Nicaragua approves special economic zones to attract Chinese investment, as the National Assembly grants wide tax exemptions for companies operating in the framework of the Belt and Road Initiative.
Nicaragua recently approved special economic zones, or free-trade areas, in a move to deepen ties with China and attract foreign investment. The National Assembly green-lighted the Nicaragua–China Special Economic Zones (SEZ), a framework that will give new fiscal and regulatory incentives for Chinese companies operating in the country and help diversify its industrial base. The zones will target manufacturing, agribusiness, logistics, and high-tech sectors.
Operating under the auspices of Beijing’s Belt and Road Initiative, these special economic zones will benefit from a preferential fiscal and regulatory regime that will remain in place for the next 10 years. The move is one of the most significant economic measures adopted by Nicaragua since it resumed relations with China in 2021.
Fiscal and Investment Incentives
Companies that operate in the SEZs will enjoy a 100% exemption on income tax for the next decade, as well as exemption from customs duties, municipal taxes, and VAT on purchases made in Nicaragua, according to the recently approved law. The special regime also exempts from taxation the importation of machinery, raw materials, and intermediate goods for use in Nicaragua, as well as the payment of dividends.
The incentives could lead to investment in industrial manufacturing, agriculture and agro-industry, renewable energy, information technology, and other sectors. Nicaragua’s Ministry of Development, Industry and Trade (MIFIC) said that the law also promotes investments in export-oriented logistics and infrastructure. The government hopes the SEZs will also attract Chinese investment in the assembly of electronic components, auto parts, and other light industries.
Nicaragua plans to position itself as an attractive destination for Chinese firms looking to set up assembly lines and export to the United States and Europe, as well as a supplier of agricultural goods, under the framework of the Belt and Road Initiative (BRI), Beijing’s massive global infrastructure and investment program.
China’s BRI and Nicaragua: A Growing Partnership
Nicaragua and China signed the free trade agreement (FTA) in 2023, which will increase the access of Nicaraguan products such as beef, coffee, fish, cocoa, and sesame seeds to the Chinese market. Chinese state companies have also built thousands of homes, financed modernization of the country’s Pacific ports, and provided infrastructure and credit for upgrading the national telecoms network. The new SEZ measure is the latest in a long list of economic concessions to Beijing.
While Nicaraguan officials have hailed the measure as historic, the U.S. government has reacted with harsh rhetoric and warnings of potential economic reprisals. The administration of U.S. President Joe Biden is expected to impose a 100% tariff on Nicaraguan exports and suspend a range of preferential trade arrangements, including parts of the Central America–Dominican Republic Free Trade Agreement (CAFTA-DR), citing “continued authoritarianism and the deterioration of human rights” under the Ortega government.
Nicaragua approves special economic zones and the U.S. government fears that China is tightening its grip on Nicaragua, as Nicaragua-China Economic and Trade Forum plans to deepen ties between private sectors of both nations.
Government officials say that Nicaragua’s policy pivot to China and away from traditional Western partners is raising new concerns about transparency, labor standards, and national sovereignty. Analysts note that further U.S. sanctions could blunt some of the expected benefits of Chinese investment, given that the U.S. is Nicaragua’s largest export market.
Growing concern about China’s increasing footprint in the country has given way to protests and public criticism of the Ortega administration’s strategic alignment with Beijing. However, the Nicaraguan government has brushed off concerns, describing the move as a “sovereign economic decision” that will create jobs, generate income, and help modernize the economy.
Opposition and Concerns at Home
The decision to create special economic zones, as well as the naming of Laureano Ortega Murillo to coordinate the SEZs, has sparked criticism of authoritarian governance in Nicaragua. Laureano Ortega Murillo, the president’s son and a high-ranking member of the ruling party, has been placed in charge of coordinating and managing these SEZs. This decision has intensified concerns over nepotism and the consolidation of power within the Ortega family and their political allies.
Civil society groups and independent economists are increasingly vocal about the lack of transparency and institutional checks in the implementation of these SEZs. They argue that without proper regulatory frameworks and mechanisms for accountability, these zones risk becoming enclaves of discretionary authority, vulnerable to corruption and limited public scrutiny.
