Building pilot free trade zones is a national strategy of overall importance. Since Shanghai Pilot Free Trade Zone was officially established in September 2013, China’s pilot free trade zones have had an operational history of three years, expanding from coastal areas to inland areas and from eastern areas to central and western areas, and forming an “1+3+7” landscape. At present, China’s pilot free trade zones have entered a key stage for the new round of construction, and how to implement the requirements of the CPC Central Committee at a deeper level, get geared up to high-standard international investment and trade rules in a bigger scope and wider fields, and accelerate construction of the international, market-oriented and legal environment becomes pressing issues.

I. China’s Pilot Free Trade Zone Strategy Implemented amid Global Governance Reforms

At present, the global governance system is undergoing eye-catching changes and the international investment and trade rules are facing a new round of restructuring. This brings important opportunities and challenges to China during its opening-up process. China shall actively beef up institutional innovation and work to become a participant and leader in the new round of trade rule formulation. Establishing pilot free trade zones is a major move that China takes to explore a new path for more comprehensive and deeper reforms amid the new situations. It is of great significance to promoting trade and investment facilitation, accelerating the transformation of government functions, forming a new power that drives deeper reforms and expanding the new advantages of opening-up.

(I) Trends of the Next Generation International Investment and Trade Rules

Formation of the next generation of international investment and trade rules is a complex process; a game with multiple players. As the WTO system is increasingly marginalized, international economic and trade negotiations, represented by the BIT, TiSA and TPP, have been advanced further in recent years and involved unprecedented depths of issues and high market access threshold. Although the newly elected US president announced the country will exit from TPP, and TTIP faces great future uncertainties, many philosophies reflected in the next generation of international investment and trade rules will have far-reaching influence on the evolution of the rules and are worthy of in-depth analysis.

In general, the evolution of the high-standard investment and trade rules can be summarized in five aspects. First, there is a more comprehensive and higher-level market access threshold. Compared with previous rules, the new economical and trade rules that are being developed focus more on loosening market access, require further reductions of tariffs and lift restrictions on the number of service providers, the types of specific legal entities and localization. Second, the mode of “pre-access national treatment and negative list” is adopted. The negative list follows the rule that “excluded ones are opened”. That is, in international agreements, the right of not granting national treatment is reserved only for the industries included in the list, and the contracting parties will assume the obligation of granting comprehensive national treatment unless otherwise arranged. Third, there is an extension from traditional boundary measures to measures within the boundaries. Besides, the issues addressed in WTO agreements, including the rules of origin and sanitary & phyto-sanitary measures, the new investment and trade agreements also cover many issues not mentioned in traditional trade agreements, such as competitive neutrality, IPRs, environment and labor. Fourth, service trade and investment become the focus of concern. As a new benchmark for international service trade rules, TiSA covers two thirds of the world’s total volume of service trade and involves formulation of new trade rules in fields including finance, telecommunications, specialized services, sea transportation, e-commerce, information communication, state-owned enterprises, government procurement, service subsidy and movement of natural persons. Fifth, the mechanism for investment protection and dispute solution is strengthened. The latest international economic and trade rules introduce the mechanism for solving disputes between investors and countries, and allow neutral arbitration for the disputes between foreign investors and governments in host countries. In nature, the new philosophies of the international economic and trade rules are a reflection of the latest trends in global investment and trade in the 21st century, and of the intention of the developed countries seeking to dominate the formulation of international rules. Traditionally, international division of labor is seen among countries, and trade negotiations are focused on the reductions of tariff and non-tariff barriers. But since the end of the Cold War, the global value chain with intra-production specialization at the core has become the main form of the international division of labor. The frequent flows of intermediate goods require trade tariffs to be reduced to zero, so as to lower the cost of final products. Meanwhile, as the value chain specialization goes deep into each country, the boundary barrier plays a weaker role and barriers mainly come from support for specific enterprises, IPRs, environmental standards and other areas within the boundaries. So, measures within the boundaries are required to be limited to protect free trade.

