Reg Watch No. 1: China’s Wave of Free Trade Zones

Pilot free trade zones are usually a bellwether for China’s reform and opening-up policy. Their missions include exploring economic systems and building high-level trade rules that other parts of the country can one day replicate.

The country has set up 21 pilot free trade zones since 2013. Reform and liberalization policies are stress-tested in these areas before potential nationwide expansion. Initiatives include lowering restrictions on foreign investment, intellectual property protection measures, experimenting with cross-border data governance and administrative streamlining. The crown jewel and free-trade-port-to-be, Hainan, will be empowered by a dedicated law to carry out what officials have described as unparalleled reform and liberalization.

Huang Qifan, former mayor of Chongqing and a respected economist, sees the wave of new free-trade zones in recent years as evidence that the country is deepening its reform, allowing greater freedom of movement for factors of production (land, labor and capital), and forming a rule-based environment that meets international standards. As China begins to ponder “high-standard” trade deals such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), these zones are ever more important as a reference point for what the government can and cannot accept.

With the exception of Hainan — where the whole island will be sealed off for trade liberalization — the zones host special customs supervision areas where tariffs exemptions are in place. This allows clusters of economic activity to flourish, such as processing trade and e-commerce bonded import warehouses. In recent years, differential planning has highlighted the zones’ functions in both bolstering local industries and strengthening cooperation with specific countries.

Here is a timeline of China’s efforts to establish free trade zones in the last two years — efforts that have increasingly focused on beefing up Hainan into a free trade port. Many of the measures are encouraging. But Caixin has advocated a greater focus on regulatory consistency — between central and local governments, between different regions and departments — as consistency is required for higher-level trade pacts such as the CPTPP.

Free Trade Pilot Zones & Free Trade Port

Aug. 2019   State Council

Plan to set up six new free trade pilot zones, bringing the number of pilot zones in the country to 18. New additions include zones in Shandong, Jiangsu, Guangxi, Hebei, Yunnan, and Heilongjiang

June 2020   Central Committee & State Council

Hainan master plan released to establish China’s inaugural free trade port by 2035, including:

● liberalization of trade in goods and services

● facilitation of investment, opening-up of key sectors

● lower income tax

● free movement of people, capital, and data

July 2020   Ministry of Finance, General Administration of Customs & State Taxation Administration

Relaxation of duty-free rules in Hainan:

● quota for individuals on duty-free purchases tripled to 100,000 yuan a year

● duty-free product catalogue increased from 38 to 45, adding new options such as mobile phones and wine

● previous limits on the number of items that could be purchased per customer were increased or eliminated

July 2020   State Council

A sixth batch of measures successfully trialled in free trade pilot zones were promoted nationwide. These include encouraging institutional reform in finance, trade and governance.

Sept. 2020   State Council

Plans for new free trade pilot zones in Beijing, Hunan, and Anhui and expansion of the Zhejiang zone, taking the total number to 21. Common themes include:

● opening-up of the financial sector

● investment reform

● trade facilitation and innovation

● promoting integrated development within respective city-cluster or international trade channels

Oct. 2020   Supreme People’s Procuratorat

The institution issued a document titled “Opinions on Fully Performing Procuratorial Functions to Serve and Guarantee Free Trade Pilot Zone Construction.” It proposed 15 specific measures, including protecting various market entities, implementing criminal policies with an appropriate gradient from lenient to severe punishments and strengthening legal supervision of litigation activities involving entities inside zones.

Nov. 2020   Ministry of Finance, General Administration of Customs & State Taxation Administration

Zero-tariff policy for raw and secondary materials imports for Hainan is implemented through a positive list system.

Dec. 2020   National Development and Reform Commission & Ministry of Commerce

Hainan free trade port’s inaugural “Foreign Investment Negative List” lifts foreign equity restriction on all auto manufacturing in Hainan, a year before the mainland plans to carry out similar measures.

Dec. 2020   National People’s Congress

A first draft of the Hainan Free Trade Port Law was revealed. Through legislation, a series of unprecedented measures in trade and investment liberalization, fiscal support and tax reform will be institutionalized. It will allow for the implementation of the June 2020 master plan.

Compiled by Caixin Insight, the research arm of Caixin Group.

Contact editor Joshua Dummer (joshuadummer@caixin.com)

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