Special economic zones are fast becoming the instrument of choice for African countries looking to attract mobile capital and increase their integration into global markets. Among the many initiatives planned or in operation on the continent are a series of economic cooperation zones in six African
Special economic zones are fast becoming the instrument of choice for African countries looking to attract mobile capital and increase their integration into global markets. Among the many initiatives planned or in operation on the continent are a series of economic cooperation zones in six African countries, all established with financial and technical support from China. The Suez Economic and Trade Cooperation Zone (SETC-Zone) in Egypt, established in 2008, is a flagship of Chinese zone-based cooperation in participating African countries and an important example of the impact Chinese industrial zones have on the development pathways of host locations.
Similar in many ways to conventional zone models backed by Western donors, the SETC-Zone is a geographically delimited area that offers fiscal and regulatory incentives to Chinese investors to stimulate their overseas production. And yet it also displays unique features that shed light on China’s particular approach to overseas zone-based development, chief among which is the central role of Chinese regional governments in developing and operating these ventures.
Chinese policymakers argue that regional cooperation has the potential to promote industrialization and development in host economies by allowing domestic firms to strategically couple with Chinese-led production networks in similar industries. As platforms for initiating cross-border regional relations, economic zones are supposed to encourage the development of links between firms and facilitate the diffusion of economic activity, thus improving standards of living in host regions. This vision has been scaled up in the emerging plans for connectivity and cooperation under China’s Belt and Road Initiative, with several countries in the Middle East and Africa slated to construct additional industrial cooperation zones.
The SETC-Zone has succeeded in creating an open trading environment in Egypt for the operation of Chinese firms. Yet its roadmap and the provisions that govern its operation do not accommodate the types of proactive policies required to develop domestic linkages, promote capabilities and generate broad-based development. After 15 years in operation, the dynamics between firms that have emerged indicate that the SETC-Zone model maintains global, free-market patterns of production, as opposed to promoting domestic industrial development. These dynamics have allowed firms to expand globally in search of markets and resources while constraining host economies to a limited position in the international division of labor.
Economic zones are one of the primary tools that helped drive job creation and growth in post-reform China, a period in the late 1970s when Chinese policymakers began leading the country away from a planned economy and opened it to foreign trade and investment. By facilitating the transfer of development resources and productive investments to strategically located regions inside China, the government’s economic zone strategy catalyzed domestic industrialization. Its implementation helped to increase value-added in the manufacturing sector, enhance capabilities and gradually transition production from labor-intensive activities to knowledge-intensive innovative manufacturing, thus enabling the economy to achieve extraordinary structural impacts.[1]
According to Chinese policymakers and advocates of China-Africa cooperation, overseas zones spearheaded by Chinese companies provide host countries with the opportunity to replicate the Chinese development experience.[2] The relocation of Chinese enterprises into these zones can potentially help build up industries in the same value chains, boosting local economies and creating the conditions for initial industrialization. China’s Suez Economic and Trade Cooperation Zone in Egypt offers a unique perspective on the development outcomes of Chinese zone initiatives and the implications of Chinese industrial cooperation initiatives in the Middle East and North Africa region more broadly. With a capital intensity level of $700 per square meter, the SETCzone is regarded as a success story of China’s Africa economic zone program for the significant amount of investment capital it has attracted, motivating plans for a 6km expansion of the zone’s starting area.[3]
The SETC-Zone was launched in 2008 as a joint venture between Chinese zone developer Tianjin Economic-Technological Development Area (TEDA) Investment Holdings—a subsidiary of the Tianjin municipal government—and the Egyptian Chinese Company for Investment, which holds a minority stake and is a consortium of Egyptian state-owned enterprises (that also includes TEDA as a minority shareholder). TEDA established Egypt TEDA Investment Company, a country-based affiliate to develop the SETC-Zone on a 1.34 km square plot of land in the third sector of Egypt’s then 223 km square special economic zone in the Suez Canal area, directly adjacent to the port facility of Ain el Sokhkna along the Red Sea coast.
