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Upgrading China’s Free Trade Zone Strategy

Sep 18, 2019
  • Zhang Monan

    Senior Fellow, China Center for International Economic Exchanges

Economic globalization has reached a crossroads. In the face of new global trends, should China be closed or open, act in opposition or cooperation, take part in global governance or stay away from it? History proves that where there is openness, there is economic prosperity. In the face of the unilateralism countercurrent, China can prosper by promoting a new open economy, upgrading its free trade zone strategy and building its institutional framework.

Since the China (Shanghai) Pilot Free Trade Zone, the first of its kind in China, was established in Shanghai in September 2013, it has led a new round of reform and exploration that has resulted in institutional innovations. Since then, China’s free trade zones have gradually expanded. For example, the free trade zones set up in Guangdong, Tianjin and Fujian in 2015, those in Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan and Shaanxi in 2017, and the Hainan Free Trade Zone in 2018.

Despite all this, China cannot match the world’s advanced free zones. The reason is that there are problems with the free flow of factors, the financial system and the regulatory system, and the degree of liberalization is low. There is little tax value to current free trade zones, as they follow the preferential policies of bonded areas, including export tax rebates and processing in bond. Thus, the tax reduction function is not prominent.

At the same time, changes in international economic and trade rules are the prominent manifestation of a significant adjustment in the global economic order. Since 2018, we have seen the formation of super-large free trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the Economic Partnership Agreement (EPA), the United States–Mexico–Canada Agreement (USMCA) and Mercosul. At the same time, the formation of new international economic and trade rules poses new challenges for China in intellectual property rights protection, opening the service industry, digital trade, environmental protection, labour safety, competition policy and the transformation of state-owned enterprises.

Based on this, several free trade zones in China have been set up recently, including the Lingang New Area of the Shanghai Pilot Free Trade Zone, the Shenzhen Pioneering Demonstration Zone of Socialism with Chinese Characteristics, and the pilot free trade zones in Shandong, Jiangsu, Guangxi, Hebei, Yunnan and Heilongjiang. As of today, the country has set up 18 free trade zones in three batches. So far the country’s opening has established a pattern of east-west, north-south, land-sea and internal-external linkages. China has upgraded its free trade zone strategy.

Compared with past approaches, China’s latest strategy puts more attention on putting institutions first. Internally, it has changed government-approved models in favor of introducing the negative list. This has simultaneously promoted the trade supervision system focusing on trade facilitation, the financial innovation system with the goal of capital account convertibility and financial service opening, and the basic system of during-and-post supervision with the transformation of government functions as the core, creating a freer and more convenient business environment. Externally, it has allowed China to deeply integrate into the global economic system and take part in and lead the new round of international economic and trade rules reconstructing, and further explore the formation of a high-level institutional framework for future free trade zones.

Free trade zones should not only be free trade highlands but also be highlands for institutional innovation. They should play a pioneering role in exploring and breaking through the constraints of existing institutional mechanisms, innovating market access mechanisms and informing the country’s new round of reform and opening up. The political report of the 19th National Congress of the Communist Party of China states that the country will grant more powers to pilot free trade zones to conduct reform and explore the opening of free trade ports. This kind of power has been reflected in our earlier analyses of putting institutions first, emphasizing industrial competitive advantage and aligning with international standards.

Since the establishment of the first modern free trade port in Genoa, Italy in 1547, there have been more than 600 free trade ports around the world, including Hong Kong, Singapore, Dubai, Hamburg, New York, London, Rotterdam and Panama. They have become hubs, distribution centers and trading centers for leading international trade by virtue of preferential policies such as taxation and service trade advantages.

At present, the global free trade port system is set up under the Kyoto Convention, which takes into consideration the conditions of each country. The purpose is to realize the free entry and exit of trade, investment, personnel and information. 

With the free trade ports, the promotion of zero tariffs, zero barriers and zero subsidies, that is – three-zero rule – is becoming a core issue in the new round of regional free trade agreement negotiations. President Trump was the first to propose the three-zero goal at the G7 summit in Canada, suggesting in a joint statement issued by the United States and Europe in July 2018 that all tariffs, non-tariff barriers and subsidies should be dropped for U.S. and European non-auto industrial goods. Although the proposal is pending, it reveals the future trend. Further, the CPTPP has already entered in force. The CPTPP continues the Trans-Pacific Partnership’s tariff regulations and aims to reduce tariff levels to zero.

The three-zero rule promises to not only promote fair market competition and end policy distortions but will also greatly enhance the competitive advantage of enterprises in the region. On the other hand, China’s existing and new free trade zones have no complete tax-exempt practices for the time being and no implementation of the three-zero rule. This is the gap between the Chinese and Western versions of free trade zones. If China adjusts the tax system so that it extends to the reform of free trade zones, institutional factors can alleviate trade frictions. Eventually, this is bound to produce more sustained trade growth momentum.

Standing at this historical juncture, the strategic planning of free trade zones needs reform to be revitalized.

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