1. Rules of Origin and their Importance for Goods Produced in SEZs

The treatment of goods manufactured in SEZs for preferential tariff treatment’s purpose is one of the challenging issues confronting RTAs. From the earlier discussion, the question of whether these products benefitting from incentives can still compete “fairly” with other goods in the free trade area is legitimate. The central issue is the “origin” of goods that can benefit from preferential tariff treatments and whether goods produced in SEZs should be excluded from tariff preferences and thus considered as any other third-country product.

However, there is no one-size-fits-all approach for treating goods manufactured in SEZs in trade agreements. According to the World Customs Organization’s (WCO) guidance on free trade zones, “some” FTAs, on the one hand, include a special provision which excludes products obtained in the SEZs from gaining the origin status to be eligible for preferential tariff treatment.Footnote ⁵⁹ The exclusion of SEZ-manufactured goods is guided by the arguments posited earlier, consisting of considering these goods as somewhat “subsidized”, for they benefit from fiscal and other incentives that reduce the cost of production. Another reason to maintain a restrictive approach to Rules of Origin (RoOs), including for SEZ-manufactured goods, is to limit the opportunity for freeriding. The United States has been particularly erratic in this area. For instance, before the North American Free Trade Agreement (NAFTA) renegotiation and the passing of the United States-Mexico-Canada Agreement (USMCA) Implementation Act in the US, goods manufactured in the US FTZ did not confer origin as US-manufactured goods for preferential tariff purposes.^{Footnote 60} Indeed, the US NAFTA Implementation Act provided that goods produced in US FTZs were not to be treated as originating in any NAFTA country upon entry into the US customs territory.^{Footnote 61} The new USMCA Implementation Act,^{Footnote 62} which repealed the former Act,^{Footnote 63} initially scrapped this restriction before making a U-turn only eleven months later. Indeed, under the January USMCA Implementation Act 2020, FTZs-originating goods were no longer denied preferential tariff treatment.^{Footnote 64} The reason for this paradigm shift seemed at variance with the Trump Administration’s views and desire to “stop the bleeding” from factory closures, job losses and trade deficits.Footnote ⁶⁵ One would have expected somewhat stricter RoOs for SEZ-produced goods to keep in the spirit of NAFTA’s renegotiations objectives.Footnote ⁶⁶ From the turn of things, however, the removal of this relaxation resulted from a drafting mistake immediately addressed by making a set of “technical corrections”.Footnote ⁶⁷ Therefore, a few months later, this restriction disqualifying SEZ-manufactured from UMSCA’s preferential tariff was restored,Footnote ⁶⁸ thus reflecting the US’s enduring position under NAFTA.Footnote ⁶⁹

On the other hand, “many” FTAs in the world grant originating status to products manufactured in SEZs and have an explicit provision for the inclusion of SEZs in the FTA.Footnote ⁷⁰ FTAs do so because the general understanding is that goods produced in SEZs are eligible for tariff preferences as they are originating goods in the territory of the FTA’s contracting parties and meet the applicable origin criteria.Footnote ⁷¹ Nevertheless, the guidance adds that even in this case of admission of SEZ-made products as originating, “the territorial definition” of an SEZ “may impact on eligibility to benefit from a preferential tariff treatment”.Footnote ⁷² Since FTAs generally apply to the customs territory of its parties, an explicit FTA provision is required to include goods produced in SEZs in cases where national legislation defines an SEZ as being outside its customs territory.Footnote ⁷³ How domestic customs laws define SEZs will impact the treatment of goods produced in them, especially because the Revised Kyoto Convention considers that “any goods introduced [in SEZs] are generally regarded, insofar as import duties and taxes are concerned, as being outside the Customs territory.”Footnote ⁷⁴ In other words, the Revised Kyoto Convention stipulates that goods located in SEZs are considered outside a country’s Customs territory concerning import duties and taxes. The corollary of this situation is that goods sold by a company established on the domestic market to an entity established in an SEZ are considered an export for duties and tax purposes. States could, therefore, establish SEZs to produce goods that may be denied origin status, thus excluded from the tariff liberalization schemes in the FTA.

Rules of origin are, therefore, of utmost importance in this scenario, and the tendency seems to favor granting originating status to goods manufactured in SEZs even though some countries’ practices, such as the US, are far from the epitome of consistency. Rules of origin refer to the specific rules applied by a country or group of countries for assigning national origin to a product. The WTO Agreement on Rules of Origin refers to them as “laws, regulations and administrative determinations of general application applied by any Member to determine the country of origin of goods.”Footnote ⁷⁵ An attributed origin may designate a country, even a region or part of a country, depending on the circumstances. Origin can also designate a group of countries, for example, within the framework of a customs union or a free trade area. The rules of origin thus make it possible to apply to each product a tariff, any restrictions, specific trade defense rules (such as anti-dumping or countervailing duties), and, where applicable, tariff preferences or exemptions agreed between the trading partners. Conversely, they prevent non-qualifying originating goods from benefiting from the preferential tariff treatment offered under a trade regime.