Egypt TEDA invested a majority of the capital in the zone. The local partner Egyptian Chinese Company for Investment provided the land—obtained at below market cost—and acted as a contract partner with the role of providing external and off-site infrastructure such as link roads, and services such as extending water, electricity and power lines. Egypt TEDA, however, took on construction of the zone’s infrastructure, buildings and roads, as well as the provision of sanitation and utilities through public private partnerships and build-operate-transfer contractual arrangements. Masterplans and development strategies were provided by the Chinese partner with limited local participation in zone planning and high-level management. Together with the China-Africa Development Fund, a venture capital instrument of the central government of China, Tianjin Investment Holdings controls 75 percent of Egypt TEDA’s shares. Along with a further 5 percent owned by a company controlled by Tianjin TEDA, the SETC-Zone is effectively a Chinese state-run project.
From the Chinese perspective, establishing the zone was meant to provide a secure environment and standardized management for offshoring Chinese enterprises in a space designed around their needs. In doing so, China hoped to facilitate its strategy of what some scholars have called “going global in groups” in reference to both the internationalization of Chinese firms and the formation of agglomeration economies in host locations.[4] This plan is consistent with the broader objective that motivated the launch of the economic and trade cooperation zone program and justified heavy capital investment by the Chinese state. But the strategic location of the Suez region at the heart of global trade routes provided a particularly strong incentive for the relocation of Chinese manufacturing firms into the area, and it granted the SETC-Zone unique status among other economic zone initiatives.
For Chinese companies engaging in trade in the Middle East and also in transatlantic trade with West African and North American markets, locating production near the Suez Canal significantly reduces the distance to consumer markets, thus saving time and operational costs associated with long-distance transport. Egypt has implemented a series of preferential policies directed at Chinese investors to further lower costs for Chinese producers and encourage export firms currently operating in China to relocate into the zone. To attract Chinese investment, Egypt enacted selective trade liberalization and investment facilitation measures that include regulatory and fiscal incentives, administrative support, tailored infrastructure and a range of other services. Production elements like labor, land, energy and transportation are also made available at a reduced cost.
But perhaps one of the most important strategic advantages of the SETC-Zone is a provision in its regulatory framework that gives foreign exporters access to Egyptian Certificates of Origin. These documents permit companies to claim their products are Egyptian, thus allowing firms to make use of Egypt's preferential trade agreements and international trade deals. Obtaining Egyptian certificates guarantees Chinese firms access to markets in the United States, European Union, Turkey and other Middle Eastern markets free of custom duties and other non-tariff barriers, as well as allowing Chinese firms to bypass barriers and quotas on exports from China. Such access is crucial for enabling the expansion of China’s international trade, rendering the SETC-Zone a key instrument in supporting China’s export policy and core interests in the region and beyond.
For domestic government actors the primary advantage offered by the zone appears to be increased opportunities for rent-seeking and assured access by state-owned enterprises to infrastructure contracts. Since it provided the land, the Egyptian Chinese Company for Investment receives a portion of the profits from its sale to investors once the land is fully developed according to its share of the original investment. As the main developing company it also benefits from privileged access to contracts for initial infrastructure provision. Proceeds from taxes and Suez Canal transit fees are directly accrued by state authorities overseeing the Suez Canal region.
Contrary to China’s own developmental approach, where central state institutions play an important role in supporting industry and developing the export capacity of local firms, local Egyptian authorities have done little to support the emergence of firm linkages that would help develop the export industries of the Suez region.
Contrary to China’s own developmental approach, where central state institutions play an important role in supporting industry and developing the export capacity of local firms, local Egyptian authorities have done little to support the emergence of firm linkages that would help develop the export industries of the Suez region. Such linkages are crucial if the zone is to act as a developmental spearhead and contribute to the area’s growth and development. Similarly, neither the zone’s top (Chinese) managers nor the Chinese Ministry of Commerce, which oversees the economic zone program, put forward plans to connect Egyptian firms with the zone.
On one hand, the way the SETC-Zone has operated thus far replicates the rentierism of Egypt’s political economy.[5] On the other hand, the policy space available to domestic authorities to promote such cooperation is extremely limited. Weak domestic leadership coupled with heavy Chinese capital investment has allowed Chinese actors to monopolize zone planning, management and investment promotion. Each of these aspects (and indeed the zone’s general orientation) prioritize trade liberalization and investment facilitation in the interest of enabling the free flow of Chinese goods and capital over state-centered solutions that target domestic Egyptian industry. Such measures are not driven simply by the market-oriented goal of profit maximization. Rather, they can be viewed as part of a wider Chinese government agenda that uses commercial entities for strategic purposes related to internal development.[6]
China’s overseas economic zone program was launched in 2006 as part of its “Going Global” campaign. Building upon 20 years of growing international engagement, this initiative aimed to increase Chinese manufacturing investments abroad and find new markets for Chinese goods and services. Announced during the Third Forum on China-Africa Cooperation, the gradual rollout of the global zone program began with the development of six zones in Africa to serve as a cornerstone of China-Africa cooperation: two in Nigeria and one each in Egypt, Zambia, Mauritius and Ethiopia.
