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Thursday 10 October 2019

China’s latest commitment to free trade

Iram Khan. 

Call it a trade war or a desperate attempt by the US to adjust its inefficiencies, the protraction is proving at least one thing: China will go out of its way to uphold the international free trade system built and matured during the last century. 

As the opening up process of the Chinese economy continues, new measures are coming up and demonstrating the country’s commitment to free trade – latest being the launch of six new Free Trade Zones (FTZs). Introduced for the first time in 2013, these zones have been termed one of the boldest moves in China’s reforms. They allowed business in fields that were, at that time, not accessible to foreign investors and provided a window to the Chinese market. 

The latest FTZs have been launched in coastal regions as well as in other border provinces. Their geographical locations in Shandong, Yunnan, Guangxi, Heilongjiang, Jiangsu, and Hebei reveal that China is planning to boost land-based transactions along with seaborne shipments and cater to the demands of different regions. Each covers a range of sectors from the marine industry to health and finance. 

FTZs have been playing a central role in China’s pursuit of development that is based on fair trade. After it joined the World Trade Organization (WTO), several steps were required to be taken to bring the economy on par with international standards. It had to liberalize its regime and inculcate a predictable environment in line with WTO rules. The FTZs debuted, according to Premier Li Keqiang, as “icebreakers for further opening up”. The process now continues in a staggered manner so that any corrective measures can be timely identified and applied.

These special zones have consistently facilitated the entry of foreign enterprises. They shifted the approach from outlining allowed areas of investment to one that specified only negative areas. A foreign project does not need to apply for confirmation from the government if it is not included in the negative list. This concept is immensely helpful in reducing paperwork and cutting red tape. 

The negative list approach has been augmenting the decentralization of authority to bring in more investment. It undergoes periodic revisions wherein the restricted areas are systematically reduced. The latest revision to the nationwide list in June this year slashed it from 48 areas to 40 and in one free zone from 45 to 37. 

The FTZs are also spurring liberalization of customs in China. As costs are reduced, they appeal to a larger consumer base. Consequently, consumption rises giving a boost to economic growth. Another pay-off of the liberalization is that export of services can be focused as much as that of manufacturing. Although the rise of China has largely depended upon industrial development, scaling the service sector has even greater potential in accelerating the growth. 

In the past, firms could register with Chinese authorities, build a factory and just start with their production lines. Now, however, China is catering to external and internal markets’ demands of high-end commodities which rely on sophisticated and efficient facilities. Likewise, the expertise level of talent that is now required is far higher. This is where FTZs come into play. They are attracting big-ticket industries with strong policy-level backing from the government. Returns on investment are increasing and causing a push to the high-quality national growth.  

The recently launched FTZs will be experimenting with innovative policies related to administrative functioning of the zones, managing of investment and attracting foreign talent. The government aims to ultimately replicate these practices across the country. The procedures followed in FTZs are evolving and policymakers are learning how they can be molded as per local conditions. Once they have been customized by fulfilling all domestic peculiarities, their countrywide implementation will completely liberalize the Chinese economy and enable it to expand its worldwide contribution. 

The evil of protectionism, meanwhile, has resurfaced and is hampering production around the world. If it spirals out of control, it will undo the hard-earned global prosperity. The bulwark against protectionism in the form of limited or waived tariffs in FTZs makes cross border flow of goods and capital flexible for all the stakeholders. 

The benefits of multilateralism and free trade are not only important for China but also for the rest of the world. The tariff spree initiated by the US is discouraging businesses and, in many cases, forcing companies to downsize. Shockwaves from this unwise strategy are being felt by all those connected with the supply chains between the US and China. Launch of the new FTZs at this time is a welcome step that will help offset some of the effects of the tariff induced international down growth.

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