The world’s most successful special economic zones (SEZs) — in China — faced sanctions after the Tiananmen Square massacre in 1989. These sanctions backfired, further fuelling Chinese growth.
This has obvious implications in light of recent events, such as the sanctions on Russia as a result of the war in Ukraine, the US–China trade war and the global supply chain crisis. The aftermath of Tiananmen Square gives us a window into the potential future of SEZs cut off from the global community. For SEZs in Russia, Belarus and other countries shunned by the Western community, they could follow in the footsteps of their Chinese counterparts.
For SEZs in Russia, Belarus and other countries shunned by the Western community, they could follow in the footsteps of their Chinese counterparts.
Before 1976, China had a completely closed economy. It was illegal for foreign businesses to operate. All industry was controlled by large state-run monopolies. China was one of the poorest countries in the world.
Then, in 1976, there was a leadership change. A new generation of reformers liberalised many aspects of the Chinese economy and, as a result, the 1980s became a time of incredible prosperity as thousands of businesses brought in billions of dollars in foreign direct investment (FDI).
The creation of SEZs played a key role in this transformation. In 1980, the Chinese government created four SEZs, the most famous being Shenzhen. During the 1980s, the first four SEZs accounted for 59.8% of FDI in China. From 1980 until 1984, Shenzhen’s local economy grew annually by 58%. In 1985 alone, Shenzhen’s economy grew by 95%. By the end of 1985, realised FDI in the first four zones totalled $1.2bn.
Everything changed in June 1989.
China’s economic reforms came with increasing demands for political reform. One million protestors gathered in Beijing to make various demands. Most hoped for political reform such as free elections, freedom of the press and an end to corruption. Some also opposed China’s market reforms.
Although the Communist Party had been eager to reform the economy, they were unwilling to reform the political system. The government deployed 300,000 soldiers to Beijing, and began arresting protestors en masse. When the protests continued, the soldiers opened fire into the crowd. Between 2000 and 6000 protestors were killed during the next three days, according to various estimates.
Western governments responded by imposing sanctions on China. The US created a list of goods which could no longer be sold to and from China; Japan froze Chinese loans; and the Netherlands closed its embassy in Beijing. Thousands of Western businesses left. The post-Tiananmen sanctions would remain in force for three years, until another wave of reforms in 1992.
But Chinese SEZs responded to the post-Tiananmen sanctions by moving up the value chain.
Chinese SEZs responded to the post-Tiananmen sanctions by moving up the value chain.
In one example, many Chinese firms produced plastic toothbrush handles and bristles for Western toothbrush manufacturers. When the Western toothbrush component buyers moved out, the Chinese handle and bristle manufacturers did not stop. Instead, they joined together, forming their own toothbrush manufacturer called Jiangsu 5A, which is now the second largest toothbrush producer in China.
Tiananmen also caused capital flight. The Chinese government responded by opening China’s first two domestic stock exchanges — in the Shenzhen SEZ and Shanghai Pudong SEZ. Despite sanctions, many Westerners found ways to start trading in these exchanges. As soon as the sanctions were lifted, foreign capital rushed in. The Shanghai Stock Exchange is now the world’s third-largest and the Shenzhen Stock Exchange is the world’s fifth-largest.
The legal flexibility of SEZs makes them robust. As long as SEZs can quickly change their rules, a crisis will only make them grow faster. While gazing in the crystal ball is a fool’s errand, the history of SEZs in China shows us that isolation from the outside world can be a catalyst for industrial development.
Thibault Serlet is the director of research at the Adrianople Group, a business intelligence advisory firm.
Thibault's previous columns:
- When vertical integration fails: a cautionary tale from the Coega IDZ
- Digital nomads open door to new SEZ models
- How universities lead to successful SEZs
This article first appeared in the December 2022/January 2023 print edition of fDi Intelligence. View a digital edition of the magazine here.