREEMENT

This part considers the main WTO standards that keep SEZ incentives under the
purview of the SCM Agreement. The focus is on substantive parameters for defining
WTO-regulated subsidies and the procedural requirement to notify subsidies.

A. Whether a ‘subsidy’ exists

Article 1.1 of the SCM Agreement provides an exhaustive list of the types of finan-
cial contributions, so not every public transaction creating benefit would necessarily
be captured by this agreement.35 Specifically, a financial contribution may take the
form of (i) a (potential) direct transfer of funds, (ii) the foregoing of government rev-
enue otherwise due, (iii) government provision of goods or services other than general
infrastructure or government purchase of goods, or (iv) government’s payment to a
funding mechanism or entrustment/direction of a private body to make any of the
financial contributions in (i) to (iii).36

33 Although anti-subsidy WTO rulings appear to put greater pressure on a subsidizing country (that can face
retaliation in case of non-compliance), the countervailing of an SEZ subsidy by multiple countries (especially
major export destinations of SEZ products) may also cause the targeted government to discontinue or revise
that subsidy. In addition, under Article 18 of the SCM Agreement, the government may voluntarily undertake
to eliminate or limit the subsidy with a view to causing suspension or termination of a countervailing duty
procedure.
34 Engman, Onodera, and Pinali, above n 2, at 45.
35 Appellate Body Report, United States—Final Countervailing Duty Determination with Respect to Certain Soft-
wood Lumber from Canada (US—Softwood Lumber IV), WT/DS257/AB/R, adopted 17 February 2004, n
35 to para 52.
36 Article 1 of the SCM Agreement states in the relevant part:
1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if:
(a)(1) there is a financial contribution by a government or any public body within the territory of a member
(referred to in this Agreement as ‘government’), i.e. where:
(i) a government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion),
potential direct transfers of funds or liabilities (e.g. loan guarantees);
(ii) government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax
credits); [footnote 1 omitted]
(iii) a government provides goods or services other than general infrastructure, or purchases goods;
10 • The SCM Agreement and Special Economic Zones

SEZ incentives may fall under any of the aforementioned categories. For example,

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the panel in India—Export Related Measures found that the SEZ-related duty and tax
exemptions and deductions amounted to government revenues foregone in the sense of
Article 1.1(a)(1)(ii) because the fiscal treatment applying to SEZ units contrasted with
that in the comparable fiscal situations where enterprises actually had to pay the charges
at issue.37 Domestic investigations have identified other forms of countervailable SEZ
subsidies as well, with some of them shown in Table 1.
An SEZ enterprise is considered to be subsidized if a financial contribution gives it a
‘benefit’—something that makes it better off in the market.38 In this connection, Article
14 of the SCM Agreement on benefit calculations suggests that one should compare the
financial contribution at issue with a relevant commercial (or market) practice to verify
any difference in treatment favourable to the recipient.
In India—Export Related Measures, the panel turned down India’s argument that the
relevant market for a benefit analysis should refer to ‘all entities potentially qualifying
for an alleged subsidy scheme’. Contrary to India’s position, the panel compared the
treatment of enterprises within and outside the SEZ scheme and concluded that this
scheme conferred a benefit as the market itself ‘does not give such gifts’ as the fiscal
preferences at issue.39 It follows that SEZ-specific incentives constituting a financial
contribution would likely be found to confer a benefit to SEZ enterprises by merely not
extending to non-SEZ competitors, provided that the proper market for comparisons
stretches beyond the SEZ territory.40
Subsidy issues have traditionally concerned incentives unilaterally provided by the
SEZ-hosting government itself.41 But the EU has recently shifted from this paradigm
by countervailing SEZ financial support from external sources.42 In an investigation
on imports from Egypt, the European Commission found that China’s preferential
financing for producers in the China–Egypt Suez Economic and Trade Cooperation
Zone in Egypt constituted a countervailable subsidy. It determined that this subsidy
was attributable to the Egyptian government mainly given its bilateral cooperation with
China under the Belt and Road Initiative and beyond.43 Some commentators argue that

(iv) a government makes payments to a funding mechanism, or entrusts or directs a private body to carry
out one or more of the type of functions illustrated in (i) to (iii) above which would normally be
vested in the government and the practice, in no real sense, differs from practices normally followed by
governments[.]
37 Panel Report, India—Export Related Measures, above n 17, paras 7.342–7.403.
38 Appellate Body Report, Canada—Measures Affecting the Export of Civilian Aircraft, WT/DS70/AB/R,
adopted 20 August 1999, paras 154, 157–58.
39 Panel Report, India—Export Related Measures, above n 17, paras 7.456–7.457, 7.452.
40 See ibid, paras 7.451–7.453.
41 See Part II of this article.
42 See Victor Crochet and Vineet Hegde, ‘China’s “Going Global” Policy: Transnational Production Subsidies
under the WTO SCM Agreement’, 23 Journal of International Economic Law 841 (2020).
43 Commission Implementing Regulation (EU) 2020/870 of 24 June 2020 Imposing a Definitive Coun-
tervailing Duty and Definitively Collecting the Provisional Countervailing Duty Imposed on Imports of
Continuous Filament Glass Fibre Products Originating in Egypt, and Levying the Definitive Countervail-
ing Duty on the Registered Imports of Continuous Filament Glass Fibre Products Originating in Egypt, OJ
L 201/10 (25 June 2020), paras 35–48, 85, 94.
 The SCM Agreement and Special Economic Zones • 11

the SCM Agreement seems to exclude such ‘transnational’ subsidization from counter-