The program was launched at a time when Chinese industry was beginning to shift toward knowledge-intensive innovative manufacturing. Departing from an overseas direct investment strategy oriented solely toward natural resource extraction, Chinese policymakers adopted a new approach of relocating China’s manufacturing industries to boost domestic restructuring and to gain access to additional markets abroad. Overseas zones provided a means to facilitate industrial relocation, while introducing industrial cooperation as a new component of China’s relationships in Africa and beyond.
The logic behind the planning and design of economic zones also reflects conceptual and material shifts in the contemporary global economy. The spatial paradigm underpinning the economic zones model is consistent with global trends of using open trading environments to facilitate the cross-border flow of goods and capital. Their mode of delivery fits within an emerging global consensus focused on international cooperation to ensure the provision of tailored facilities for cross-border production and trade and that jointly finance the infrastructure gap present in the world economy.[7] Finally, an assessment of the common features of Africa’s economic zones reveals that the development approach they engender converges with mainstream development practices that are focused on deregulating key sectors in host economies and on global market integration and free trade. This approach stands in contrast to the more state-centered solutions that characterized China’s own growth path.
But it is not enough to make broad assertions about the reproduction of free-market ideas and practices in China’s overseas development projects. On the ground and in development scholarship and practice little is known about the actors and processes that enable concrete operations integrating China deeper into the world economic system. African economic zones offer crucial insights into the particular spatial strategies and relevant agencies involved in the implementation of China’s proliferating economic zones.
While multiple stakeholders are involved in economic zone initiatives, the central role of Chinese provinces and regions is key to understanding how China’s internationalization is planned and realized, and for assessing the likely outcomes for host countries. Chinese economic zone planning has adopted a unique model in which the government delegates the development and operation of overseas initiatives to Chinese companies at the municipal or provincial level.[8] The devolution of responsibility to subnational actors is rooted in a domestic Chinese planning agenda centered on regional development and reflects an emerging trend of regional cooperation between China and its development partners.[9]
Chinese economic zone planning has adopted a unique model in which the government delegates the development and operation of overseas initiatives to Chinese companies at the municipal or provincial level.
The construction and development of each of the six economic zones relied on seed money provided by a different Chinese company. These developers are either direct subsidiaries of local Chinese governments or large provincial firms (either private or state owned). Developers (such as TEDA) were expected to generate enough revenue to support the development phase—the physical build-up of zones, including infrastructure, warehousing facilities, administrative buildings and housing as well as future expansions. Additional sources of financing were made available by Chinese government bodies to ensure the successful implementation of economic zones. For example, the Chinese Ministry of Commerce provided monetary assistance to subsidize pre-construction and implementation costs and state banks and venture capital funds offered low-cost finance and equity participation. All of this support is indicative of the guidance provided by the central government and the strong links between the zone programs and policymaking on the national level.
]Nevertheless, from their inception the aim was for zones to eventually operate independently of central government support, following a domestic Chinese Special Economic Zone institutional system where subnational regional actors take the lead on expanding fixed asset investments to facilitate economic activity. The practice of fiscal and administrative decentralization was inscribed in the main criteria set by the central government in selecting overseas zone developers. The criteria required proof of financing capacity by the developer and a proven track record in implementing a major construction engineering project as a means of ensuring independence from the central state.
