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Shanghai FTZ: China’s Globalization 2.0

Sep 27 , 2013
  • Zhang Monan

    Senior Fellow, China Int'l Economic Exchanges Center

The Shanghai Free Trade Zone, which will be officially on the map very soon, is another strategic move in China’s latest round of “boosting opening with further reform.” China has embarked on the voyage of reform and opening for more than 30 years, every decade of which has been a growth cycle. The 1980s saw all the key economic factors pay dividends; the second cycle (the 1990s) reaped dividends in system reform, and the third decade (the first of the 21st century) brought dividends from globalization. Today, a new reform and opening strategy symbolized by the Shanghai FTZ is beginning, and promises another round of fresh dividends from economic growth, deeper reform, and globalization. 

Zhang Monan

Currently there are six types of special economic zones in China’s mainland, including the bonded zones, bonded logistics zones and bonded port zones. The Shanghai FTZ will be the first of its kind ever established in the country that is true to its name. That is why academic circles see it as equal in strategic significance to the establishment of the Shenzhen Special Economic Zone, and the nation’s acceptance into the World Trade Organization. 

What profound and far-reaching implications do we find in the introduction of the overall plan of the Shanghai FTZ? In terms of the general trend, the first round of “dividends from globalization” for China, characterized mainly by those from vastly improved key economic factors, is now drawing to a close, while the next round of “dividends from globalization” cannot begin soon enough. The second round of “dividends from globalization” will be different from the previous one, when the country depended on the low cost of key economic factors more than anything else to be a part of the international distribution of labor. It will be different in that the nation’s economic upgrade will be driven mainly by a new global value chain with China’s vast domestic market attracting high-value key economic factors, such as technology and talents from overseas. And the Shanghai FTZ is tasked with making the plan work as a strategic testing ground. 

The Shanghai FTZ’s mission is expected to demonstrate how the national value chain should be constructed to allow the country’s processing trade sector to occupy a higher spot in the international distribution of labor. The Yangtze River Delta region, led by Shanghai, is one of China’s leading foreign trade bases. Because of its overreliance on imports for parts and components, the country’s processing trade operates with both the R&D and sales ends located overseas. The processing section of the value chain is thus left at home, as it is too short to power the supporting industries as much as it should. This means that the country needs to restructure its processing trade and extend the home section of the value chain by encouraging companies involved in the processing trade to keep forging and sharpening their competitive edge. This will mean that cross-national corporations become confident enough to place their research, production, circulation and service operations in China, thus optimizing the distribution of labor among mother companies and affiliates, and enabling the processing trade to turn from production to a worldwide operation combining with all-round servicing. 

The Shanghai FTZ will also serve as an example for regional processing trade centers around the country in extending the industry chain and increasing the ratio of value-added operations, as called for in the 12th Five-Year National Development Program. Such efforts will require the coordinated development of foreign-funded and home-grown processing trades, a highly-categorized assessment of the processing industry, a clear and detailed industry catalog system that bars and/or drops banned and/or restricted industries according to international standards, and an increased competitive core strength by means of better guidance on accounting, taxation, finance and brand certification, to name just a few. 

Also, as the global influence of China’s mainland market grew in the past 10 years, more and more cross-national conglomerates have wanted to set up their Asia-Pacific regional headquarters or even corporate headquarters and global R&D centers in Shanghai. The city now faces a window of strategic opportunity for attracting cross-national conglomerates from around the world to set up their regional headquarters there. In the “post-financial crisis era” the domestic market will grow faster in response to demand-boosting policies; while steadily improving labor quality. The support capabilities will also add to China’s appeal to foreign investors in high value-added and hi-tech businesses. This is also the time when cross-national conglomerates are increasingly inclined to shift their strategic focus from developed markets in Europe and North America to emerging markets in the Asia-Pacific region. Such shifts will lead to the relocation of complete value chains. By the end of September 2012, Shanghai was already home to 393 cross-national conglomerates’ regional headquarters, the most among mainland cities. There is no doubt that all eyes will be on the Shanghai FTZ in coming years to see how it attracts more and more high-value economic factors to China. 

The Shanghai FTZ strategy is not only a response to the pressing demand for a fresh round of reform, but also the result of pressure from another round of globalization in the “post-financial crisis era.” In light of the overall international situation, we find current negotiations equally focused on trade and investment, while service trade tends to be tied to an investment agreement more than ever. The gathering pace of the Trade in Services Agreement (TISA), the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership negotiations is particularly noteworthy. As international free trade agreements are now held to a higher standard, the parties involved are required to provide the framework and content, as well as the be all and end all of the agreements with matching professionalism. For example, most TISA negotiations no longer put limits on the ratio of foreign holdings and business scopes in financial, securities and legal services; while China’s policies in these areas still maintain many measures designed to limit foreign investment in the industries concerned under the framework of multilateral trade commonly adopted by WTO members. The areas still under such restrictive measures include banking, securities, insurance and telecom services. This means China is not yet qualified to join TISA. 

As for the TPP and TTIP talks, China is excluded for reasons born of international politics. The nation is not in a position to call shots, as far as the latest round of regional free trade negotiations is concerned. Once concluded, the TPP and TIPP agreements will change world trade rules, standards and structure, as well as challenge the trade rule-setting system. Western developed economies will raise the bar in rules over intellectual property right protection and labor standards, which will no doubt make it harder for other economies to enter the markets of member states. On the other hand, given that member economies tend to open their markets to domestic investors while limiting access for foreign investors, outside economies usually find it so hard to enter member markets that they eventually look elsewhere for investment opportunities. The same applies to China in the form of growing pressure for competing internationally. Thus, the decision to speed up the establishment of the Shanghai FTZ apparently makes a lot of sense from the globalization perspective. 

Zhang Monan is a researcher at the Strategic Studies Department of the China International Economic Exchange Center.

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