D.P.R. of Korea security issue: P.R. of China’s model of Special Economic Zones as an alternative to Six Party Talks?

D.P.R. of Korea security issue: P.R. of China’s model of 
 Special Economic Zones as an alternative to Six Party Talks? 
 
 
Andrej Agacevic A.Y. 2012 – Master in International Relations    1  
Introduction 
In the past decades, China has demonstrated, over and over, how it is possible to 
pursue development and growth, with “peaceful rise” and the philosophy of 
“harmonious world”. Special Economic Zones and bilateral relations have played a 
crucial role in this development. As for the North Korea, with its stagnant economy, 
hampered by a “military first” ideology, it has brought nothing but trouble to the 
region and to the country itself.  
Arguing that so far, the negotiations that evolved in Six Party Talks were highly 
inefficient in bringing any kind of concrete or permanent solution to North Korea’s 
aggressive defensive policy, I wish to point out how more was achieved through 
bilateral talks between Pyongyang and some of the participants. All the participants 
seem to have personal agendas that in some cases even clash with those of other 
participants, rendering pointless collective talks or efforts.  
China is a world leader and an important presence in the region. Although it 
could seem that just recently has China started to acknowledge its role and has taken 
on responsibilities towards countries that look up to her, I argue that it is just takes a 
thoughtful shift in focus of countries involved in the talks, and China is up to the 
task. By focusing their efforts in Foreign Policy onto bilateral talks, much more 
could be accomplished in North Korea’s case, especially by China, given its 
geopolitical importance and the rich and meaningful experience in the 
implementation and control of the Special Economic Zones that could be of vital 
importance for the opening, development, stabilisation and future progress of 
Pyongyang 
The importance of this study is as clear as it is simple. It plainly points out to 
something that is already there, but that somehow all the participants in the talks 
ignore, or pretend to do so. Is it because of pride, prejudice and unwillingness to 
acknowledge China’s role, its development and Foreign Policy as a Key Solution to 
one of the problems that has been on top of five leading countries agenda’s for 
decades? It is a question that will not be answered here. But if a question is, how do 
we find a solution to the Six Party Talks, then the answer is in here and, ultimately, 
it lies in China’s hands.
D.P.R. of Korea security issue: P.R. of China’s model of 
 Special Economic Zones as an alternative to Six Party Talks? 
 
Andrej Agacevic A.Y. 2012 – Master in International Relations    2  
1. Special Economic Zones 
 
As of today, numerous countries designate areas that possess special economic 
regulations that differ from other economic areas in the same country. Specifically, 
these regulations define and explain measures that concern and aim to attract 
foreign direct investment. Establishing and conducting business in a Special 
Economic Zone - SEZ usually assures that a company is expected to receive tax 
incentives or reductions and is offered the opportunity to pay lower tariffs on 
goods. 
While numerous countries have set up their own Special Economic Zones, China 
can be considered the most successful in using SEZ as a mean to attract foreign 
capital. China has gone even further, bestowing the status of a SEZ not only on 
more ample areas but even on an entire province – Hainan. This is a very distinct 
case as most SEZ around the world are within city limits. 
Here follows a brief overview of the history, development, classification and 
functionality of SEZ around the world, before we shift the focus on the ones 
implemented in China. 
1.1 What defines a Special Economic Zone - SEZ? 
Technically speaking, Special Economic Zones - SEZs are, as Murray defined them, 
‘…geographical areas, governed by one oversight management body, that offer 
special trade incentives to firms who choose to physically locate within them’
1
. 
                                                                                                                                                                   
1 MURRAY, Megan, What Are Special Economic Zones? February 9 2012
D.P.R. of Korea security issue: P.R. of China’s model of 
 Special Economic Zones as an alternative to Six Party Talks? 
 
Andrej Agacevic A.Y. 2012 – Master in International Relations    3  
Countries usually employ their own kind of SEZ, and in doing so adopt their own 
terminology to define them. For instance, Mexico defines its zones as 
“maquiladoras,” Ghana, Jordan and Cameroon, define them “industrial free zones,” 
they are “special export processing zones” in Philippines and Russia calls its “free 
economic zones”. Despite the differences in definitions, each SEZ aims to increase 
trade throughout its respective region by means of offering special trade incentives 
to attract and stimulate local and foreign investment. 
Chronologically speaking, the first modern SEZ was established in Puerto Rico in 
1942. Since then, 135 countries, majority of them being emerging markets, have 
implemented over 3,000 zones. Their development has aided and improved global 
trade relations and has created over 70 million jobs and hundreds of billions of 
dollars in trade revenue.
2
 
Special Economic Zones are usually designed to meet fiscal, social, and 
infrastructure policy reasons. The most important fiscal goal of an SEZ is to aid the 
economic growth, implementing reduced tariffs and efficient customs controls. 
They are also vital tools for companies aiming at cutting costs and improving 
inventory efficiency. SEZ help developing nations in reworking poor, inefficient 
trade policies and non-existent infrastructure.  
Special Economic Zones are generally classified as areas that promote increased, 
streamlined trade via beneficial taxation schemes and diminished customs 
oversight, but many slight differences have emerged within this broad framework 
                                                                                                                                                                   
2 MISHRA Neeraj, SEZ (Special Economic Zone) – An Overview, Challenges, and Future 
July 26, 2008
D.P.R. of Korea security issue: P.R. of China’s model of 
 Special Economic Zones as an alternative to Six Party Talks? 
 
