Special economic zones and quotas on imported intermediate goods: a policy proposal

A novel, very general and global approach to the analysis of the welfare effects of the establishment of special economic zones in a small open economy with tariffs on trade in final goods and binding quotas on the imports of intermediate goods is developed. It is proven that there generally exist allocations of binding quotas to the domestic and special economic zones which improve welfare. Then it is shown that the abolition of the quotas on imports into the special economic zone may reduce welfare. Finally the welfare effects of abolishing the quotas also in the domestic zone are analysed.