Nicaragua’s macroeconomic environment and broader political climate have also been a source of concern, especially for investors outside of China. Nicaragua’s media freedom, the independence of the judiciary, and space for political opposition have all come under pressure, a dynamic that could make the Ortega government less attractive to diverse sources of foreign direct investment.
A Chinese Flagship Investment?
Nicaragua approved special economic zones recently to support Chinese investment, as both countries signed an important FTA on 7 April in Managua. China’s trade and investments have reached significant levels in a short period. The Asian nation’s role as an investor has grown substantially since the renewal of bilateral relations in 2021.
In 2023 alone, more than 85% of the $870 million invested by China in Nicaragua focused on five economic sectors: construction and public works, trade, tourism, finance, and agriculture. The largest share was construction and infrastructure, reaching $200 million in private investment and another $400 million in public works. All of these projects will have a synergic relationship with the Special Economic Zones.
Nicaragua has become an important partner for Chinese investment in the Central American region and for diplomatic support in international fora, as both sides approve special economic zones. In 2022, Nicaragua–China trade reached $851 million, a 150% increase in just one year, with a trade surplus of $504 million in favor of Beijing.
Despite being a net importer of Chinese goods, Nicaragua’s exports to China have also grown significantly. In 2022, Nicaragua’s exports to China totaled $347 million, more than double the $136 million from the previous year. In terms of sectors, while Nicaraguan exports to China are mainly composed of agricultural goods and seafood, China exports a variety of manufactured goods, including electronic appliances and machinery.
China’s Economic Presence in Nicaragua
Chinese FDI has increased rapidly across sectors, including infrastructure, real estate, and mining. The Nicaragua–China Economic and Trade Forum is planning to play an important role in deepening the trade relationship between the private sectors of both countries and building bridges for further cooperation.
China approved two large infrastructure projects in 2022: a nearly $200 million investment in telecommunications equipment to upgrade the country’s telecoms network and a $367 million deal for the Pacific road, a coastal highway stretching over 100 km along the Pacific Ocean and open to bids from international investors.
The latest project, a 100,000-home development in Tipitapa, about 20 km north of Managua, is part of a deal signed in 2022. The $900 million development, which aims to build more than 500,000 homes by 2026, is being financed through Chinese debt and Chinese firms.
Opportunities and Risks Ahead
Nicaragua’s approval of the Nicaragua–China Special Economic Zones marks a significant shift in its economic policy, with the potential to reshape the country’s trade dynamics and foreign investment landscape. On the positive side, these zones could provide a much-needed boost to the Nicaraguan economy by attracting substantial Chinese investment, creating jobs, and fostering economic diversification.
Enhanced bilateral trade with China, supported by the zones, is also expected to increase revenue from exports and bring in advanced technology, which could be particularly beneficial for sectors like manufacturing and agriculture.
Nicaragua also sees the SEZs as a means to reduce economic dependence on the United States and explore new avenues for growth and development. However, these positive aspects are not without their risks and challenges. The special economic zones could exacerbate the existing economic dominance of Chinese interests, further concentrating economic power and limiting the growth of domestic industries that are not directly aligned with Chinese investment strategies.
Nicaragua recently approved special economic zones, but the growing Chinese footprint in the country also raises concerns about transparency, labor rights, and environmental standards, which are not always aligned with international norms. The potential impact on the U.S. trade relationship is particularly worrisome, given the traditional economic ties between Nicaragua and the U.S. Market.
The U.S. response, which could include punitive tariffs and a withdrawal of trade privileges, threatens to undermine the very investment that Nicaragua seeks to attract. Moreover, these zones could become highly politicized, serving as instruments for consolidating political power rather than advancing broader economic interests. The appointment of Laureano Ortega Murillo, the president’s son, as the coordinator for the SEZs has only intensified these concerns.
Conclusion
In conclusion, while the SEZs offer a strategic opportunity for Nicaragua to engage with China and potentially transform its economic landscape, the move is fraught with geopolitical, economic, and social implications. The potential benefits of job creation, technological transfer, and infrastructure development must be carefully weighed against the risks of increased dependence, economic polarization, and the potential erosion of regulatory standards. The outcome will largely depend on how Nicaragua navigates these complex dynamics and whether it can ensure that the SEZs serve the interests of the entire nation, rather than a privileged few.