It follows that the origin of goods is essential for countries’ customs purposes and the functioning of a regional trade agreement. Countries’ tariff schedules usually set different rates for the same products depending on their origin. While these differentiated rates would typically violate the cardinal MFN principle, they could result from preferential tariffs accorded to developing countries to implement the Generalized System of Preferences (GSP) schemeFootnote ⁷⁶ or a WTO waiver,Footnote ⁷⁷ constituting a somewhat “positive” discrimination. Rules of origin further find their importance in the implementation of trade policies, notably, as relevant for this paper, in the field of trade remedies.Footnote ⁷⁸ RoOs will therefore serve as the basis for the correct determination of the countervailing duties to be imposed on goods originating in SEZs if they are found to contravene the subsidies rules.

For regional trade agreements and goods produced in partner countries’ SEZs, RoOs define the conditions to which the goods traded between the state parties must comply before they can benefit from the exemption from customs duties on imports. They are referred to as “preferential” RoOs as opposed to “non-preferential” RoOs in the context of the WTO. Preferential RoOs are particularly important in Free Trade Areas (FTAs) and less so in Customs Unions with a common external tariff regardless of the point of a good’s entry.Footnote ⁷⁹ In FTAs, preferences are only accorded to goods originating in a state party to the FTA.Footnote ⁸⁰

International trade is predicated on granting preferential tariffs, whether on a global MFN basis, unilaterally in the context of the GSP, or bilaterally in a reciprocal trade agreement. RoOs ensure that advantages granted to goods originating in beneficiary countries do not benefit imports from third countries. Third countries could be tempted to fraudulently confer on goods produced in their territory, the origin of a state benefitting from tariff preferences. Likewise, RTAs might want to exclude goods manufactured in SEZs from preferential tariff treatment for many reasons, including the protection of their own domestic industries and the preservation of fair competition in the market of a regional trade agreement.

2. African RTAs and the Treatment of Goods Produced in SEZs

African countries face the challenge of SEZs regulation at national, regional and multilateral levels. While industrial policies like this usually garner domestic approvals, for they address economic and social challenges, participation in RTAs could appear as an obstacle. This is because, depending on the framing of the rules, goods originating in one country’s SEZ may be denied preferential tariff treatment in an RTA, thus considered as goods from a third state subject to the default/global MFN tariff. The support for such exclusion may result from the sentiments among African policymakers that established firms in African SEZs are far from being genuinely African.Footnote ⁸¹ Since most of the capital is foreign, the reasoning continues, they do not always benefit the local economies and should equally not benefit from preferential tariff liberalization. However, denying such a benefit would also renege on one of the motives of creating what is referred to in the African trade agreement context as “regional economic communities” (RECs). Likewise, not all firms established in SEZs are foreign-owned. Denying originating status to all SEZ-produced goods would, therefore, also penalize national and other African investors.

The formation of African RECs responds to political and economic imperatives. Understanding these rationales is essential for grasping why the fate of goods produced in SEZs for preferential tariff treatment matters. While from a political standpoint, a united Africa free from colonial bondage was the prime motive, achieving a level of industrialization capable of integrating African economies into the global trading system underpins the formation of RECs.Footnote ⁸² Of the many RECs created in the aftermath of independence,Footnote ⁸³ only eight are recognized by the African Union as building blocs toward the concretization of the African Economic Community.Footnote ⁸⁴ They are the Arab Maghreb Union (AMU),Footnote ⁸⁵ the Common Market for Eastern and Southern Africa (COMESA),Footnote ⁸⁶ the Community of Sahel-Saharan States (CEN-SAD),Footnote ⁸⁷ the East African Community (EAC),Footnote ⁸⁸ the Economic Community of Central African States (ECCAS),Footnote ⁸⁹ the Economic Community of West African States (ECOWAS),Footnote ⁹⁰ the Intergovernmental Authority on Development (IGAD),Footnote ⁹¹ and the Southern Africa Development Community (SADC).Footnote ⁹² Not all of these RECs contain provisions relating to goods produced on SEZs. Practice is inconsistent, even though the tendency seems to favor granting origin to SEZ-produced goods.

3. RoOs for Goods Produced in SEZs under the AfCFTA

With the creation of the AfCFTA, the question of rules of origin and goods manufactured in SEZs acquired another level of complexity for African states. AfCFTA’s main objective is the creation of a single continental market for goods and services, which, associated with the free movement of business persons and investments, will pave the way for establishing a continental Customs Union.Footnote ¹¹¹ With a market spanning 54 African Union Member States, the AfCFTA is today the largest free trade area in the world in terms of membership, with the potential to also become one of the largest integrated markets in terms of volume of trade when fully implemented. The progressive elimination of tariffs and non-tariff barriers to trade in goods is one of the means to achieve a united continental market.Footnote ¹¹² Adopting an AfCFTA Agreement’s Protocol on Trade in Goods serves to achieve a liberalized market for trade in goods.Footnote ¹¹³