In cases where the developer is affiliated with a municipal Chinese government the latter is the main shareholder in the zone. There are varying arrangements for infrastructure delivery in partnership with domestic governments, but in most cases regional Chinese developers are responsible for on-site infrastructure delivery and, due to heavy capital expenditure, own majority shares in economic zones. As an example, the initial investment in the SECT-Zone was made by Tianjin TEDA, a subsidiary of the regional Tianjin government, using its own capital with only a small participatory stake by the domestic partner Egyptian Chinese Company for Investment. Similarly, the sole developer of the Mauritius Jinfei Economic and Trade Cooperation Zone is Shanxi province Tianli Group, a provincial state-owned enterprise active in trade, construction, real estate and textiles.[10]
In cases where the zone developer is a private enterprise, regional state-owned enterprises will act as technical partners on the project as a way of maintaining links to regional authorities. Ethiopia’s Eastern Industrial Park, for example, is fully owned and run by Jiangsu Qiyuan Group, a private Chinese enterprise based in Zhangjiagang city in Suzhou municipality that is active in steel pipe and aluminum production. The Ethiopian industrial park is modeled on and receives support from the regional government-led Suzhou Zhangjiagang Free Trade Zone, however, maintaining a key role for regional Chinese actors in its operations.
The economic zone program’s financing mechanism and model of engagement is underpinned by a strategy designed to deepen the global economic integration of China’s regions. China is redefining globalization with its own characteristics, which can be better understood by examining China’s domestic development processes and the variety of actors involved in their implementation.
A globalization strategy based on international regional integration emerged from the context of China’s domestic regional planning and development policies. In the late 1970s during the early years of China’s market reforms, regions were positioned by the central government as engines of growth for the national economy. Regional development interventions were concentrated in eastern coastal areas during this phase but later a more comprehensive strategy of coordinated regional development was launched to close the gap between the more and less developed regions. At the turn of the century, government statements on regional coordination and development began featuring an emphasis on developing international regional linkages with the rest of Asia and beyond, signaling a new phase in the evolution of China’s regional policy.[11]
International regional integration would allow local governments to pursue their particular commercial interests within a broader national strategy of rebalancing China’s economy by exporting surplus capital overseas.[12] Critically, a strategy focused on promoting a diverse range of trajectories would enable Chinese regions to pursue and maximize their specific competitive advantages, leveraging different segments in the Chinese economy. Companies winning bids to develop economic zones will therefore have assessed the market potential, local industrial base and geographical advantages of the host countries where their proposed zones would be located, also ensuring its compatibility with their home region’s production structure and the priorities of local manufacturing investors.
The sectoral orientation of the African zones reflects the imperative of pursuing diverse regional development pathways. The Zambia-China Economic and Trade Cooperation Zone/Chambishi multi-facility economic zone, for example, was established by China Nonferrous Mining Company and focuses on raw material extraction and processing in the value chain of copper and cobalt, allowing the firm to optimize its advantages. The Egyptian SETC-Zone on the other hand hosts enterprises from the Tianjin region that specialize in industries compatible with the local industrial base, including textiles and garments, drilling machinery and electrical transmission equipment, and which can capitalize on the Suez Canal’s locational advantage.
China’s strategy of opening up thus builds on the country’s decades-long development trajectory, in which investment and trade liberalization is combined with controlled decentralization of state power to regional authorities. It also suggests a vision for economic globalization under Chinese leadership based on the idea of developing cross-border regional linkages on a global scale.[13] The economic zone program was among the first endeavors aimed at realizing this broadly envisioned geography, providing a means to accelerate the opening up of China’s regions and serving a bridging function between Chinese and other localities. In a way, the economic zone program acted as a pilot for cross-border regional cooperation, globalizing China’s subnational regional policy model to facilitate international regional cooperation and help Chinese regions achieve strategic economic advantage.
In recent years Chinese policymakers have increasingly framed the country’s overseas cooperation zone program in the context of the Belt and Road Initiative, which has come to be the overarching framework for China’s international integration. Launched in 2013 by President Xi Jinping, the initiative encompasses over 100 countries along a maritime road and territorial belt. The aim of the project is to enhance Chinese-centric global connectivity by linking “core cities along the Belt and Road and using key economic industrial parks as cooperation platforms,” according to its vision document.[14] Specific development plans build on various existing initiatives launched within the China-Africa cooperation framework, including economic zones in Egypt and Ethiopia, and separate projects in Kenya, Tanzania and South Africa. The Belt and Road Initiative thus seeks to elevate preexisting ideas and practices implemented at the subnational level, leveraging the benefits of existing zone initiatives while deepening and diversifying ties and business opportunities for relocating Chinese firms.[15]
The SETC-Zone project was established with the aim of supporting the export of excess Chinese industrial capital, opening new markets for Chinese products and increasing international demand for Chinese manufactured goods. After the announcement of the Belt and Road Initiative in 2013 and a concurrent announcement in 2015 by the Egyptian government of an urban and economic regeneration project in Suez, the SETC-Zone assumed a new level of importance as a flagship for Egyptian-Chinese cooperation.
