Shanghai's Free Trade Zone

Shanghai introduced a free trade zone around the city with the expectation that foreign investors would set up warehouses, manufacturing or distribution centers. The end goal is to make Shanghai an international shipping center. To reach this goal there are three guidelines for product movements for the zone: Guideline 1 addresses the relationship between the zone and abroad. By implementing a negative-list approach all sectors are opened for trade except for any excluded by law. This approach allows goods to freely exit and enter China free of customs supervision. Guideline 2 addresses the relationship between the zone and the rest of China. It states that all goods moving into the rest of China will be subject to taxes and regulations. Guideline 3 addresses the zone itself which allows free flow of goods within the zone. The guidelines are straightforward and simple to understand. The difficult part is to know what will happen with financial reform within the zone.

With the trading guidelines Shanghai needs a financial reform to ultimately work. There are 9 components to the financial reform: 1) interest rate liberalization, 2) capital account liberalization, 3) foreign banks can be established, 4) restricted license banks can be established, 5)  foreign invested credit rating companies can be established, 6) particular Chinese banks can engage in offshore business, 7) tax incentives will be given to financial lease businesses, 8) foreign companies are allowed to set up operations within the zone for delivery of goods, and 9) a corporate tax will be implemented for project companies working in overseas equity investment.

With all the above guidelines in place and ready to take effect, Shanghai is waiting for foreign investors to act. So far there are only two new actors in the zone. One is an entrepreneur from Hunan, a province in China, who wants to avoid red tape when getting his business started. The second is Amazon who has plans to build a warehouse in the zone. Even though the zone was only opened 11 days ago the zone has already been considered a failure. Shanghai expected a quicker response from foreign companies even though the JP Morgan article states the development of the zone will be a gradual process.

The zone has a high potential to improve Shanghai’s trading position. As more foreign companies establish a location within the zone it will bring job to domestic workers and increase exports for China while saving the companies money by avoiding import taxes. As the months continue it will be interesting to follow Shanghai’s development and transition into a free trade zone.