As an FTA, AfCFTA Agreement also provides RoOs in goods and services. The services RoOs govern the conditions to benefit from service liberalization as a service supplier established in one State Party, whether by being a national or a permanent resident. Footnote ¹¹⁴ For the AfCFTA Agreement, goods will be eligible for preferential treatment only if “they are originating in any of the State Parties” in accordance with RoOs conditions and criteria and other product-specific rules to be developed.Footnote ¹¹⁵ These “criteria and conditions” stipulated in Article 13 of the Protocol on Trade in Goods are located in Annex 2 of the Protocol on Trade in Goods.Footnote ¹¹⁶ This is also where the definition of an SEZ is provided. Indeed, Article 1(u) of Annex 2 to the AfCFTA Protocol on Trade in Goods describes them as “Special Economic Arrangements” or “Special Economic Zones”. It then defines them as “special regulatory provisions applicable in a geographical demarcation within a State Party’s Territory where the legal, regulatory and fiscal and Customs schemes, applicable to business differ, generally in a more liberal way, from those in application in the rest of that State Party’s Territory”.Footnote ¹¹⁷

For goods produced in SEZs, the AfCFTA Agreement’s Protocol on Trade in Goods addresses them as a “complementary” policy in Part VII of the Agreement (including “infant industries” policiesFootnote ¹¹⁸ and “state trading enterprises” policies).Footnote ¹¹⁹ The Agreement recognizes the right of AfCFTA State Parties to “support the establishment and operation of special economic arrangements or zones for the purpose of accelerating development.”Footnote ¹²⁰ The developmental aspect of SEZs is therefore acknowledged. However, for goods in SEZs, the Protocol on Trade in Goods seems to distinguish, although elusively, between products “benefitting from” SEZsFootnote ¹²¹ and the trade of products “manufactured” in SEZs.Footnote ¹²² For the former, i.e. goods “benefitting” from SEZs, the regulations will intend to address how they should be treated, while the latter deals with how they would be traded.

For products “benefitting” from SEZs, Article 23(2) of the AfCFTA Agreement’s Protocol on Trade in Goods states that the Council of Ministers will develop appropriate regulations, which “shall be in support of the continental industrialization programmes [sic]”. Therefore, SEZs form part of the continental industrial programs and the treatment of goods in them is crucial to realizing these objectives. The development of these regulations constitutes outstanding issues under the RoOs negotiations.Footnote ¹²³ For goods “manufactured” in SEZs, their trade within the AfCFTA is subject to RoOs.Footnote ¹²⁴ In this regard, Article 9(1) of Annex 2 of the Protocol on Trade in Goods stipulates that they “shall be treated as originating” goods if they meet the requirements of the RoOs. Moreover, State Parties are required to “take all necessary measures” to ensure that goods which are traded under cover of proof of origin and which, during their transportation use an SEZ situated in their territory, “shall remain under the control of the Customs Authority and are not substituted by other goods”.Footnote ¹²⁵ In other words, Customs Authorities shall ensure that goods that transit through SEZs are not substituted with goods manufactured in SEZs or brought from other places simply for the purpose of being shipped to the destination market. Goods smuggling is known to be a real problem within SEZs,Footnote ¹²⁶ hence the imperative of strict and effective customs controls. However, transiting goods in SEZs may require handling necessary to preserve the commodities in good condition, which would be tolerated.Footnote ¹²⁷

Interestingly, an outstanding provision addresses a situation where a product is imported from a State Party into an SEZ. This is generally the case for inputs for the manufacturing of other products. The end product would eventually qualify as originating in the SEZ subject to undergoing substantial processing or transformation per the RoOs criteria.Footnote ¹²⁸ This would be in contradiction with EAC RoOs that deny originating status to final goods whose inputs come from an SEZ.Footnote ¹²⁹ Criteria for determining the origins of goods under the AfCFTA RoOs are classic ones. The first is the “wholly obtained” product in a State Party,Footnote ¹³⁰ and the second criterion is the “substantial transformation” in a State Party.Footnote ¹³¹ It is out of the scope of this paper to study these criteria in detail. Suffices it to say that goods manufactured in SEZs must meet these criteria to be treated as originating in one State Party and benefit from preferential tariff treatment. The AfCFTA Agreement, therefore, treats SEZ-produced goods as originating, as most African RECs studied earlier.

As mentioned above, African countries face challenges in treating SEZ-produced goods not only in the AfCFTA (continental) but also in the RECs (regional). The AfCFTA’s regime thus adds another layer of complexity to the matters. FTAs created by RECs are recognized as AfCFTA’s “building blocs”,Footnote ¹³² thus a potential for overlap and even conflict of RoOs and treatment of SEZ-produced goods if not carefully framed and implemented. There is no apparent conflict between AfCFTA RoOs and many African RECs FTAs RoOs concerning the treatment of goods produced in SEZs. They agree that goods produced in SEZs will be granted preferential tariff treatment as any goods manufactured in the “territory” of State Parties. One can, therefore, not anticipate significant legal problems with the free movement of goods produced in African countries’ SEZs under AfCFTA rules.