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vailing measures because the agreement treats a subsidizing and exporting member as
‘one and the same’ for the purposes of countervailing duty investigations.44

B. Whether the subsidy is ‘specific’

In SEZs that are open only to particular industries, subsidies will be found to be
industry-specific within the meaning of the SCM Agreement. This was the case, for
instance, of Iran’s Petrochemical SEZ, the UAE’s Dubai Auto Free Zone, International
Media Production Free Zone, and Dubai Flower Centre Free Zone as investigated by
the EU authorities.45 But in other zones, specificity of subsidies may not always be that
obvious.
In the past WTO discussions, Turkey, Korea, and Panama argued that their SEZ sub-
sidies were not specific on the grounds that these measures were not tied to exportation,
import substitution, or any particular industries.46 However, many subsidies confined
to SEZs as delimited territories would be considered regionally specific.47 Under Arti-
cle 2.2 of the SCM Agreement, SEZ subsidies are regionally specific if they are limited
to ‘a designated geographical region within the jurisdiction of the granting authority’. In
other words, when the central or regional/local governments provide subsidies to SEZs
while not extending them to the remaining territory under their respective jurisdictions,
these subsidies will have regional specificity as a rule.48
In US—Countervailing Measures (China), the DOC confirmed regional specificity
solely on the basis of its findings that the land provided to producers was located within
an industrial park or economic development zone and that the park or zone was within
the jurisdiction of the seller of the land rights (e.g. municipality or county).49 The panel
held that these findings were insufficient for proving a limitation of access to the sub-
sidy.50 It concluded that the DOC should have additionally found the existence of a
difference in the provision of land within and outside the park or zone:

[W]hether the provision of land-use rights takes place within an industrial park or eco-
nomic development zone can be relevant for the finding of a [subsidy access] limitation,
but only if it is determined that the provision of land within the park or zone is distinct
from the provision of land outside the park or zone. Establishing that the conditions for

44 Crochet and Hegde, above n 42, at 855.

45 Commission Regulation (EU) No 473/2010 of 31 May 2010 Imposing a Provisional Countervailing Duty on
Imports of Certain Polyethylene Terephthalate Originating in Iran, Pakistan, and the United Arab Emirates,
OJ L 134/25 (1 June 2010), paras 22–23, 32, 190.
46 WTO, Committee on Subsidies and Countervailing Measures (SCM)—Minutes of the Special Meeting—
Held on 28 October 2010, G/SCM/M/74 (3 February 2011), paras 26–27; WTO, Trade Policy
Review Body (TPRB)—Trade Policy Review—Report by the Secretariat—Republic of Korea—Revision,
WT/TPR/S/204/Rev.1 (4 December 2008), at 41; WTO, Committee on SCM—Subsidies—Replies to
Questions Posed by the European Communities Regarding the New and Full Notification of Panama—
Revision, G/SCM/Q2/PAN/6/Rev.1 (13 April 1999), at 2.
47 This was the case of, for example, the provision of utilities at preferential rates in Vietnamese industrial zones.
US DOC, ‘Laminated Woven Sacks from the Socialist Republic of Vietnam: Final Affirmative Countervailing
Duty Determination’ [C-552-824], 84 FR 14647 (11 April 2019), Memorandum (4 April 2019), at 23–24.
48 See also Torres, above n 9, at 218.
49 Panel Report, US—Countervailing Measures (China), above n 26, paras 7.333, 7.344.
50 Ibid, para 7.352.
12 • The SCM Agreement and Special Economic Zones

the provision of land within the park or zone were different from and preferential to the

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conditions outside the park or zone, in terms of special rules or distinctive pricing, for
instance, would have established the required limitation.51

Pursuant to the Appellate Body’s interpretation, the term ‘geographical region’ in

Article 2.2 does not depend on the territorial size of the area covered by a subsidy.
Therefore, even when an SEZ constitutes almost all (say 98%) of the territory under
the granting authority’s jurisdiction, that authority’s subsidy given to the SEZ in ques-
tion will likely remain regionally specific if the uncovered area (2%), albeit territorially
small, is nevertheless economically important.52
Contrary to the widespread practice of geographically demarcating SEZs, some
countries like Colombia, the Dominican Republic, and Mexico grant SEZ status to
individual enterprises rather than delimited territories.53 In this case, enterprise- or
industry-specificity would be more pertinent. However, if such enterprise zones are
concentrated within an identifiable territorial site, the regional specificity test may still
come into play. Subsidies in ‘single factory’ export processing zones54 may be found to
be specific in the form of export subsidies.