The SETC-Zone’s operational framework and track record thus far provides insights into the types of outcomes that can be expected from enhanced cooperation with China. A key claim of the SETC-Zone is that it is modeled on the domestic variant of Chinese cooperation zones and guided by the same rationale. Early Chinese zones were similarly marked by labor-intensive manufacturing, provided broad incentives and were expected to play the same role of expanding investments, generating employment and stimulating growth. From their inception, however, and contrary to what has happened in the SETC-Zone, the focus of domestic Chinese zones went beyond the aim of attracting foreign investments. Domestic Chinese manufacturing zones were underpinned by a staged vision for development that entailed shifting the comparative advantage of regional economies from low to high value-added production. This vision relied on establishing connections with foreign firms to facilitate the transfer of knowledge and technology to domestic firms while also creating the conditions for the development of backward linkages to the local economy—a necessary condition for regional regeneration and the long-term structural change they facilitated.[16]
In contrast, after almost two decades in operation, the SETC-Zone remains an enclosed space for the relocation of offshoring Chinese firms, relying heavily on incentives with no substantial backward linkages to the local economy. Chinese enterprises remain the dominant, and in some sectors the exclusive, providers of component parts and services to zone-based firms while the participation of Egyptian producers in the value-adding process is either restricted or heavily controlled. This situation leaves minimal opportunity for the transfer of knowledge and technology to local firms. Data on production gathered directly from six SETC-Zone investment projects in the heavy industry and textiles sectors reveals that the exclusion of the domestic private sector from zone-based activity arises from zone-based firms systematically engaging Chinese rather than domestic input suppliers. This tendency appears to be linked to a broader imperative by Chinese firms to retain control of all stages of labor-intensive manufacturing chains rather than outsourcing operations to domestic firms.
Chinese enterprises remain the dominant, and in some sectors the exclusive, providers of component parts and services to zone-based firms while the participation of Egyptian producers in the value-adding process is either restricted or heavily controlled.
The vertical integration of Chinese value chains is a feature that cuts across the different industrial sectors present in the SETC-Zone, despite considerable variation in strategies adopted within each sector. In the heavy industry sector, for example, firms are upstream suppliers directing their product flow of component parts to regional markets. Among the largest enterprises in this sector is International Drilling Material Manufacturing, which produces casing and tubing used in drilling and pipeline equipment and sells its merchandise to large international oil companies operating in the Suez Canal and the Mediterranean deepwater ports.
Other zone-based firms are downstream suppliers, importing unfinished products from their parent firm in China and assembling them for distribution in local and regional markets. Small and midsized enterprises in the textile sector, for example, provide assembly services to the main manufacturing supplier factories in China, importing all the primary commodities used in production such as fabrics and yarn and directing finished products such as scarves and blankets to the local market.
In both patterns of cross-border production the key organizing principle is intrafirm collaboration, where lead firms retain control of all stages of the value-adding process rather than disaggregate production to local suppliers. In rare cases where production of component parts is localized (the production of transformers used in the development of power plants for example), the inputs sourced from local vendors are typically low in complexity with few standard requirements, keeping buyer-seller coordination requirements and hence learning opportunities, relatively low. According to supply chain logic, in chains characterized by such relationships, the prospects for upgrading manufacturing processes or expanding the customer base to additional purchasing firms are lower. The absence of domestic linkages has allowed the zone to develop as an exclusionary node for value creation in China’s unbundled value chains. The zone’s near complete administrative autonomy enhances its enclave structure and reflects a core emphasis by the zone operator, Egypt TEDA, to create an open trading environment linked to Chinese regions but isolated from the rest of the Egyptian economy.