One such challenge lies with ECOWAS RoOs that do not recognize SEZ-produced goods as originating products and the EAC RoOs that exclude outputs made from subsidized inputs. How, then, to reconcile ECOWAS restrictive regime for SEZ-produced goods with AfCFTA liberal regime? For a long time, overlapping membership in African RTAs has been identified as one of the central and tenuous problems preventing them from realizing their full potential.Footnote ¹³³ The DRC, which belongs to at least six RECs,Footnote ¹³⁴ is often pointed out as an example of this problem.Footnote ¹³⁵ As a result of this observation, AfCFTA aims to “resolv[e] the challenges of multiple and overlapping trade regimes to achieve policy coherence.”^{Footnote 136}

One solution to the problem of overlapping and conflicting RoOs between AfCFTA and extant RECs for goods made in SEZs can be found in the AfCFTA conflict rules. It is not novel to deal with conflicts when two or more treaties concluded between the same parties relate to the same subject matter. The lex specialis and the lex posterior principles are often used in trade agreements to address conflicts. Under the lex specialis principle, priority is given to the more specific norm whenever two or more norms deal with the same subject matter. This is, for instance, the case of the AfCFTA Dispute Settlement Protocol, which states that it shall apply to all disputes under the AfCFTA Agreement “subject to such special and additional rules and procedures on dispute settlement contained in the Agreement.”Footnote ¹³⁷ That provision further reiterates that if “there is a difference between the rules and procedures of [that] Protocol and the special or additional rules and procedures in the [AfCFTA] Agreement, the special or additional rules and procedures shall prevail.”Footnote ¹³⁸ This technique would not prove helpful for RoOs of SEZs goods between AfCFTA and other African RECs since they are all specific norms.

On the other hand, lex posterior (derogat legi priori) signifies that “a legal rule arising after a conflicting legal rule prevails over the earlier rule to the extent of the conflict.”Footnote ¹³⁹ The principle applies, for our purposes, to the provisions of conflicting treaties between the same parties,Footnote ¹⁴⁰ in this case, between AfCFTA Agreement’s State Parties and RECs State Parties. Of the existing rules to solve conflicts between treaties, the Vienna Convention on the Law of Treaties (VCLT) has codified the lex posterior principle. Article 30 VCLT addresses conflicts regarding “successive treaties relating to the same subject matter”. It applies to all types of treaties regardless of the subject matter and the number of parties provided the treaties have been concluded at different times – as there must be an earlier and a later treaty for overlap and conflict to arise – and are still in force, and the parties are the same.

However, resorting to this provision to solve a conflict between two treaties is subject to Article 30(2) VCLT, which contains a subordination clause. Accordingly, “[w]hen a treaty specifies that it is subject to, or that it is not to be considered as incompatible with, an earlier or later treaty, the provisions of that other treaty prevail.” In other words, if a later treaty expressly concedes priority to an earlier treaty, Article 30 VCLT will not apply. This provision is, however, silent about a later treaty clause claiming priority over an earlier treaty, as is the case with AfCFTA Agreement (the later treaty) and existing RECs FTAs (earlier treaties).

Article 19 of the AfCFTA Agreement contains a conflict rule, which would be relevant for treating SEZ-produced goods under the AfCFTA RoOs and other (overlapping and conflicting) RoOS, such as the ECOWAS and EAC. Article 19(1) states the following:

This provision suggests that the liberal RoOs under the AfCFTA Agreement that confers originating status to SEZ-produced goods will prevail over conflicting restrictive RoOs in ECOWAS for the ECOWAS Member States that are also AfCFTA State Parties. As ECOWAS Member States have all signed the AfCFTA Agreement, this would, at first sight, seem straightforward if drafters had not included another element of complexity in the texts.

The phrase “except as otherwise provided in this Agreement” in paragraph 1 of Article 19 of the AfCFTA Agreement is given meaning in Article 19(2), which stipulates:

Paragraph 2 takes into account the fact that RECs are AfCFTA’s building blocs and that not all RECs are at the same level of integration. It aims to prevent integration backsliding if more advanced ones were to be required to slow down on their efforts for deeper integration. However, the incidence of this provision on RoOs in extant RECs is unclear and even contradictory. This provision ensures that RECs regimes (including their RoOs) function in parallel with AfCFTA rules when these RECs “have attained among themselves higher levels of regional integration” than under the AfCFTA Agreement. Article 8(2) of the AfCFTA Agreement’s Protocol on Trade in Goods repeats the same call by asking State Parties that are members of other RECs to maintain a higher level of trade liberalization among themselves and, where possible, improve on them.Footnote ¹⁴² Improving on these higher levels of liberalization might entail further restriction on goods produced in SEZs as they may be deemed subsidized, which would conflict with AfCFTA RoOs concerning SEZ-produced merchandise.

The AfCFTA Agreement has erected “best practices” in the RECs as one of its core principles at the same level as MFN, national treatment, reciprocity, etc.Footnote ¹⁴³ Unless one considers restrictive RoOs for goods produced in SEZs a bad practice, this would seem to form part of the RECs “acquis” that the AfCFTA Agreement aims to preserve.Footnote ¹⁴⁴ While this relationship would benefit from further clarification, notably how RECs’ level of liberalization and “best practices” are incorporated by reference in the AfCFTA, the undefined term “higher levels of regional integration” is another hurdle worth clarifying in the future.

