Is “Free-trade Zone” Really Free?

The success of special trade zone established in Shenzhen in the late 1900s has given the public much expectation to the Shanghai Free Trade Zone (SFTZ) in 2013. After almost three years from that time, this innovation seems to have little inspiration for the trade partners given the firm control of the authorities and rigid regulations. The free trade zone, from my perspective, has not set business free at all.

SFTZ is located on atrade1
small area on the rural and coastal side of Shanghai. Right from the start, the “negative list” that includes the items foreigners cannot invest in the zone released restrained investors, because instead of a short list of just banning guns, drugs and pornography there were over 1,000 banned sectors. In the end, there were only six sectors opened for business in the zone, including financial, shipping, commercial, professional, cultural and social areas. The first area is the one that the official wanted to pay most attention to. Financial reforms promised to free the currency convertibility and interest rates, in order to trade2promote Chinese currency. However, bankers said they could not find any difference in-and-out of the zone.

However, SFTZ is not without its merits. The zone has cut red tape especially for customs, logistics, shipping and professional services such as education and law. For example, the customs clearing process has been expedited from three to four weeks to several days, which encourages imports. In addition, there were 37 service industries and 17 manufacturing industries permitted in the zone but not elsewhere in China. But these benefits are more visible for small businesses; such as seafood importers that made the local people line up to buy cheap lobsters.

Nevertheless, “there were around three quarters of respondents in a survey believed the free-trade zone offered no tangible benefits for their business.” “Around half said they hadn’t noticed any change for their business since the zone opened in September 2013.” (WSJ) The slowing down of China’s economy and unfavored policies discouraged foreign companies. Also, the obvious laterality towards local firms put foreign investors in a disadvantaged position. SFTZ seems more like a hype that the authority used to attract foreign investors but without much success.

What is more interesting is that nobody really understands about the exact rules, even lawyers. The investors still are willing to open their stores in the zone, having the belief that it is better than nothing. They expect that the benefits could be materialized one day. The unpredictability concerns the investors.

The Free Trade Zone suggests the government’s determination on market liberation. The financial reform is correspondent to recent political movements such as anti-corruption. However, the pilot projects should be sped up since capital control policy will become less and less effective along with the increase of wealth of the public. The government has to regulate the financial sector properly or the accumulated wealth could not be capitalized effectively. At first place, the ambition was to catch up Hong Kong and become the inland financial hub. However, it has fallen far short on a lot of aspects especially legal regulation. Financial investors put more emphasis on risks, which makes them still prefer Hong Kong to Shanghai after the opening of FTZ. There has been no obvious protection and deregulation needed to lure major financial firms to expand their business so far. The failure is originated from the foundational political concerns that make the government is reluctant to free the market.

Lastly, the policies listed that “enterprises engaged in manufacturing business in the FTZ enjoy 15% income tax rate” and for every tax free policy there is a word “may” connected explicitly shows that the Free Trade Zone is never free.

 

Sources:

 

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5 Responses to Is “Free-trade Zone” Really Free?

  1. Siwei Xia says:

    The blog states that the Shanghai Free Trade Zone (SFTZ) established in 2013 hasn’t set business at all. First the author criticized that there are only six sectors opened, of which the most important one, financial sector, doesn’t make any difference to bankers. Then the author listed a few negative comments on the free trade zone to strengthen the argument, which used the facts of economy slowdown, the unflavored policies for foreign companies. Third, the passage stated that no one understands the exact rules of SFTZ. Fourth, the author talked about what he or she thinks was proper to the financial sector, and pointed out that the financial regulation in SFTZ doesn’t appeal financial firms at all.
    As stated in the paragraph, nevertheless, SFTZ still benefits business such as customs, logistics, shipping and professional services. Even if these are all small business, it takes time for any policy to work, and three years are not long at all. The six sectors can be just a start to test whether this is a good approach to realize market liberalization. Also, we can’t blame SFTZ for the factors related to the entire environment. In all, I think we should wait and see how things will go for the next few years in the SFTZ before we draw a conclusion that it’s meaningless.

  2. luyingyuan says:

    Since its launch in 2013, the Shanghai Free Trade Zone (SFTZ) has not really set business free. Six sectors were opened for business, especially the financial sector, which was intended to free the currency convertibility and interest rates but bankers could not find any difference. SFTZ has also cut red tape for customs, which accelerates the customs clearing process and encourages imports. Many industries were permitted in the zone not elsewhere in China but more than half of the survey respondents claimed there were no tangible benefits for their business which may be due to the unfavored policies for foreign companies.
    The whole point of the zone is to spark broader liberalisation. It is right in terms of direction. There will be greater opportunities when yuan convertibility and interest rate liberalisation are accomplished. Another opportunity lies in the simplifying and speeding up of the import process. Moreover, it was argued that the greatest advance the SFTZ could bring is regulation predictability. China’s next stage of development may depend on it.

  3. luyingyuan says:

    Since its launch in 2013, the Shanghai Free Trade Zone (SFTZ) has not really set business free. Six sectors were opened for business, especially the financial sector, which was intended to free the currency convertibility and interest rates but bankers could not find any difference. SFTZ has also cut red tape for customs, which accelerates the customs clearing process and encourages imports. Many industries were permitted in the zone not elsewhere in China but more than half of the survey respondents claimed there were no tangible benefits for their business which may be due to the unfavored policies for foreign companies.
    The whole point of the zone is to spark broader liberalisation. It is right in terms of direction. There will be greater opportunities when yuan convertibility and interest rate liberalisation are accomplished. Another opportunity lies in the simplifying and speeding up of the import process. Moreover, it was argued that the greatest advance the SFTZ could bring is regulation predictability. China’s next stage of development may depend on it.

  4. jonathanweininger says:

    It is interesting to see how this FTZ may want to seek a specialization of a region by only allowing a few industries to be developed in that area. Maybe the Free trade shouldn’t be taken literally as a zone where investors can do almost anything, but as a place that offers benefits regarding taxes and tariffs to be competitive with the rest of the world. Maybe after rule of law is cleared up and maybe an expansion in industry diversity in the future, the fruits of this plan may actually be seen in the (long) future

  5. carriewang17 says:

    China has been protecting its domestic industries by imposing strict restrictions on foreign investments and high tax rates on imports for years. The establishment of SFTZ has overcome lots of obstacles put by Chinese ministries and commissions and other interest parties. The strategic planning for the zone is very innovative, including unrestricted foreign currency exchange, low financial requirements for corporate establishment, and a tax-free period of 10 years for businesses.

    However, only a few of the regulations have been implemented and some global asset managers are unable to launch their business currently due to the withholding quota approval and the State Administration of Foreign Exchange’s reluctance to open additional outbound channels. I agree with the author that SFTZ is not “free” as for now. More negotiation with local interest parties and effective legislation are needed to ensure the advance of economic reforms.

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