C. Whether the subsidy is ‘prohibited’

Article 3 of the SCM Agreement prohibits subsidies that are contingent, both de
jure and de facto, upon the recipients’ export performance and use of domestic over
imported goods. Export contingency can easily be proved for SEZ measures falling
under an ‘Illustrative List of Export Subsidies’ in Annex I of the SCM Agreement.
The SEZ subsidies in India—Export Related Measures were found to be de jure
export-contingent because the domestic law ordered SEZ units to meet a net foreign
exchange requirement by, inter alia, exporting goods (or else face a ‘penal action’) and
expressly allowed deductions of the units’ export profits from their taxable income.55
In contrast, when SEZ rules are silent on the contingency issue, it is still possible to
find the export or localization linkage by implication. This could be the case of, for
example, subsidy schemes that ban SEZ-made products from entering the home mar-
ket56 —hence implicitly requiring their exportation abroad—or that set a ceiling on the
use of foreign content in SEZ manufacturing.57

51 Ibid (emphasis original).

52 See Appellate Body Report, United States—Anti-Dumping and Countervailing Measures on Large Residential
Washers from Korea, WT/DS464/AB/R, adopted 26 September 2016, paras 5.234, 5.236.
53 UNCTAD, above n 3, at 146–49.
54 FIAS, above n 1, at 10–11.
55 Panel Report, India—Export Related Measures, above n 17, paras 7.521–7.534.
56 Torres, above n 9, at 220.
57 In the past, the Appellate Body found that a 50% ceiling for the use of imported inputs linked to a tax exemp-
tion violated Article III:4 of the General Agreement on Tariffs and Trade (GATT) by creating a ‘considerable
impetus’ for manufacturers to use domestic over imported inputs. Appellate Body Report, United States—Tax
Treatment for ‘Foreign Sales Corporations’—Recourse to Article 21.5 of the DSU by the European Communities,
WT/DS108/AB/RW, adopted 29 January 2002, paras 212, 220–22.
 The SCM Agreement and Special Economic Zones • 13

D. The obligation to notify

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Article 25 of the SCM Agreement instructs every member to notify its specific subsidies
providing information on a subsidy’s form, amount, policy objective/purpose,
duration, and statistics on trade effects. Despite quite a number of subsidy notifications
mentioning SEZs,58 it seems that some (or perhaps many) SEZ incentives remain
under-notified for different reasons.
Capacity building constraints could prevent members from identifying notifiable
subsidies in SEZs. During its trade policy review, Myanmar openly cited its ‘lim-
ited capacity’ and requested technical assistance from the WTO for making noti-
fications on its SEZ-related fiscal benefits.59 Further, in response to their peers’
inquiries, members may refuse to notify on the grounds that their SEZ schemes
do not meet the subsidy or specificity standards under the SCM Agreement. For
instance, Qatar did not notify incentives in Qatar Science & Technology Park as it
considered this zone to be a ‘non-governmental’ entity.60 Japan argued that its sub-
sidies in Kansai Innovation Comprehensive Global Special Zone were provided ‘to a
wide range of manufacturers and not confined to specific sectors’.61 The UAE denied
providing ‘any subsidies or countervailing offerings in the free zones’ and merely
added that its SEZ preferences were ‘mainly related to tax regime and exemption
from customs duties’.62 China claimed that certain SEZ subsidies counter-notified by
the USA—because of China’s alleged failure to notify on its own—simply did not
exist.63
Nevertheless, peers’ inquiries about non-notified SEZs matter as they can draw
members’ attention to this issue. For example, Viet Nam promised that it would
consider its SEZ-related regulation, said to be omitted from its last notification, in
preparing the next subsidy notification.64

IV. SEZ INCENTIVES (RELATIVELY) TOLERATED UNDER THE SCM

AGREEMENT
While the WTO system regulates many SEZ subsidies, it still leaves some room for gov-
ernments to preserve SEZ unilateralism in promoting economic activities. In particular,
the SCM Agreement allows for discovering certain non-subsidies and relatively ‘safe’

58 A quick search of WTO documents ‘G/SCM/N/*’ with the key word ‘free zone’ reveals over 170 subsidy
notifications (including the repetitive ones) referring to SEZs submitted to the WTO between 1995 and
2020. See https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S001.aspx (visited 10 February 2021).
59 WTO, TPRB—11 and 13 March 2014—Trade Policy Review—Myanmar—Minutes of the Meeting—
Addendum, WT/TPR/M/293/Add.1 (11 June 2014), at 28.
60 WTO, Committee on SCM—Subsidies—Replies to Questions Posed by the United States Regarding the
New and Full Notification of Qatar, G/SCM/Q2/QAT/6 (24 October 2016), section D.
61 WTO, Committee on SCM—Subsidies—Reply from Japan to the Question Posed by the United States
Regarding the New and Full Notification of Japan, G/SCM/Q2/JPN/75 (31 March 2016), at 3.
62 WTO, TPRB—1 and 3 June 2016—Trade Policy Review—UAE—Minutes of the Meeting—Addendum,
WT/TPR/M/338/Add.1 (5 August 2016), at 95.
63 WTO, Committee on SCM—Minutes of the Regular Meeting Held on 27 October 2015, G/SCM/M/95
(2 February 2016), paras 147, 175.
64 WTO, Committee on SCM—Subsidies—Replies to Questions Posed by the United States Regarding the
New and Full Notification of Viet Nam, G/SCM/Q2/VNM/6 (27 May 2016), at 2–3.
14 • The SCM Agreement and Special Economic Zones

subsidies that could be used in SEZs.65 The following sections single out the types of

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measures that are not/less prone to the WTO legal constraints.