Andrej Agacevic A.Y. 2012 – Master in International Relations    4  
to accommodate specialized industries, working conditions, local infrastructure, 
government monitoring and geographical conditions. 
1.2. Classification of Special Economic Zones 
Free Trade Zone 
The most numerous type of SEZ is a Free Trade Zone -FTZ. An FTZ is a 
geographically enclosed, tax-free area that provides storage, distribution facilities 
for trade, shipping and import/export activities in a reduced regulatory 
environment. That means they generally have less stringent customs controls and 
sometimes looser labour and environmental controls. These zones generally focus 
on tangible parts of international trade. Because many SEZs attract labour-
intensive manufacturing such as assembly-oriented production of clothing, textiles, 
and electrical goods, they enjoy quite a popularity like the Colon Free Zone in 
Panama.
3
 
Export Processing Zone 
Another type of SEZ is an Export Processing Zone - EPZ. Their similarity to FTZ 
lies in that they encompass large land that they do not provide the same degree of 
tax benefits or regulatory leniency. These areas provide a functional advantage to 
investors seeking to capitalize thanks to the economies of scale that are offered by 
a geographic concentration of production and manufacturing estates that focus on 
foreign exports, but the difference is in in a trade region. These zones are 
                                                                                                                                                                   
3 Brittanica: Definition of Free Trade Zone; 2012
D.P.R. of Korea security issue: P.R. of China’s model of 
 Special Economic Zones as an alternative to Six Party Talks? 
 
Andrej Agacevic A.Y. 2012 – Master in International Relations    5  
beneficial to a host country, if successful, because there is no need to provide 
reduced tariffs or regulations but there are still benefits from increased trade.
4
  
Hybrid EPZs are also geographically delimited zones, but they are broken down 
into specialized zones that cater to specific industries. In a hybrid EPZ, all industries 
use the “general” zone’s central resources, but each industry also operates within 
its own zone created to streamline specialized processes unique to those industries.  
An example is the Lat Krabang Industrial Estate in Thailand where all investors 
have access to the general trade area, but within it is a specialized, export-
processing zone that only certain export-based investors may utilize. Sometimes 
these specialized areas are actually fenced off, while other times they are fully 
integrated within the general SEZ area.
5
 
Urban Enterprise Zones  
Urban Enterprise Zones, in addition to providing manufacturing or production 
benefits like other SEZs, also provide unique benefits of local, centralized 
development efforts and are created by national or local governments to revitalize 
or gentrify a distressed urban area. The Empowerment Zone in Chicago is an 
example of an Enterprise Zone. It was created to revitalize certain south and west 
Chicago areas and increase trade by guaranteeing public safety, providing better 
job training, creating affordable housing, and fostering cultural diversity.
6
 
                                                                                                                                                                   
4 HIRASUNA Don and MICHAEL Joel, Enterprise Zones: A Review of the Economic 
Theory and Empirical Evidence, January 2005  
5 Ibidem 
6 SULLIVAN Arthur; SHEFFRIN Steven M. , Economics: Principles in action 2003
D.P.R. of Korea security issue: P.R. of China’s model of 
 Special Economic Zones as an alternative to Six Party Talks? 
 
Andrej Agacevic A.Y. 2012 – Master in International Relations    6  
These zones favour more economic incentives—like tax incentives and financial 
assistance—to revitalize the area by bringing trades into the zone that will 
stimulate organic, localized development and improve local quality of life. 
Single Factories 
Single Factories are special types of SEZs that are not geographically delineated, 
meaning they don’t have to locate within a designated zone to receive trade 
incentives. The focus is on the development of a particular type of factory or 
enterprise, not tied to a location in order to create specialization in a specific 
industry.  
A country that desires to create an export concentration in a specific industry 
gives each factory specializing in that trade economic incentives. One of the most 
notable single factory examples is the “maquiladora” in Mexico, where factories 
specialize in the importation of foreign merchandise on a temporary basis and 
workers assemble or manufacture specific goods before shipping them out to 
other countries.
7
 
Freeport – porto franco 
Some zones specialize more in human capital goods and services such as call 
centres and telecommunication processing. The HM & Revenue and Costumes 
states ‘A Free Zone is a designated area in which non-Community goods are 
treated as outside the customs territory of the Community for the purposes of 
import duties’. What this would mean is ‘… that import duties (including 
                                                                                                                                                                   
7 Murray; Ibidem
D.P.R. of Korea security issue: P.R. of China’s model of 
 Special Economic Zones as an alternative to Six Party Talks? 
 