Given the possible adjustment of policies by the US administration that recently took office, the coming trends of the negotiations about international economic and trade rules are uncertain. But one thing is for sure. That is, China will unswervingly stick to reforms and opening-up, and the connotation of high-level pilot free trade zones will be deepened with the times. In a certain sense, the halt of TPP creates an opportunity for the accelerated advance of RCEP. China shall play a more important role in the process. Pilot free trade zones shall actively be geared to high-standard investment and trade rules, step up efforts in exploring the economic and trade rules that meet the interests of developing countries, and be fully aligned to the “One Belt, One Road” strategy, so as to provide due basis for China’s opening-up experiment.

(II) Development Trends and Main Modes of Worldwide Free Trade Parks

1. Development trends of free trade parks. Free trade parks refer to the special zones set up for foreign economic activities, where special economic management systems and special policies are implemented about goods supervision, foreign exchanges management, taxation and setup of enterprises. They have different names in different countries or regions, including free zones, industrial & commercial free trade zones, free export zones, free tariff zones, tax-free trade zones, tax-free zones, free trade ports, free towns, free industrial zones, investment promotion zones and foreign trade zones. As their basic functions, they serve as the place for imports & exports trade, entrepot trade, storage & logistics, simple industrial processing, commodity exhibition and financial services. Against the backdrop of economic globalization and service-oriented industrialization, free trade parks show the trends of shift in functions from goods trade to service trade, offshore business, investment & operation and financial innovation. First, the domination of goods trade is increasingly replaced by the equal emphasis on both goods trade and service trade, and service trade attracts growing attention. With the economic globalization and service-oriented industrialization, the world sees rapid development of service trade, which represents nearly 20% of international trade. Based on imports & exports trade and entrepot trade, free trade parks extend into service trade and become an important vehicle of global service trade. Second, the sole reliance on trade is increasingly shifted to the dependence on both trade and investment, and investment liberalization and facilitation receives increasing attention. To meet the new trends of global and regional economic and trade negotiations, free trade parks begin to focus on policies about investment liberalization, and create a highly open investment environment in market access, business operation and investment services. Take Singapore for example. It has no restrictions on the ratio of contribution by foreign investors in all the industries and projects except journalism, broadcasting and utilities, or restrictions on the operation of foreign investment, unless it is made in industries related to national defense. Third, the focus on onshore functions is shifted to equal attention to both onshore and offshore functions, and offshore functions draw more attention. As free trade parks are within national borders but beyond customs, they are ideal for offshore business. With the deepening of globalization, particularly the deepening of the division of labor in multinational corporations, free trade parks keeps expanding their offshore functions. On one hand, offshore trade becomes increasingly developed. Hong Kong has changed from a center of entrepot trade to a center of offshore trade, with the values of goods involved in offshore trade 1.4 times those in entrepot trade in 2011; On the other hand, offshore financial innovation is increasingly deepened. London, Hong Kong of China, New York and Singapore have seen formation of developed offshore financial markets. Fourth, the function of gathering production and trade enterprises is increasingly replaced by the function of gathering the regional headquarters of multinational corporations, which are the intermediate organizations connecting company headquarters with their overseas subsidiaries and branches, as well as the important nodes for multinational corporations to distribute resources across the globe. Free trade parks feature a relatively loose environment for operation and thus become the top choice for multinational corporations to settle down their headquarters. For example, Hong Kong has attracted more than 3,500 regional headquarters of multinational corporations, and Singapore has drawn as many as 4,200 regional headquarters of multinational corporations.