A. Provision of ‘general infrastructure’

Article 1.1(a)(1)(iii) of the SCM Agreement suggests that a government’s provi-
sion of ‘general infrastructure’ to SEZ enterprises, as juxtaposed to the provision
of other goods or services, does not constitute a financial contribution and conse-
quently a subsidy. According to the panel’s interpretation in EC and certain member
States—Large Civil Aircraft, infrastructure is ‘general’ when it is ‘not provided to or
for the advantage of only a single entity or limited group of entities but rather is
available to all or nearly all entities’.66 This can be verified on a case-by-case basis
through the assessment of all relevant factors including, inter alia, the existence of
de jure or de facto limitations on access to or use of infrastructure, the circumstances
surrounding the creation of infrastructure, and the nature and type of infrastruc-
ture.67 In contrast, the fulfilment by the infrastructure of ‘a public policy objective’
is largely irrelevant as this aspect does not help distinguish general from non-general
infrastructure.68
Importantly, the panel in EC and certain member States—Large Civil Aircraft made it
clear that no specific type of infrastructure could be predefined as ‘inherently “general”
per se’ and added:69

For instance, in our view, such things as railroads or electrical distribution systems do not
necessarily constitute ‘general infrastructure’.3870
____________________
3870
Take as an extreme example a 2 kilometer stretch of railway from a mine to a min-
eral processing plant, used for transporting raw ore for processing, on land owned by the
mining company. It seems clear to us that the provision by a government of such a railway
cannot properly be considered ‘general infrastructure’ simply because it is a railway.

From the panel’s observations above, it follows that highways, airports, seaports, rail-
ways, and other forms of infrastructure provided by the government to SEZ enterprises
fall outside the scope of the SCM Agreement only if they are widely accessible by non-
SEZ entities as well. This is the case of many ‘customs-free’ zones like warehousing and
logistics service areas that are close to (but themselves do not limit access to) airports,
seaports, or border corridors.70 It may also be economically unreasonable for many
other SEZs not to share access to these or other types of infrastructure that often require
high construction and maintenance costs. As sufficient infrastructure is considered a

65 UNCTAD, above n 3, at 174.

66 Panel Report, European Communities and Certain Member States—Measures Affecting Trade in Large Civil
Aircraft, WT/DS316/R, adopted 1 June 2011, para 7.1036.
67 Ibid, paras 7.1037, 7.1039.
68 Ibid, para 7.1038.
69 Ibid, para 7.1039 and accompanying n 3870.
70 UNCTAD, above n 3, at 135–36.
 The SCM Agreement and Special Economic Zones • 15

key factor contributing to SEZ success,71 the panel’s interpretation of ‘general infras-

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tructure’ offers important policy implications for providing infrastructure support to
SEZs in a WTO-consistent way.

B. Certain fiscal incentives for export production

SEZs can use properly designed border tax adjustments and duty drawbacks72 that, as
per footnote 1 to Article 1.1(a)(1)(ii) of the SCM Agreement, do not amount to a
subsidy:

In accordance with the provisions of Article XVI of GATT 1994 (Note to Article XVI) and
the provisions of Annexes I through III of this Agreement, the exemption of an exported
product from duties or taxes borne by the like product when destined for domestic con-
sumption, or the remission of such duties or taxes in amounts not in excess of those which
have accrued, shall not be deemed to be a subsidy.

In essence, footnote 1 as read together with the cited provisions allows exemptions
of exported products and their relevant inputs from the exporting country’s import
duties or indirect taxes, as well as non-excess refunds (remissions) thereof.73 For exam-
ple, the following fiscal incentives typically provided in SEZs are not considered as a
subsidy:74

• exemptions or remissions of indirect taxes on exported products not in excess of

those levied on like products sold for domestic consumption;
• exemptions, remissions, or deferrals of prior-stage cumulative indirect taxes on
goods or services used in the production of exported products not in excess of
those applicable to goods or services used in the production of like products
sold for domestic consumption; or
• remissions or drawbacks of import charges not in excess of those levied on
imported inputs consumed in the production of exported products.

Conversely, excess remissions on export manufacturing are considered as export

subsidies, and so are export-related incentives on direct taxes and social welfare
charges.75
The inputs eligible for legitimate exemptions or remissions covered by footnote
1 include ‘inputs physically incorporated, energy, fuels, and oil used in the produc-
tion process and catalysts which are consumed in the course of their use to obtain the
exported product’.76 Therefore, the panel in India—Export Related Measures concluded
that the fiscal charge exemptions for capital goods (equipment, machinery, etc.) used

71 Ibid, at 189–91.
72 For duty drawbacks, see Sherzod Shadikhodjaev, ‘Duty Drawback and Regional Trade Agreements: Foes or
Friends?’, 16 Journal of International Economic Law 587 (2013).
73 See Panel Report, India—Export Related Measures, above n 17, paras 7.165–7.188.
74 See Annex I of the SCM Agreement (paragraphs (g)–(i)) as read together with footnote 1 to the SCM
Agreement.
75 Annex I of the SCM Agreement (paragraphs (e)–(i)).
76 Footnote 61 to Annex II of the SCM Agreement.
16 • The SCM Agreement and Special Economic Zones

in export production did not meet the conditions of footnote 1 so as to be excluded