Andrej Agacevic A.Y. 2012 – Master in International Relations    7  
agricultural charges) are not due provided the goods are not released for free 
circulation. Import VAT and Excise duty is also suspended until the goods are 
removed to the UK market or used or consumed within the Free Zone. There are 
no special reliefs in Free Zones from other taxes, or local authority rates.’
8
 
Freeport is a typically very expansive zone that encompasses many different 
goods and service-related trade activities like travel, tourism, and retail sales. The 
variation of products and services available to a Freeport cause them to be more 
integrated with the host country’s economy. A fully integrated life on-site is 
encouraged for those who work in the Freeport, as opposed to just using the SEZ 
for manufacturing, production and shipping. Examples can be found in India and 
the Philippines where large military bases have been converted and now function 
as specialized cities, and in Korea’s “International City” on the island of Jeju. People 
live and work on the island and use the Freeport as a draw for high technology, 
tourism, and financial products industries.
9
 
Specialized Zones 
Specialized Zones aim to promote highly technical products and services unique 
to an industry, for example science and technology parks, petrochemical zones, 
highly technical logistics and warehousing sites, and airport-based economies. In 
his paper, Murray mentions Dubai Internet City as one specialized zone that 
focuses solely on the development of software and internet-based services, while 
the Labuan Offshore Financial Centre in Malaysia is another example of a 
                                                                                                                                                                   
8 Her Majesty's Revenue and Customs, Reference: Notice 334; April 2011 
9 Jeju special self-governing province web site; 2012
D.P.R. of Korea security issue: P.R. of China’s model of 
 Special Economic Zones as an alternative to Six Party Talks? 
 
Andrej Agacevic A.Y. 2012 – Master in International Relations    8  
specialized zone that caters mostly to the development of off-shore financial 
services.
10
 
Global industrialization has contributed in creating entire cities, like Shenzhen 
Village, whose sole purpose and infrastructure is the result of Special Economic 
Zones. Some of these cities are a spin-off of their initial SEZ classification and have 
developed into modern, investment hubs, like Taiwan, while others retain low-
skilled textile and apparel manufacturing industries, like Ho Chi Minh City. 
1.3 Regulatory Characteristics of Special Economic Zones 
The regulatory procedures of SEZ have evolved since their original inception. For 
example, Murray claims that ‘…government regulation of SEZs originally mandated 
that most zones be located in remote locations or clearly delineated with fences or 
physical boundaries. Difficulties in attracting businesses to isolated areas 
prompted host country governments to establish more flexible boundary 
regulations that treated SEZs more like large scale, inter-city property 
developments rather than isolated trade zones. Original zones were also mostly 
restricted to export-based industries, whereas newer regulations allow SEZs to 
emphasize both imports and exports’.
11
 
In their analytical publication regarding SEZ, Akinci and Crittle explain the 
evolution of SEZ stating that ‘…zones were developed, operated, and regulated by 
the same body. This approach characterizes most of the original zones developed 
through the 1980s, particularly in Asia. But the focus of these bodies has changed 
                                                                                                                                                                   
10 Murray; Ibidem  
11 Murray; Ibidem
D.P.R. of Korea security issue: P.R. of China’s model of 
 Special Economic Zones as an alternative to Six Party Talks? 
 
Andrej Agacevic A.Y. 2012 – Master in International Relations    9  
significantly in many countries. With the entry of the private sector into zone 
development, most countries have either set-up specialized public sector zone 
development and management agencies, or increasingly divested the physical 
project development function to the private sector, and transformed their zone 
authorities into purely regulatory, planning, and promotional bodies’ Akinci and 
Crittle conclude that international experience has shown how countries embarking 
on private SEZ development difficultly reconcile the divergent functions of zone 
management, regulation, and investment promotion.
12
 
Regarding SEZ-sponsoring countries, Akinci and Crittle claim that conflicts of 
interest have arisen when regulatory bodies were also engaged in zone 
development activity, particularly when existing public zones would compete with 
new private zones. In their report the issue is how ‘Opportunities for perceived and 
actual conflicts of interest are multiplied when the entity charged with guiding and 
monitoring SEZ performance is simultaneously one of the SEZ operators being 
monitored.’ In any case, traditional structures continue to characterize most of the 
zone administrative bodies around  the world, despite the arrival of private zones. 
In cases as Kenya, El Salvador, Honduras and Uruguay, government bodies 
continue to develop and operate zones, while regulating zone activity in all zones, 
public and private.
13 
 
The FIAS sponsored study concludes that frequently, public zones are not 
conducted on a cost-recovery basis, therefore undercutting the competitiveness of 
private zones. In some cases, authorities are becoming more user-responsive 
                                                                                                                                                                   
12 AKINCI Gokhan and CRITTLE James, Special economic Zones performance, lessons 
learned, and implications for Zone development April 2008 
13 Ibidem