1. WTO Subsidies Rules and African SEZs

WTO rules allow Members to recourse to trade defense instruments by adopting restrictive measures in response to particular circumstances. For example, state support practices to promote access of their products to international markets that cause distortions and disrupt the normal functioning of the market of importing countries are considered unfair and predatory competitive practices in the territory of the importing countries. Generally speaking, a trade defense instrument, or trade remedy, is a tool that a state can use to protect itself in the event of these unfair trade practices or a massive increase in imports that could destabilize a domestic industry. While the granting of export subsidies, such as SEZ-induced measures, may be tolerated in certain instances, such as to support developing countries’ industrial policies, some export subsidies are only an aggressive and unfair means of promoting the development of exports. The role of WTO rules is to balance and distinguish between justifiable and prohibited measures.Footnote ¹⁴⁷

Of the three main trade defense instruments – anti-dumping, safeguard, and countervailing measures – countervailing measuresFootnote ¹⁴⁸ respond to imports of products benefiting from undue subsidies, such as SEZs incentives. No blanket provision in the WTO ASCM addresses SEZs as such. Instead, the measures chosen by governments to promote SEZs are those caught by WTO rules. To better grasp the WTO ASCM’s relevance to incentives provided in SEZs, some conceptual clarifications are worth making. The WTO ASCM defines a subsidy as a financial contribution by a government or a public body conferring benefit to the recipient.Footnote ¹⁴⁹

For the ASCM, a financial contribution occurs each time a government makes contributions with a monetary, economic or financial value.Footnote ¹⁵⁰ As mentioned earlier regarding the measures taken to promote SEZ schemes, financial contributions can take many forms. They range from a direct transfer of funds (grants, loans, equity participation), potential direct transfers of funds or liabilities (loan guarantees, for example), and public revenues uncollected or forfeited receivables. A contribution may also have financial value without a direct transfer of funds, such as supplies of goods or services or purchase of goods. The ASCM Agreement, therefore, adopts a rather broad conception of the term “financial contribution.”

According to Article 1.1 of the SCM Agreement, the financial contribution presupposes that revenue “otherwise due” is foregone or not collected. This implies that government authorities have collected less revenue than they could have collected in normal circumstances. On the other hand, revenue foregone means that the government has given up a right to raise revenue that it should or could have collected.Footnote ¹⁵¹ Since governments remain free to choose which transactions to tax, provided they respect WTO rules, what is otherwise due “depends on the rules of taxation that each Member […] establishes for itself.”Footnote ¹⁵² It follows that one must compare the tax that a government would have otherwise collected “but for” a contested measure. Note that footnote 1 to Article 1.1(a)(1)(iii) ASCM provides an exception for “the exemption of an exported product from duties or taxes borne by the like product when destined for domestic consumption, or the remission of such duties or taxes in amounts not in excess of those which have accrued”, which the ASCM states “shall not be deemed to be a subsidy.”

Pursuant to Article 1.2 ASCM, the Agreement only covers “specific” subsidies. Specificity, as further elaborated by Article 2 ASCM, implies that a challenged subsidy must be able to expressly benefit certain enterprises rather than others.Footnote ¹⁵³ So, suppose firms established in an SEZ are the only ones to benefit from a government incentive defined as a subsidy under Article 1.1 ASCM. In that case, the criterion of “specificity” will be met.Footnote ¹⁵⁴ The first threshold question is to determine whether an SEZ program effectively meets the requirement to qualify as a subsidy.

The India – Export Related Measures dispute required the Panel to address the compatibility of an SEZ scheme with the ASCM. In that case, the US challenged a set of measures provided by India in its SEZ program, alleging that they amounted to export subsidies and were thus incompatible with the ASCM. The measures included the following: (i) exemption from customs duties on imports into, and exports from, an SEZ to every developer or entrepreneur; (ii) the exemption from India’s Integrated Goods and Services Tax (IGST) of all goods imported by a unit or a developer in the SEZ; and (iii) the deduction, from the corporate income tax base of an entrepreneur, of the export earnings of the entrepreneur’s SEZ Unit.Footnote ¹⁵⁵ The Panel had no difficulty concluding that these measures amounted to subsidies as they constituted financial contributions.Footnote ¹⁵⁶ The Panel argued that the reasons behind the creation of SEZs were immaterial so long as India forewent revenue otherwise due, thus conferring a benefit. Indeed, for the Panel, while “the promotion of exports is a key reason” behind the SEZ Scheme, other reasons included “the generation of additional economic activity, investment, and employment, and the maintenance of India’s sovereignty.”Footnote ¹⁵⁷

Following the definition of a subsidy, it is worth noting that the ASCM prohibits two types of subsidies: subsidies contingent upon export performanceFootnote ¹⁵⁸ and subsidies contingent on the use of domestic products in preference to imported products (i.e. import substitution subsidies).Footnote ¹⁵⁹ In India – Export Related Measures, the complainant argued that the subsidies under the SEZ program were contingent, in law and, in fact, on export performance. All three SEZ measures were found to meet this threshold as they were all contingent on export performance and thus prohibited.Footnote ¹⁶⁰ It is worth noting that, contrary to the case of RoOs, where subsidized inputs can result in a denial of originating status to the final product,Footnote ¹⁶¹ the ASCM does not consider duty exemption on raw materials and intermediate inputs in the manufacturing of the final products for export as prohibited subsidies.Footnote ¹⁶² In other words, SEZ-produced goods made of subsidized inputs may still be denied originating status for preferential tariff treatment in ECOWAS and EAC, even if they may not fall afoul of the rule prohibiting export subsidies.

