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China adds new free trade zones

January 2, 2022
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Why this is important to Wisconsin businesses: China is expected to set up more free trade zones, providing significant opportunities and benefits to foreign enterprises in the Chinese market.

China has set up three new free trade zones in an effort to expand financial reform and allow more foreign investment.

Since its first free trade zone was established in 2013 in Shanghai, China has now created 21 of these special economic areas where the trading of goods receives custom-related advantages and is free from certain taxes.

Three of the free trade zones may be of particular interest—those in Beijing, Hainan and Shanghai.

The Shanghai free trade zone was expanded in 2019 to create a new Lingang zone. This expansion is a mission to explore the freedom of investment, trade, capital, transportation and employment. According to the plan, the newly established Lingang zone aims to increase openness in critical fields such as telecommunications, insurance and securities. Lingang zone has become a popular place for foreign investment. It houses Mercedes-Benz’s auto parts remanufacturing plant, the only one the Daimler group has outside of Europe, and one of the largest remanufacturing plants in the world. Tesla’s Gigafactory also is within the Lingang zone. It is scheduled to produce 500,000 all-electric vehicles a year, and is the largest foreign-owned manufacturing project in Shanghai.

In 2020, China issued a master plan for construction of the Hainan free trade port, making Hainan an important gateway for China’s effort to become more open to the rest of the world. The Hainan Free Trade Port will have zero tariffs and low tax rates. It will operate throughout the island, off China’s southern coast, creating unique customs similar to those in Hong Kong. Meanwhile, China’s consumption tax—which covers luxury items ranging from cigarettes to jewelry—will be exempted in Hainan. In addition, an International Communications Import and Export Bureau will support the construction of global energy, shipping and technology projects. These policies go way beyond the general free trade zone, which elevates the Hainan free trade port to an unprecedented level of openness.

Most of China’s free trade zones target traditional trade in goods, but the Beijing zone is a pilot project that targets trade in services. It features scientific and technological innovation, opening up of the financial services industry and the digital economy. Over the past 20 years, the rapid advance of globalization has driven the flow of international trade in goods, and China has become the world’s leading “factory.” Today, the importance of trade in services has never been more prominent, and the Chinese government is aiming to build Beijing as a leader in this sector.

In general, a free trade zone has a higher degree of reform and exploration, obtains greater autonomy in management, and enjoys certain privileges in tax preferences, service reforms, foreign investment access and financial openness. Therefore, it is expected that China will continue to set up more free trade zones as it connects more closely with the international community, providing more significant opportunities and benefits to foreign enterprises interested in participating in the Chinese market.

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