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from the SCM Agreement.77 Presumably driven by the same legal rationale, Costa
Rica requested transitional extensions under Article 27.4 of the SCM Agreement for
its SEZ-related tax exemptions on machinery and equipment used in the production of
exports.78 Similar incentives also exist in other countries’ SEZs and are not necessarily
eligible for the WTO’s special and differential (S&D) treatment.79
As for procedural requirements, Annexes II and III of the SCM Agreement autho-
rize investigators to check whether an exporting country has a reasonable and effective
system of verifying the use and amount of inputs for the purpose of fiscal remis-
sions or drawbacks. In one investigation, the EU authority determined that some duty
drawbacks in an Iranian petrochemical SEZ were a countervailable subsidy due to the
absence of ‘a proper verification system to monitor the amount of duty-free imported
raw materials consumed in the production of the resultant export product’.80 For the
same reason, the EU authority decided to countervail the total amount of unpaid
duties, rather than the excess remission of duties.81 But, according to subsequent WTO
jurisprudence, the mere absence of a verification system does not provide legal grounds
for countervailing the entire amount of duty (or tax) remissions because only the por-
tion of such remissions that is proved to be excess can be countervailed.82 Where such a
system does not exist or works improperly, the investigating authority can still rely on
the ‘facts available’ on record to track excess remissions.83

C. Government support for creating new markets

One study underscores a critical role that technology parks have played in the emer-
gence of software and biotechnology industries in India.84 Indeed, SEZs could be used
for incubating new sectors (like information technology, robotics, and so on) that do
not exist in the SEZ-hosting member yet.85 Depending on circumstances, it might be
economically safe for governments to promote a new industry on a limited SEZ scale,

77 Panel Report, India—Export Related Measures, above n 17, paras 7.196–7.216, 7.255–7.256.
78 See WTO, Committee on SCM—Subsidies—Requests Pursuant to Article 27.4 of the SCM Agreement—
Requests Pursuant to the Procedure in Document G/SCM/39—Costa Rica, G/SCM/N/74/CRI
(20 December 2001).
79 See, e.g., Gabriel Gari, ‘Free Zone Incentives in MERCOSUR Countries and WTO Law’, 6 Global Trade and
Customs Journal 223 (2011), at 236–38, 243–44. For the S&D provisions, see Part IV.F of this article.
80 Commission Regulation (EU) No 473/2010, above n 45, para 29, as confirmed in Council Implement-
ing Regulation (EU) No 857/2010 of 27 September 2010 Imposing a Definitive Countervailing Duty
and Collecting Definitely the Provisional Duty Imposed on Imports of Certain Polyethylene Terephthalate
Originating in Iran, Pakistan, and the United Arab Emirates, OJ L 254/10 (29 September 2010), para 27.
81 Commission Regulation (EU) No 473/2010, above n 45, paras 29–41, as confirmed in Council Implement-
ing Regulation (EU) No 857/2010, above n 80, para 27.
82 Panel Report, European Union—Countervailing Measures on Certain Polyethylene Terephthalate from Pak-
istan, WT/DS486/R, adopted 28 May 2018, paras 7.57–7.60; Appellate Body Report, European Union—
Countervailing Measures on Certain Polyethylene Terephthalate from Pakistan, WT/DS486/AB/R, adopted 28
May 2018, paras 5.126, 5.134, 5.139.
83 Ibid.
84 Geetha Vaidyanathan, ‘Technology Parks in a Developing Country: The Case of India’, 33 Journal of
Technology Transfer 285 (2008), at 285.
85 See also Douglas Zeng, ‘The Past, Present and Future of Special Economic Zones: Their Evolution and
Impact’, 24 Journal of International Economic Law (2021), in this issue.
 The SCM Agreement and Special Economic Zones • 17

so as to reduce possible failure risks, and stop SEZ support after that industry becomes

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mature enough.
Trade economics and law provide some justifications to this end. The infant indus-
try argument in economics supports the idea that government interventions to create
a new industry are warranted when the market itself fails to do so.86 Further, the
Appellate Body in Canada—Renewable Energy/Canada—Feed-In Tariff Program held
that a government’s support for a nascent market would not necessarily constitute a
WTO-constrained subsidy, as such an immature market could not provide appropriate
benchmarks for benefit-discovering comparisons needed for subsidy determinations.87
In particular, the Appellate Body made a distinction between market creation by a
government that ‘does not in and of itself give rise to subsidies’ under the SCM Agree-
ment and government support in existing markets that ‘may amount to subsidies’.88 In
other words, this finding generally acknowledges unilateral economic law of states that
creates new markets via SEZs and other support schemes.89

D. Avoiding or dismantling prohibited subsidies

SEZs must avoid providing prohibited subsidies. But if already in place, these subsi-
dies must be either discontinued or converted into actionable subsidies by withdrawing
the associated export or local content requirements. For example, before the WTO
accession, Kazakhstan removed the eligibility criteria of export orientation and import
substitution from its SEZ rules.90 When Viet Nam entered the WTO, it assured that
enterprises in its export processing zones would no longer be required to export their
production and ‘would only be entitled to incentives in the form, inter alia, of facili-
tation of procedures with respect to investment and rental of land and premises and
facilitation in the supply and training of labour and supply of water, power, and other
utilities’.91
An elimination of export conditionality of subsidies should be supplemented with
the guarantee that SEZ products are not banned from accessing the home market.92
A careful reading of Annex I of the SCM Agreement that enumerates the examples of