These rules that apply to all WTO Members come with some exceptions. To begin with, WTO Members say that they recognize that “subsidies may play an important role in economic development programs of developing country Members,”Footnote ¹⁶³ thereby acknowledging the importance of subsidies, including those made in the framework of SEZ promotion, for developing countries’ industrial policies. Consequently, developing countries can, by virtue of the following provisions, continue to grant export subsidies contingent on export performance without violating WTO rules.

Article 27.2 of the SCM Agreement provides:

According to this provision, some developing countries benefit from a blanket exemption (Article 27.2(a)), while a phase-out is provided for other developing countries (Article 27.2 (b)). These provisions protect qualifying countries’ SEZ programs from the ASCM’s prohibition of export subsidies. In other words, if measures used to promote SEZs and attract investment were to qualify as prohibited subsidies contingent upon export, they would be shielded from inconsistency from WTO rules by Article 27 provisions.

Annex VII of the SCM Agreement, titled “Developing country Members referred to in paragraph 2(a) of Article 27”, provides:

Paragraph (b) of Annex VII provides that countries will graduate from this list if their Gross National Product (GNP) per capita reaches USD 1,000. It is fitting to note that this provision is a testimony that special and differential treatment is not a lifetime permit but a mere license that gives these countries time to gradually bring their domestic support programs into conformity with the ASCM. The license expires when a beneficiary’s GNP attains the designated threshold.Footnote ¹⁶⁵ This is also in line with the spirit of the Enabling Clause, which stipulates that developing countries and LDCs are expected to graduate from special and differential treatment as their capacity to participate more fully in multilateral trade increases.Footnote ¹⁶⁶

When that is the case, listed countries will be subject to paragraph 2(b) of Article 27 ASCM and required to phase out export subsidies within eight years “from the date of entry into force of the WTO Agreement.” Contrary to some developing countries’ views, especially those listed in Annex VII(b) ASCM, the Panel in India – Export Related Measures clarified that this period ran from the entry into force of the WTO Agreement in 1995 and consequently expired in 2003.Footnote ¹⁶⁷ India had argued, supported by Egypt and Sri Lanka, that the period of phasing out export subsidies for graduating countries should be counted from the graduation date.Footnote ¹⁶⁸ According to India, holding the entry into force of the WTO Agreement as the starting point would deprive the mandatory language of paragraph (b) of Annex VII of its effectiveness and diminish the value of special and differential treatment in favor of developing countries by distinguishing between graduating developing countries and the others.

This case proves that SEZ incentives can generate disputes and effectively go against the WTO rulebook. Indeed, the Panel found that the impugned measures, i.e. (i) exemption from customs duties on imports into or export from the SEZ, (ii) the exemption from IGST on imports into the SEZ, and (iii) the deduction of export earnings from the taxable base for corporate income tax qualified as a “financial contribution” within the meaning of Article 1 ASCM. Since they were contingent in law upon export performance – i.e. export was the condition for granting these financial contributions – the Panel had little difficulty concluding that they were incompatible with Article 3.1(a) ASCM.Footnote ¹⁶⁹ The respondent was also found to either grant or maintain subsidies against the provision of Article 3.2 ASCM.Footnote ¹⁷⁰

However, one peculiarity of the India – Export Related Measures dispute for African SEZs is that India had graduated from Annex VII(b) and Article 27.2(a) ASCM. Had this not been the case, its measures would have been compliant with the rules thanks to its status as a developing country. This implies that SEZ schemes from countries such as Senegal, Tanzania or Lesotho are covered by the exception and not inconsistent with the WTO ASCM. Of the 164 WTO Members, as of the date of this writing, 44 are from Africa. Of these 44 countries, 26 are LDCs.^{Footnote 171} Those qualifying African countries, therefore, i.e. those that have not graduated from Annex VII(b) ASCM, continue to benefit from special and differential treatment for export subsidy rules, including subsidies provided in their SEZ programs.Footnote ¹⁷² Conversely, this dispute clamors for the end in the near future of fiscal incentives that countries such as Kenya or Cameroon (featured in Annex VII(b)) use to champion their SEZ programs.Footnote ¹⁷³

2. AfCFTA Subsidies Rules and their Relevance on SEZs Measures

Apart from WTO rules, RTAs frequently contain trade defense instruments to help fight against unfair trade practices. Like the WTO, RTAs also allow recourse to trade remedies when confronted with unfair trade practices. An unfair practice, such as subsidies to goods produced in SEZs, has an ambivalent effect in practice. While systematically penalizing producers of the imported goods, as they would find it difficult to compete with goods obtained under “unfair” terms and conditions, this situation could, at the same time, favor consumers, for they would purchase the same commodity at a lower price. However, governments feel the urge to intervene to ensure equal chances for all competitors. In this intervention, RTAs State Parties rank the community interests higher than consumers’ opportunity for cheaper goods against the producers’ loss in revenue along the way. Trade remedies, therefore, ensure equitable market shares among all economic actors by rebalancing rights and obligations under the RTA. Like with the RoOs, the effect of the “penalty” for subsidized goods originating in SEZs is a denial of the bound or applied preferential MFN tariffs rate.