2. Main modes of global free trade parks. There hasn’t been any widely recognized classification about free trade parks. From the perspective of functions, free trade parks break down into five categories: i) Free trade parks as bonded warehouses. Those with bonded warehousing and logistics as main functions are similar to bonded warehouses where procedures for imports & exports of foreign goods are canceled. For example, at Amsterdam Port, the Netherlands, commodities can be exempted from import duties when transported into the area, and the commodities stored in warehouses can be packaged simply as samples for exhibition or parts for assembly and enjoy favorable policies like exemption of tariffs and transit services. With close business relations with airport business, Amsterdam Port Free Trade Park also advances the joint development of logistics at both the sea port and airport. ii) Free trade parks for transit and distribution. They refer to the free trade parks that are specialized in the trans-shipment and distribution of goods, storage of goods and commercial processing, relying on their superior geographical locations. For example, based on the Panama Canal, Colon Free Zone is one of the shipping hubs in the world. It boasts huge turnover of goods, with entrepot trade as the main business. Without quota limits or taxes for imported goods, it sees free flows of goods, and has become a trading hub in Latin America. iii) Free trade parks that combine manufacturing and trade. Such parks integrate functions like processing, trade, storage and logistics. Take the US foreign trade zones for example. Any foreign and domestic commodities except those banned by laws can enter the zones. They are not restricted by the US customs laws, and allow all kinds of foreign trade activities, including storage, exhibition, sales, repackaging, assembly, sorting, cleaning and processing of foreign goods matched with domestic goods. Take Jebel Ali Free Zone, Dubai, UAE as another example. About 1,500 out of its 6,700 tenant enterprises are industrial manufacturers, most of which are logistical enterprises in petrochemical, motor vehicle and electrical fields. iv) Freeport cities. That is, a whole city is a free trade park. Both the port and other parts of the city are opened, where foreign investors are allowed to stay freely and embark on relevant businesses. For example, Hong Kong and Singapore both offer freedom in trade, investment & operation, financing & exchange, movement of people across borders and shipping. In the whole city areas, there are few restrictions on financial opening-up, market access, national treatment for foreign investment, business operation and investment services. v) Free economic zones. Special areas in cities are chosen to implement more open and freer investment policies, and create a sounder business environment. For example, Incheon Free Economic Zone and Busan Free Economic Zone in South Korea support development of foreign investment and cutting-edge industries by providing diversified preferential taxes, free and complete regulations, nice living environment and convenient administrative services. The free economic zones allow setup of foreign educational institutions and hospitals and use of foreign currencies, and provide tax exemption, financing support and some other preferential policies.

(III) China’s Pilot Free Trade Zone Strategy

1. China’s strategic purpose in launching pilot free trade zones. Building pilot free trade zones is a major move that China has taken amid the new historical conditions for its reform and opening-up to meet the strategic needs of the State and the new trends in global economic and trade development and to open itself further to the outside world in a more active manner. Its strategic purpose is reflected in three aspects. First, it wants to be actively adapted to the new trends and landscape of global economic governance. At present, the new landscape of global economic governance is taking shape, in which developed countries vigorously advance “re-industrialization” and the “return of manufacturing”, while emerging economies rise at a faster pace and enjoy a bigger say in global economic and trade development. Meanwhile, the international investment system and multilateral trading system are being restructured at an accelerated speed. China’s pilot free trade zone move is aimed to actively meet the new trends in global economic governance, implement a more vigorous opening-up strategy and create a strategic vehicle that serves the world and is deeply rooted in Asia-Pacific in the new era. Second, it wants to be actively geared to the new international rules and requirements about investment and trade. In recent years, international investment and trade rules face profound restructuring, in which a higher level of trade and investment liberalization is advocated, the mode of “pre-access national treatment and negative list” is adopted and there is an extension from traditional boundary measures to measures within boundaries. China launched the pilot free trade zone strategy, with the aim to experiment with the new international investment and trade rules, provide a basis for relevant negotiations with the US and other developed countries and offer powerful support for China’s participation in the formulation of international economic and trade rules. Third, it wants to establish the new advantage in promoting reforms and development with opening-up. As China enters a new stage for reforms and opening-up, it’s imperative to promote the reforms with opening-up. On one hand, China shall expand the fields of opening-up, improve the level of opening-up and build the new highland for opening-up; On the other hand, it shall be geared to international practice comprehensively and improve the new economic system for opening-up. China’s pilot free trade zone strategy is designed to lead the experiment with the systems and rules, government services and operation modes geared up to international practices through pilot projects in local areas, and to create pacemakers in the new round of reforms and opening-up.