86 See Howard Pack and Kamal Saggi, ‘Is There a Case for Industrial Policy? A Critical Survey’, 21 The World
Bank Research Observer 267 (2006), at 269–72.
87 See Sherzod Shadikhodjaev, ‘First WTO Judicial Review of Climate Change Subsidy Issues’, 107 American
Journal of International Law 864 (2013), at 872–77; Sherzod Shadikhodjaev, ‘Renewable Energy and Gov-
ernment Support: Time to ‘Green’ the SCM Agreement?’ 14 World Trade Review 479 (2015), at 485–87;
Sherzod Shadikhodjaev, ‘Promotion of ‘Green’ Electricity and International Dispute Settlement: Trade and
Investment Issues’, 49 The International Lawyer 343 (2016), at 350–52.
88 Appellate Body Reports, Canada—Certain Measures Affecting the Renewable Energy Generation Sec-
tor/Canada—Measures Relating to the Feed-in Tariff Program, WT/DS412/AB/R, WT/DS426/AB/R,
adopted 24 May 2013, para 5.188, emphasis in the quoted part original.
89 For a critical analysis of the Appellate Body’s interpretation in this case, see Rajib Pal, ‘Has the Appel-
late Body’s Decision in Canada—Renewable Energy/Canada—Feed-in Tariff Program Opened the Door for
Production Subsidies?’ 17 Journal of International Economic Law 125 (2014), at 129–36.
90 WTO, WT/ACC/KAZ/93, above n 7, paras 920–21.
91 WTO, WT/ACC/VNM/48, above n 7, para 285.
92 Stephen Creskoff and Peter Walkenhorst, ‘Implications of WTO Disciplines for Special Economic Zones in
Developing Countries’, Policy Research Working Paper No. 4892 (World Bank, 2009), at 37.
18 • The SCM Agreement and Special Economic Zones

export subsidies can be helpful in finding ways of delinking particular types of subsi-

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dies from export performance.93 One empirical study on the Dominican Republic’s
export subsidy reforms in SEZs suggests that while the removal of the export require-
ment from SEZ subsidies will hardly boost exports, it may importantly increase the
investment attractiveness of SEZs and consequently generate substantial welfare gains
and knowledge spillovers.94
Governments can also rely on Annex I(k) of the SCM Agreement to subsidize SEZ
exports in a certain way, free from the Article 3 constraints. Specifically, if they provide
export credits meeting the conditions of a relevant international arrangement (namely,
the Organization for Economic Cooperation and Development arrangement on export
credits), such export credits are not considered an export subsidy prohibited by the
SCM Agreement.
As for import substitution subsidies, WTO law provides some room for legally less
risky alternatives, such as subsidies given directly to input producers (rather than down-
stream subsidies conditioned upon the use of domestic inputs) and stimulation of local
content consumption in government procurement, services, or through the rules of
origin in regional trade agreements.95
In addition, governments may also switch from localization or exportation to other
important and yet ‘WTO-safer’ conditions when granting subsidies to SEZ enterprises.
For example, prohibited subsidies in SEZs could be replaced with subsidies contingent
upon recipients’ compliance with corporate social responsibility—generally, business
commitments vis-à-vis employees, communities, consumers, or the environment with
positive societal impacts. This would help countries continuously subsidize in a socially
desirable way without violating Article 3 of the SCM Agreement and thereby providing
greater legal certainty to investors.96

E. Other tolerable measures

When governmental loans, loan guarantees, and other financial contributions are pro-
vided in SEZs on terms not more preferential than what the market would offer, such
SEZ measures would not be considered as providing a benefit and would thus not qual-
ify as a ‘subsidy’. In this regard, Article 14 of the SCM Agreement specifies the terms
under which certain financial contributions are not deemed as conferring a benefit.
Further, if non-prohibited subsidies in SEZs are made generally available irrespec-
tive of sectoral and locational factors, this would render them unspecific and free from
the WTO subsidy control. Should, however, such ‘generalization’ affect all incentives,

93 For concrete ways of how this could be made under the Annex I list, see ibid, at 31–32.
94 See Fabrice Defever et al., ‘Special Economic Zones and WTO Compliance: Evidence from the Dominican
Republic’, 86 Economica 532 (2019), at 555–56.
95 Sherzod Shadikhodjaev, Industrial Policy and the World Trade Organization: Between Legal Constraints and
Flexibilities (Cambridge: Cambridge University Press, 2018), at 178; Sherzod Shadikhodjaev, ‘India – Certain
Measures Relating to Solar Cells and Solar Modules’, 111 American Journal of International Law 139 (2017),
at 144.
96 James J. Waters, ‘Achieving World Trade Organization Compliance for Export Processing Zones while
Maintaining Economic Competitiveness for Developing Countries’, 63 Duke Law Journal 481 (2013), at
514–24.
 The SCM Agreement and Special Economic Zones • 19

this risks depriving the SEZ of its key merit of being exclusive vis-à-vis the rest of the