The strategies of offshored Chinese firms provide useful insights and a strong basis for evaluating the impact of Chinese zone cooperation on the development pathways of host regions. While broad conclusions cannot be drawn from the particular context of a single economic zone project, mounting evidence suggests that Chinese zones elsewhere display similar features, with many developing as enclaves segregated from their host regions. A deliberate strategy of setting up economic zones to function independently of their local setting enhances their separation and decreases the capacity of national-level institutions to intervene in their operations. The concept of enclave development stands in opposition to the dominant narrative about what Chinese zones aim to achieve. Without channels for domestic firms to create strategically beneficial global connections, Chinese zone initiatives may create limited jobs and perhaps even generate a degree of economic growth. But they will have limited capacity to initiate the type of long-term structural change that will allow host economies to gradually climb up the development ladder.
Significantly, the SETC-Zone and similar cases point to common features and outcomes of Chinese-led production relations and regional cooperation. Such initiatives appear to engender the same uneven power relations that have typically characterized relationships between host countries and their industrialized partners in the Global North. The logic that underpins and animates them is linked to the idea of improving the competitive performance of offshoring firms with the expectation that the benefits of firm-led development will trickle down to surrounding communities.[17]
If this situation reveals anything, it is that Chinese manufacturing zones reproduce free-market patterns in production organization; they facilitate the flow of capital and goods from Chinese regions to world markets, supporting the internationalization of Chinese regions while ultimately consigning host economies to a dependent position in an emerging international division of labor led by China.
[Safa Joudeh is a doctoral candidate at the Department of Development Studies, SOAS, University of London.]
[1] Xiangming Chen, "Change and Continuity in Special Economic Zones: A Reassessment and Lessons from China," Transnational Corporations Journal 26/2 (2019).
[2] Fantu Cheru and Arkebe Oqubay, "Catalysing China-Africa Ties for Africa’s Structural Transformation: Lessons from Ethiopia," in Arkebe Oqubay and Justin Lifu Yin, eds. China-Africa and an Economic Transformation (Oxford, UK: Oxford University Press, 2019).
[3] Egypt TEDA 2016 Development Report.
[4] Deborah Bräutigam and Xiaoyang Tang, "’Going Global in Groups:’ Structural Transformation and China’s Special Economic Zones Overseas," World Development 63 (2014).
[5] Yezid Sayigh, "Owners of the Republic: An Anatomy of Egypt’s Military Economy," Carnegie Middle East Center (2019).
[6] Deborah Bräutigam and Tang Xiaoyang, "Economic Statecraft in China's New Overseas Special Economic Zones: Soft Power, Business or Resource Security?" International Affairs 88/4 (2012).
[7] Zhigao Liu, Seth Schindler and Weidong Liu, "Demystifying Chinese Overseas Investment in Infrastructure: Port Development, the Belt and Road Initiative and Regional Development," Journal of Transport Geography 87 (2020).
[8] Deborah Bräutigam and Tang Xiaoyang, “China’s Investment in Special Economic Zones in Africa: Overview and Initial Lessons,” In Thomas Farole and Gokhan Akinci, eds, Special Economic Zones: Progress, Emerging Challenges, and Future Directions (Washington, DC: The World Bank, 2011).
[9] Tomasz Kamiński, Adrianna Skorupska and Justyna Szczudlik, The Subnational Dimension of EU-China relations (Polish Institute of International Affairs, 2019).
[10] Brautigam, “China’s Investment in Special Economic Zones in Africa.”
[11] Tim Summers, "China’s ‘New Silk Roads’: Sub-National Regions and Networks of Global Political Economy," Third World Quarterly 37/9 (2016).
[12] Lee Jones and Jinghan Zeng, “Understanding China’s ‘Belt and Road Initiative’: Beyond ‘Grand Strategy’ to a State Transformation Analysis,” Third World Quarterly 40/8 (2019).
[13] Summers, "China’s ‘New Silk Roads’: Sub-National Regions and Networks of Global Political Economy."
[14] “Vision and Actions on Jointly Building Belt and Road,” National Development and Reform Commission, Ministry of Foreign Affairs, and Ministry of Commerce of the People's Republic of China, 2015.
[15] Summers, "China’s ‘New Silk Roads’: Sub-National Regions and Networks of Global Political Economy."
[16] Chen, "Change and Continuity in Special Economic Zones: A Reassessment and Lessons from China."
[17] Thierry Pairault, "China in Africa: Phoenix Nests Versus Special Economic Zones," Working Papers, hal-01968812, HAL (2019).