Despite the presence of trade remedies instruments in several intra-African trade agreements,Footnote ¹⁷⁴ practice does not display their use to be an everyday occurrence. The first intra-African trade dispute on the imposition of a trade remedy, which could have been resolved before a regional court but found its way to the WTO,Footnote ¹⁷⁵ is a testimony of this dearth.Footnote ¹⁷⁶ Nevertheless, the AfCFTA Agreement does not derogate from this established practice in almost all RTAs worldwide by providing its own rebalancing mechanism. Pursuant to Article 17(1) of the AfCFTA Agreement’s Protocol on Trade in Goods, “nothing […] shall prevent State Parties from applying […] countervailing measures.” Hence, State Parties can use countervailing measures if they determine that a subsidized product is entering their domestic market. The only requirement is to do so “subject to the provisions” of the Protocol itself.Footnote ¹⁷⁷ For the practical modalities of application, this provision refers to Annex 9 of the AfCFTA Agreement on Trade Remedies while at the same time insisting on the compatibility of AfCFTA countervailing measures with the relevant WTO law.Footnote ¹⁷⁸

Indeed, Article 2 of Annex 9 stipulates the following:

Annex 9 contains procedural and substantive provisions. From a procedural standpoint, the imposing State Party must investigate before taking action. There is also an invitation to hold consultations and favor the peaceful resolution of possible conflicts.Footnote ¹⁷⁹ From a substantive standpoint, the incorporation of WTO Agreements by reference signifies that AfCFTA’s countervailing measures must be WTO-compliant. AfCFTA’s countervailing duties rules thus appear to concede superiority to WTO rules on subsidies, which, for interpretative purposes, will take priority in case of conflict.Footnote ¹⁸⁰ It follows that while AfCFTA’s rules have direct applicability to SEZs created by State Parties, they must still follow the WTO ASCM since the latter remains applicable in the event of a conflict.

The AfCFTA Guidelines on Implementation of Trade Remedies confirm the pervasiveness of WTO provisions by stating that “relevant provisions of the WTO Agreements […] relating to trade remedies may apply, where applicable” pending the adoption of the Guidelines.Footnote ¹⁸¹ The caution—“where applicable”—and the option—“may apply”—do not really matter for our purpose since the Guidelines must still conform with “relevant WTO Agreements.”Footnote ¹⁸² The caveat merely signals that AfCFTA State Parties, also WTO Members, may directly apply relevant WTO provisions on subsidies and countervailing measures to other African countries’ SEZ-made products under the AfCFTA Agreement. Whether any dispute arising from applying such a measure would be a WTO dispute or an AfCFTA dispute remains to be refined, as it could be a potential incentive for forum shopping.Footnote ¹⁸³

The requirement that the AfCFTA Guidelines on subsidies must comply with WTO ASCM raises another legal issue worth clarifying in the future. In fact, as mentioned above, Article 27 ASCM provides special and differential treatment to developing countries in recognition of the important role that subsidies play in the economic development programs of these countries.Footnote ¹⁸⁴ Likewise, the AfCFTA Agreement contains its own provisions to guarantee a variable geometry and special and differential treatment to State Parties to “ensur[e] comprehensive and mutually beneficial trade in goods” as a recognition that State Parties are at “different levels of economic development” or “have individual specificities.” Footnote ¹⁸⁵ Flexibilities can take the form of “an additional transition period in the implementation” of the AfCFTA Agreement.Footnote ¹⁸⁶ How, then, do AfCFTA State Parties ensure compliance with the WTO ASCM while granting flexibility to deserving AfCFTA State Parties to pursue their industrial policies through SEZs? It is unclear whether granting flexibilities in the AfCFTA to State Parties in addition to special and differential treatment of Article 27 ASCM would fail to conform with the WTO rules incorporated by reference. In other words, it is not clear whether AfCFTA State Parties can get more special and differential treatment by combining the WTO and AfCFTA Agreement or whether any AfCFTA-compliant special and differential treatment must stop at the level authorized by the ASCM. The AfCFTA Trade Remedies Guidelines would need to clarify this scenario that risks diminishing the value of variable geometry and AfCFTA flexibility provisions if the WTO Agreement were to take precedence.

Since the AfCFTA Guidelines on trade remedies’ implementation remain a work in progress, its relationship with existing RECs is also imprecise.Footnote ¹⁸⁷ In effect, “[p]ending the adoption of the AfCFTA Guidelines, the relevant provisions of […] regional economic communities agreements relating to trade remedies may apply, where applicable.”Footnote ¹⁸⁸ This provision further consecrates the co-existence of AfCFTA rules and RECs, as alluded to earlier in the case of RoOs. Of course, one may also argue that since AfCFTA’s countervailing measures are optional – as indicated by the word “may” – State Parties may still use their relevant RECs’ provisions where they exist to tackle unfair trade practices as SEZ measures. This argument is reinforced by our discussion on AfCFTA’s conflict rule that encourages RECs that have achieved a higher degree of integration to keep it and even improve on it if possible.Footnote ¹⁸⁹ It is very likely that trade remedies in these settings might have helped achieve that higher degree of integration. This implies that SEZ-produced goods of other AfCFTA State Parties, not Members of a particular REC, may be regulated by trade remedies provisions of that REC pending the adoption of AfCFTA Guidelines. Despite their recent nature, it is pretty astonishing that AfCFTA Agreement’s Annex 9 on Trade Remedies and the provisions relating to subsidies and countervailing measures are, as of date, summary, incomplete and insufficient to create a robust legal regime for goods produced in SEZs.