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country. Yet, in the case of an SEZ being the only territory within the jurisdiction of
the granting authority (e.g. an entire city designated as an SEZ and subsidized by the
related city administration), a subsidy provided there to all eligible companies across
the board would not be considered region- and industry-specific, whereas exclusiveness
of the SEZ would remain.
Small-scale subsidies could avoid countervailing measures abroad. As stated in
Articles 11.9 and 27.10 of the SCM Agreement, importing authorities cannot coun-
tervail de minimis subsidies—those whose rate is less than 1% and 2% for devel-
oped and developing countries respectively—or subsidies benefiting the negligi-
ble volume of imports. Thus, the European Commission in an investigation on
Indian stainless steel wires decided not to examine the SEZs/export-oriented unit
scheme in detail because the associated level of subsidization turned out to be below
de minimis.97
Many SEZ subsidies in the services sector fall outside the SCM Agreement and
could even evade most of the WTO scrutiny under the General Agreement on Trade
in Services because of the absence of subsidy-specific rules for services trade (albeit
subject to other disciplines applicable in services).98 Yet, there are certain caveats. As
mentioned above, the SCM Agreement does apply to government provision of services
other than general infrastructure and to excess remissions of prior-stage cumulative
indirect taxes on services used in the production of exported products. Furthermore,
the SCM Agreement can also capture a service subsidy that flows down to the pro-
duction of goods. Specifically, the panel in Brazil—Aircraft (Article 21.5—Canada II)
examined non-refundable payments by the Brazilian government to a lender (arguably,
a direct ‘subsidy’ to a supplier of financial services) that provided export credits to pur-
chasers of Brazil-made aircraft. The panel found that, in order for the SCM Agreement
to apply, it must be shown that the benefit from these payments passed through to the
producers of a good, i.e. aircraft.99 Likewise, a subsidy given for research and develop-
ment services in SEZs that ends up creating new products can be caught by the SCM
Agreement.100
Finally, flexible terms for SEZ subsidies can be negotiated during the WTO acces-
sion process. Cape Verde (or Cabo Verde) has been a WTO member since 23 July 2008,
but its commitment to enforce its WTO obligations in its free trade zones was effective

97 Commission Regulation (EU) No 419/2013 of 3 May 2013 Imposing a Provisional Countervailing Duty on
Imports of Certain Stainless Steel Wires Originating in India, OJ L 126/19 (8 May 2013), para 112, as subse-
quently confirmed in Council Implementing Regulation (EU) No 861/2013 of 2 September 2013 Imposing
a Definitive Countervailing Duty and Collecting Definitively the Provisional Duty Imposed on Imports of
Certain Stainless Steel Wires Originating in India, OJ L 240/1 (7 September 2013), paras 46–47.
98 See Shadikhodjaev, Industrial Policy and the World Trade Organization, above n 95, at 96–100.
99 Panel Report, Brazil—Export Financing Programme for Aircraft—Second Recourse by Canada to Article 21.5
of the DSU, WT/DS46/RW/2, adopted 23 August 2001, paras 5.27–5.28, accompanying n 41 and n 42. For
the pass-through issue, see also Sherzod Shadikhodjaev, ‘How to Pass a Pass-Through Test: The Case of Input
Subsidies’, 15 Journal of International Economic Law 621 (2012).
100 Subsidies for research and development are no longer considered as permissible, or ‘non-actionable’, subsidies
under the SCM Agreement.
 20 • The SCM Agreement and Special Economic Zones

as from 1 January 2010.101 Russia’s WTO commitments are ‘subject to the exceptions

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applied for the transition periods … in respect of the goods of certain juridical persons
and individual entrepreneurs of the Kaliningrad and Magadan SEZs’.102 Kazakhstan
secured a transition period until 1 January 2017 with respect to ‘local content require-
ments’ and other specified measures on ‘the goods of juridical persons which had been
registered and active in SEZs and free warehouses prior to Kazakhstan’s accession to
the WTO’.103 Thus, countries awaiting WTO accession may follow suit.

F. Additional flexibilities for developing countries

Many developing countries use SEZs as a tool for economic development.104 However,
promotion of development as such is not the primary objective of the WTO subsidy
regime. Indeed, the economic rationale behind international subsidy regulation is, inter
alia, to prevent negotiated tariff reductions from being eroded by domestic subsidies
and to help governments resist interest groups’ requests for subsidies as a means of pro-
tection from tariff reductions.105 As for the legal rationale, the object and purpose of the
SCM Agreement is to ‘strengthen and improve GATT disciplines relating to the use of
both subsidies and countervailing measures, while, recognizing at the same time, the
right of Members to impose such measures under certain conditions’.106
Nevertheless, Article 27 of the SCM Agreement on S&D treatment does acknowl-
edge a development dimension of subsidies by stating, in paragraph 1, that ‘subsidies
may play an important role in economic development programmes of developing coun-
try Members’. It then provides some flexibility for developing countries’ subsidization
and introduces certain stricter conditions for taking anti-subsidy measures against
developing countries. Some provisions have already expired.107 In practice, SEZs
have been involved mainly in the issues regarding transition periods for prohibited
subsidies.108
Article 27.2 of the SCM Agreement exempts two categories of developing countries
from the ban against export subsidies:

101 See WTO, ‘Cabo Verde and the WTO’, https://www.wto.org/english/thewto_e/countries_e/

cape_verde_e.htm (visited 10 February 2021); WTO, Working Party on the Accession of Cape
Verde—Report of the Working Party on the Accession of Cape Verde to the World Trade Organization,
WT/ACC/CPV/30 (6 December 2007), para 187.
102 WTO, Working Party on the Accession of the Russian Federation—Report of the Working Party
on the Accession of the Russian Federation to the World Trade Organization, WT/ACC/RUS/70,
WT/MIN(11)/2 (17 November 2011), para 1124.
103 WTO, WT/ACC/KAZ/93, above n 7, para 934.
104 See Morial Shah, ‘SEZs as Enabling Tools: Unilateralism, Development and the WTO’, 24 Journal of
International Economic Law (2021), in this issue.
105 See, e.g., Daniel Brou, Edoardo Campanella, and Michele Ruta, ‘The Value of Domestic Subsidy Rules in
Trade Agreements’, WTO Staff Working Paper ERSD–2009–12 (2009); Daniel Brou and Michele Ruta, ‘A
Commitment Theory of Subsidy Agreements’, WTO Staff Working Paper ERSD–2012–15 (2012).
106 Appellate Body Report, US—Softwood Lumber IV, above n 35, para 64.
107 See WTO, Committee on Trade and Development—Special and Differential Treatment Provisions in WTO
Agreements and Decisions—Note by the Secretariat, WT/COMTD/W/239 (12 October 2018), at 61–67.
108 Shadikhodjaev, above n 6, at 206; Torres, above n 9, at 221–22; Creskoff and Walkenhorst, above n 92, at
19–24.
 The SCM Agreement and Special Economic Zones • 21