2. Development of China’s pilot free trade zones. Pilot free trade zones arise in China under the said strategic background. On a specific term, China’s pilot free trade zones have undergone a process from start to development and further development. In September 2013, China (Shanghai) Pilot Free Trade Zone was officially set up and became the first pilot free trade zone in China, which can be called the 1.0 edition. In April 2015, Shanghai Pilot Free Trade Zone was expanded, and pilot free trade zones in Guangdong, Tianjin and Fujian were officially launched, forming the “1+3” landscape. That can be called the 2.0 edition. In August 2016, based on the successful construction of pilot free trade zones in Shanghai, Guangdong, Tianjin and Fujian, China announced setup of seven more pilot free trade zones respectively in Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan and Shaanxi, forming the “1+3+7” landscape. That can be called the 3.0 edition of China’s pilot free trade zones. The constant expansion of pilot free trade zones in China fully shows the recognition of the institutional innovation of pilot free trade zones by the CPC Central Committee, and raises the bar for the further advance of the construction of pilot free trade zones amid the new situations. In general, after three years of constant efforts, great headway has been made in the construction of Chinese pilot free trade zones, and can be summarized in three aspects: First, institutional innovation in a series of key fields has been advanced. In terms of the transformation of government functions, Shanghai, taking the opportunity that the Administrative Committee of the Pilot Free Trade Zone and the government of Pudong New Area share office areas, has vigorously explored the new mode of management for first-level local governments, carried out pilot projects for the separation between business licenses and permits, and established the system for operational and post-operational regulation; Guangdong has delegated the provincial-level power in 60 items of administrative affairs to three zones; In all the three zones of Tianjin, centralized administrative approval agencies have been set up to take charge of 241 municipal-level approval and service items; Fujian has transferred power related to 253 provincial-level administrative permits to pilot free trade zones. In terms of the reforms to the investment management system, the foreign investment management mode, characterized by the combination of pre-access national treatment and negative list, has been initially established in pilot free trade zones. The principle that domestic investment and foreign investment are treated equally applies to all the fields outside the negative list. The filing system is adopted for foreign investment projects and the setup and change of enterprises (except the domestic investment projects required by the State Council to be approved). The overseas investment management mode, dominated by the filing system, is implemented, and the one-stop service platform has been established for the outbound investment by both enterprises and individuals. In terms of innovation in trade regulation, the mode characterized by “unified declaration, centralized verification and inspection in batches” is adopted; The reform for trade facilitation, characterized by the free flows of goods between free trade zones and the areas beyond national borders and the restricted flows of goods between free trade zones and the non-free trade zones at home, has been advanced; The “single window” regulation and service system for international trade has taken initial shape, and pilot projects for regulation by the categories of goods have been implemented, which effectively accelerates customs clearance. In terms of the innovation in financial openness, Shanghai Pilot Free Trade Zone has put in place the hedge system for free trade accounts, and a number of international financial trading platforms have been established at an accelerated pace. Foreign exchange funds are operated in a centralized manner, and the experience in the reform to the foreign exchange control system, such as willingness settlement of foreign exchange capital, has been scaled up in other parts of the country; Centering on the financial cooperation among Guangdong, Hong Kong and Macao, Guangdong Pilot Free Trade Zone has tentatively advanced the internationalization of RMB and opened up its financial sector to Hong Kong and Macao. Tianjin Pilot Free Trade Zone has taken the lead to push forward the institutional innovation of financial leasing. Second, innovative reforms of distinctive characteristics have been carried out. Based on national strategies, the four pilot free trade zones vigorously give play to their local advantages and explore differentiated modes of innovation. With the goal as “constructing the park with the highest level of openness”, Shanghai Pilot Free Trade Zone strengthens connection with Shanghai’s construction as “four centers” and the Yangtze River economic belt, and works to establish the comprehensive advantages for international competition. Based on the strategic needs of deepening the economic cooperation between mainland China and Hong Kong and Macao, Guangdong Pilot Free Trade Zone focuses on the CEPA framework and further opens itself to Hong Kong and Macao. Relying on institutional innovation, such as port collaboration and integrated regional customs clearance, Tianjin Pilot Free Trade Zone works to develop into a new engine driving the synergetic development among Beijing, Tianjin and Hebei and a new platform for a higher level of opening-up. Aiming to deepen the economic cooperation across the Straits, Fujian Pilot Free Trade Zone explores the new mode for the cooperation of industries between Fujian and Taiwan and further opens service trade to Taiwan. Third, popularization of the experience and innovative moves of pilot free trade zones has been advanced. First of all, successful experience has been vigorously duplicated in other parts of the country. For example, the General Administration of Customs has scaled up 25 innovative moves about trade innovation in two batches in other parts of China. Many local areas have actively advanced reforms and opening-up based on the pilot moves and experience of pilot free trade zones, and the efforts have been fruitful. Next, successful experience has been spread to other pilot free trade zones or the areas under special regulation of the customs. For example, Shanghai Pilot Free Trade Zone took the lead to experiment with the negative list for the access of foreign investment. Based on the pilot experience, China introduced the negative list system for foreign investment comprehensively as of October 2016.

