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https://docs.google.com/spreadsheets/d/1GiN0qwQtCDMG5jZNbkRutV8iWVmbREvlexkomFBn2eI/edit?usp=sharing

ABSTRACT:
Tariffs are generally assumed to depend on the product being imported, not the identity of the importer. However, special economic zones (SEZs) are a common and economically important policy tool used around the world to lower tariffs on selected intermediate goods for selected manufacturers. In effect, this creates a two-tiered tariff system: a firm in an SEZ faces a lower rate on a given product than the prevailing tariff faced by most buyers. I show theoretically that discrimination across buyers of the same good is optimal from the policymaker's perspective whenever a tax is intended to raise prices for sellers. This applies even when buyers are homogeneous, and is distinct from standard price discrimination. I build a model that applies this insight to protectionist tariffs on intermediate goods, and demonstrate that this mechanism motivates the use of SEZs. The model has substantial empirical traction, making specific predictions about the form, composition, and size of zones in equilibrium. I investigate these predictions in a comprehensive new dataset on U.S. SEZs that I compiled from public records, and find that the implementation of zone policy is consistent with the theory, including in the way that it develops over time in response to exogenous changes in the import supply of particular intermediate goods.