China recently has begun expanding its free trade zones (FTZ) in the wave of new policy seeking to foster trade and growth in China. And apart from attracting foreign interest and commodities, the new FTZs will also serve as places where new market reforms can be tested.
An FTZ is s special geographic area where normal customs and duties do not apply to sales or manufacturing, unless the goods traded within the FTZ are going to ultimately end up in that country. By adding more, China is opening up the door to potential new investments.
The first FTZ was established in Shanghai in 2013. Based on the results, new FTZs are now opening in Tianjin, Guangdong, and Fujian. Many more cities and provinces are applying for the FTZ approval in the coming years. Another goal of having numerous FTZs, as is the plan moving forward, is to have mutual competition within the various areas driving growth and innovation. China is essentially trying to set up a new competitive market within its borders.
Along with the FTZs, China is also loosening restrictions directly on foreign investment. More and more industries that were once protected by the government are being opened up to foreigners, and the number of these industries available to foreign investment is expected to rise. The results appear to be positive. Despite both the Chinese and global slowdown, China attracted more than any other country in 2014 by receiving $119.6 Billion in foreign investments.
These FTZ reforms, along with the Road and Belt initiatives and the proposed economic zone along the border with Mongolia indicate that China is branching out in its effort to curtail its slowdown. It also indicates that China is further solidifying itself as the regional leader in Asia.
With regard to international trade, China is already a ‘big country’ and therefore can significantly alter the terms and balance of trade in its favor at the expense of smaller economies. But by extending a hand to its weaker regional neighbors, China is showing that it wants a more unified Asia, albeit with a solidified China at the helm. Although China’s recent actions seem innocuous, China is strategically maneuvering itself in the geopolitical conflict that defines Asia.
Sources: http://usa.chinadaily.com.cn/business/2015-03/27/content_19923093.htm
http://usa.chinadaily.com.cn/business/2015-03/27/content_19931489.htm
Shanghai’s FTZ was one of the major economic reform of Xi Jinping administration. One-stop application processing platform and relaxation of regulation attracted over 10,000 corporations for a year. However, even though there has been a quantitative success, foreign capital regulation still exists such as choice of currency for free trade transaction accounts still limited to RMB.
What are these new FTZs? The comment above indicates that their could be a limitation to free trade with foreign countries. Are these FTZs already connected to the foreign market?
The FTZs are supposed to help alleviate the limitations on free trade that are imposed by the Chinese government. They’re similar in a way to duty free stores in airports, except the airport is China. China is rapidly reducing government protection of industries, both within the FTZs and in general. There is also greater yuan convertibility within the FTZs, as well as lower interest rates on some things such as bonds.
The four zones are expected to compete with each other in order to boost efficiency. Nevertheless, the measures for capital account liberalization that is applied to the Shanghai zone will not yet be extended to the three new zones.
These various initiatives will surely take too long to be effective as macroeconomic stimulus. It may merely be that slower growth is conducive to discussions of these sorts of projects.
That China is “big” in global trade is an important insight. Chinese import demand for iron ore and various other commodities is certainly large enough to affect international prices. It also means that having infrastructure that will facilitate trade with China is potentially a big deal to central asia.
As to the FTZs, this mimics the original “Special Economic Zone” measures in the 1980s that fostered the growth of Shenzhen and other cities as labor-intensive manufacturing export centers. Those early SEZs have in general moved beyond the “cheap labor” model, while their success paved the way to extending such policies to the entire country. FTZs are likely also in part a trial balloon. If they appear to work well and cause few problems (the two are not the same: the former is an economic evaluation, the latter a political one), then similar “easing” of rules will be extended. If so, that may pit the FTZs lobbying to maintain their exclusive status vs the rest of the local governments across China wanting a piece of the pie. Last time (with SEZs, and earlier with the Household Responsibility System and many other policies) the latter carried the day.
I really hope these Free Trade Zones are success. Although China is a big player in global trade right now, I could become a much larger one if it opened its borders to free trade. Additionally, foreign investments does not only bring capital into China, but also technology, a big factor in China’s pursuit of growth for the upcoming decade.