27.2 The prohibition of paragraph 1(a) of Article 3 shall not apply to:

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(a) developing country Members referred to in Annex VII [namely least-developed
countries (as per Annex VII(a) and the listed developing countries with the
gross national product (GNP) per capita below $1000 per annum (as per
Annex VII(b))].
(b) other developing country members for a period of eight years from the date of
entry into force of the WTO Agreement, subject to compliance with the
provisions in paragraph 4.

Annex VII(b) of the SCM Agreement says that when GNP per capita of a listed
developing country has reached $1000 per annum, that country ‘shall be subject to the
provisions’ of Article 27.2(b). In essence, this entitles the relevant developing country,
which has graduated from Annex VII, to the eight-year transition period. Whether this
period is to be counted from the date of entry into force of the WTO Agreement (i.e. 1
January 1995) or from the date of graduation from Annex VII was a key issue in India—
Export Related Measures. India had graduated from Annex VII in 2017, but in the given
dispute it insisted that its SEZ export subsidies qualified for the eight-year transition
period that allegedly runs from the date of graduation. The USA countered that this
period had already expired on 1 January 2003 as it follows from the plain text of Article
27.2(b) (‘from the date of entry into force of the WTO Agreement’).109 The panel sided
with the USA because, inter alia, the phrase in Annex VII(b) ‘shall be subject to the
provisions’ of Article 27.2(b) renders the eight-year period applicable to the graduating
countries without modifying the content of Article 27.2(b) including the starting date
of that period.110
Immunity of Annex VII countries from the WTO prohibition against export sub-
sidies ceases once a subsidized product’s export competitiveness has reached 3.25% in
world trade of that product for two consecutive calendar years, in which case the related
export subsidy must be phased out over eight years.111
Non-Annex VII developing countries, which were given the eight-year transition
period, could ask for extensions for their export subsidies following the procedures
under Article 27.4 of the SCM Agreement. As a result, the SCM Committee approved
a series of such extensions until the end of 2013, and the final two-year phase-out
period expired on 31 December 2015.112 The beneficiaries of the last extension were
19 members, of which 11 requested extensions for SEZ programmes.113
Unlike the case with export subsidies, the original S&D exemption for local content
subsidies of developing countries and least-developed countries (for five and eight years

109 Panel Report, India—Export Related Measures, above n 17, paras 7.23–7.25, 7.28.
110 Ibid, paras 7.46, 7.74.
111 Articles 27.5 and 27.6 of the SCM Agreement.
112 WTO, General Council—Article 27.4 of the SCM Agreement—Decision of 27 July 2007, WT/L/691
(31 July 2007). See also WTO, Committee on Trade and Development—S&D Treatment Provisions in
WTO Agreements and Decisions—Note by the Secretariat, WT/COMTD/W/219 (22 September 2016),
at 63–64.
113 See WTO, Committee on SCM—Notification Requirements under the Agreement on Subsidies and Coun-
tervailing Measures—Background Note by the Secretariat—Revision, G/SCM/W/546/Rev.7 (31 March
2016), Annex I.
 22 • The SCM Agreement and Special Economic Zones

respectively)114 expired completely, which is probably indicative of the WTO’s general

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preference for export promotion over import substitution.115

V. CONCLUSION
Many incentives under SEZ programmes are subject to the WTO legal constraints
on government subsidies. Until very recently, countervailing duty investigations have
been the main channel for countering foreign SEZ subsidies. However, the recent
panel procedures in India—Export Related Measures represent the first time that a frus-
trated country used WTO litigation with the aim of causing withdrawal of illegal SEZ
subsidies altogether.
With the ever-growing number of SEZs and their implications for market players,
WTO members will likely continue to use both national and multilateral anti-subsidy
tracks to address SEZ-created trade distortions. But SEZs are virtually inconceivable
without zone-specific incentives that make them distinct from the rest of the country
and, hence, a truly special form of ‘unilateral economic law’. As the SCM Agreement
does not contain any provision tailored to SEZ subsidies per se, such SEZ unilateralism
can be maintained through the existing ‘generic’ ways of escaping WTO scrutiny.
In this connection and given the enormous diversity of SEZs and related national
systems, this article has explored various options, rather than a ‘one-size-fits-all’ best
solution, for sustaining SEZ benefits in a WTO-consistent way. As an overall conclusion
to this end, host members should use multilateral legal flexibilities for subsidization,
avoid (or reform the existing) prohibited subsidies, and support zone companies with
non-subsidy measures or actionable subsidies at most.

114 Article 27.3 of the SCM Agreement.

115 Shadikhodjaev, Industrial Policy and the World Trade Organization, above n 95, at 93–94.