Since the 1970s, Special Economic Zones (SEZs) have been a key policy tool for driving industrial transformation and economic development. The first SEZs emerged in China in the late 1970s, following Deng Xiaoping’s “Open Door” policy.

Inspired by China's success, the Association of Southeast Asian Nations (ASEAN) adopted SEZ models in the 1990s, and the concept has since been embraced globally.

According to UNCTAD’s World Investment Report 2019, there are approximately 5,400 SEZs worldwide, with over 500 additional zones under development.

In Africa, SEZs have gained prominence as a strategy to attract foreign direct investment (FDI), create employment, boost exports, and accelerate industrialisation. Today, 47 African countries host more than 200 operational SEZs.

African SEZs, much like China’s model, are designated areas within national borders where businesses operate under favorable regulatory and fiscal frameworks.

Their primary objectives include attracting FDI, creating sustainable employment, and improving trade balances through increased exports.

Many African SEZs evolved from the Export Processing Zone (EPZ) model, which allows businesses to import machinery, equipment, and raw materials duty-free for export-oriented production. Duties apply only when products enter the domestic market.

To attract SEZ investments, African countries offer various incentives, including streamlined business registration processes, land and infrastructure benefits, tax holidays, duty exemptions, and preferential trade agreements with regional and global partners.

These incentives have helped position SEZs as attractive investment hubs. However, the traditional SEZ model in Africa has largely promoted an "invest here, sell elsewhere" approach, benefiting from trade agreements like COMESA while restricting SEZ-privileged goods from competing in domestic markets. But let’s examine the future for SEZs under the African Continental Free Trade Area (AfCFTA).

AfCFTA, adopted in 2012 and operational since January 2021, aims to enhance intra-African trade, drive socio-economic growth, and position Africa competitively in global markets.

By integrating 55 African Union (AU) member states and eight Regional Economic Communities (RECs) into a single market of over 1.4 billion people, AfCFTA facilitates the free movement of goods and services across borders.

Cognizant of the role of SEZs in advancing industrialisation under the African Union's Agenda 2063, the AfCFTA Ministerial Regulations 1/2023 allows SEZ-manufactured goods to qualify as "originating goods" under AfCFTA rules, provided they meet the criteria outlined in Annex 2 of the Protocol on Trade in Goods.

These criteria include goods that are wholly obtained within Africa, sufficiently processed to meet value-added thresholds or undergo modifications leading to a tariff heading change or specific processing requirements.

The AfCFTA’s preferential treatment of SEZ goods offers both opportunities and challenges for African economies. On one hand, allowing SEZ-manufactured goods preferential access fosters industrialisation by promoting value addition in key sectors such as agriculture, mining, and the blue economy.

These industries collectively contribute over 50 percent of GDP and employ 70 percent of the workforce in many African countries. Shifting from raw material exports to value-added production strengthens Africa’s position in global value chains.

On the other hand, preferential treatment of SEZ goods may threaten domestic industries in countries with weaker industrial bases.

Local producers may struggle to compete with SEZ manufacturers benefiting from economies of scale, tax incentives, and infrastructure support. To mitigate these risks, the AfCFTA framework incorporates trade remedies, anti-dumping measures, and infant industry protections.

However, enforcing these provisions remains challenging due to legal complexities, high costs, and lengthy investigations, leaving domestic industries vulnerable to market distortions.

The current disparity in SEZ policies across African countries underscores the need for harmonisation to balance domestic industry protection with regional trade promotion. One major challenge is the lack of harmonised incentives.

Many African countries offer varying tax holidays and duty exemptions to attract investors, creating unfair competition between SEZ and non-SEZ products.

This disparity distorts local markets, disadvantages domestic industries, and leads to a "race to the bottom" as countries compete to offer the most attractive incentives.

To address this issue, Africa must harmonize SEZ incentives. A potential model is the Organization for Economic Co-operation and Development (OECD) Global Minimum Tax (GMT) under the Global Anti-Base Erosion (GloBE) Rules, which aims to establish a level playing field by setting a minimum company’s income tax rate.

Overreliance on fiscal incentives not only strains national budgets but also discourages sustainable, market-driven investments. Instead, SEZs should prioritise infrastructure development, streamline regulations, and expand access to regional and global markets to attract investors.

To ensure SEZs under the AfCFTA are competitive, Africa must adopt a unified regulatory approach. This includes harmonised incentives to minimise excessive reliance on tax breaks, fostering regional value chains in key sectors like agriculture and renewable energy, and strengthening trade safeguards to balance market access with domestic protection.

Francis Gitau is a SEZ policy analyst and manager for surveillance and compliance at the Special Economic Zones Authority (SEZA).

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