Interestingly, unlike WTO ASCM and some extant African RECs, Annex 9 of the AfCFTA Agreement’s Protocol on Trade in Goods does not define the term “subsidy.” However, Annex 5, which concerns AfCFTA’s rulebook for eliminating non-tariff barriers (NTBs), considers subsidies as a “category” of NTBs.Footnote ¹⁹⁰ So, “government aids, including subsidies and tax benefits,”Footnote ¹⁹¹ are a class of NTBs, which the AfCFTA Agreement calls for the “progressive” elimination.Footnote ¹⁹² Consequently, SEZ incentives are regulated by AfCFTA’s trade remedies provisions (Annex 9 to the Protocol on Trade in Goods) and those on NTBs (Annex 5 to the Protocol on Trade in Goods). Admittedly, classifying SEZs incentive measures as NTBs (merely subject to “progressive” elimination) is a lower threshold compared to them being labelled as subsidies which are prohibited or actionable by WTO Agreements and the AfCFTA Annex 9 (incorporating WTO-covered agreements on the matter).

It is worth noting that the reference to WTO rules on subsidies in African RECs is not new. Like Article 2 of Annex 9 of the AfCFTA Agreement’s Protocol on Trade in Goods, the SADC Trade Protocol already made way for WTO law to apply when levying countervailing duties.^{Footnote 193} The SADC regime also resembles the AfCFTA in its treatment of subsidies as a form of NTB. When viewed as an NTB, a SADC Member can request a grace period from the Committee of trade ministers to maintain a subsidy program.Footnote ¹⁹⁴ This could well be SEZ-induced measures. The main difference between the SADC Trade Protocol and the AfCFTA Protocol on Trade in Goods is that the former formally prohibits subsidies, subject to exceptions, while the latter clearly does not. The result is not far from being the same, in any case. In the case of SADC, a Member can maintain a subsidy (regarded as an NTB) and even introduce “a new subsidy” (i.e. after the entry into force of the SADC Treaty prohibiting subsidies) if the subsidy scheme conforms with WTO provisions.Footnote ¹⁹⁵ This is precisely what the AfCFTA subsidies rules provide in substance. The influence of SADC Members in drafting AfCFTA trade remedy instruments, notably subsidies rules, is felt quite strongly.

Although international trade law rules in this paper have focused mainly on “products” fabricated in SEZs, and the accompanying incentives to firms, it is worth noting that the AfCFTA subsidies rules in trade in services unambiguously encourage State Parties to use subsidies “in relation to their development programmes [sic]” as “[n]othing in [the] Protocol [on Trade in Services] shall be construed to prevent” them from doing so.Footnote ¹⁹⁶ This implies that, for our purpose, establishing a services-only SEZ would comply with AfCFTA rules regardless of the types of incentives granted to established firms. Also, discriminating against foreign services and service suppliers under the AfCFTA Protocol on Trade in Services may escape the disciplines, primarily because most rules depend on the extent of State Parties’ specific commitments. The non-prohibition of industrial services subsidies by the AfCFTA services rules is anything but logical. Preventing it would be useless as State Parties may exclude from market access and national treatment commitments the sectors of interest in which they use discriminatory subsidies. One may argue that State Parties expressly allowed services subsidies simply to nudge AfCFTA State Parties to open their sectors progressively after growing national champions and avoid the overuse of MFN exemption lists.Footnote ¹⁹⁷ The slow WTO negotiations on subsidies in the GATS have not been helpful in framing rules on the matter, leaving each WTO Member’s policy space in this field untouched. Why would African countries feel the urge to prevent something that is not yet subject to any multilateral rule in a context where their share in global services trade is not sizable?Footnote ¹⁹⁸

Available data from WTO Members’ trade policy reviews indicate a prevalence of subsidies in six sectors: tourism and travel-related services; transport services; financial services; telecommunication services; and software development services, information and communication technologies related services (ICT), data processing services and telephone call center services.Footnote ¹⁹⁹ The measures include direct grants, tax incentives, preferential credits and guarantees, and equity injections.Footnote ²⁰⁰ It is not always easy to distinguish between subsidies for goods and those directed at services in SEZs. Nevertheless, the WTO Secretariat notes that service providers usually benefit from SEZ incentives if they either supply their services under mode 1 (otherwise known as cross-border supply), i.e. to consumers abroad, or directly to established companies in SEZs (i.e. under mode 3 or mode 4).Footnote ²⁰¹ These services generally include inspection, certification, marketing, distribution, transportation, packaging, and storage services.Footnote ²⁰² Apart from these services connected to the production of goods in SEZs, literature also documents instances of services-only SEZs as a new trend among developing countries.Footnote ²⁰³ It follows that services-only SEZs could also be areas that African countries may want to explore in attracting investment, including e-commerce platforms, IT-related services, call centers and fintech industries, notably for countries where manufacturing may not always be the best option.