II. Issues That Need Further Studying about Construction of China’s Pilot Free Trade Zones

As the test field in China’s new round of reform and opening-up, pilot free trade zones have their weaknesses and need further institutional innovation. That’s mainly reflected in the following six aspects:

(I) Open Experiment and Institutional Innovation Still Lag Behind High-Standard Investment and Trade Rules

In the pilot free trade zones, although the institutional arrangements that meet internationally accepted rules have been put in place in many fields like investment management and trade facilitation, they still lag behind the high-standard international economic and trade rules.

1. The negative list for foreign investment needs to be further improved. The mode that combines pre-access national treatment and the negative list represents a major step in the reform to the foreign investment management system, but it still has weaknesses. First, the negative list needs a higher level of openness. Although the negative list for foreign investment is constantly shortened, there are still many restrictive measures. Moreover, it’s not fully geared up to international practice in the forms of expression, contents, transparency and definition about investment, and thus has not fully played its role in testing the pressure involved in enlarged openness. Second, there is a lack of legal support. Internationally, the negative list for foreign investment offers detailed descriptions of the laws and regulations involved in relevant clauses, and is highly operable. But in the Chinese pilot free trade zones, the negative list fails to list the measures not in line with relevant obligations. The lack of legal basis is not conducive to implementation. Third, the industrial breakdown is not aligned with international practice. Internationally, the negative list for foreign investment generally follows the classification specified in the WTO Service Sectoral Classification List and the UN Temporary Center Product Classification Catalogue. But the negative list of Chinese pilot free trade zones is based on the classification of China’s national economic industries, which differs greatly from the international practice. Fourth, the negative list should be developed in a more transparent manner. The procedures for developing the negative list and corresponding legal basis need to be specified clearly, and relevant stakeholders haven’t fully participated in the formulation, revision and implementation of the negative list.

2. The pressure test for high-standard economic and trade rules is insufficient. Since their launch, pilot free trade zones have made certain exploration in pressure tests, but the efforts are not enough as far as their functions are concerned. In particular, systematic pressure tests have not been conducted so far in some key aspects as the focus of the next generation investment and trade rules but stay at the superficial level. Due to the less bold exploration as first movers, the pilot free trade zones find it hard to provide a powerful basis for China to participate in international economic and trade negotiations in the said fields. For example, pilot free trade zones haven’t established a special review system for fair competition in competitive neutrality fields. Consequently, information disclosure is not transparent and there is a lack of punishment for the behaviors that hamper fair competition. So, from the perspective of participating in the restructuring of international investment and trade rules, China needs to vigorously advance pressure tests and give better play to the role of pilot free trade zones as first movers.

(II) Reforms in Some Fields Need to Be Moved Forward in Both Depth

and Width

Pilot free trade zones see varying progress of reforms in different fields. Relatively speaking, the progress in trade facilitation is obvious, while reforms in fields like financial openness and taxation need to be strengthened.

1. Innovation in financial openness needs deepening. Take Shanghai Pilot Free Trade Zone for example. Although it walks in the forefront among China’s four pilot free trade zones as far as innovation in financial openness is concerned, it still has a long way to go before it truly opens capital account convertibility and financial service sectors. First, some detailed rules haven’t been implemented. Affected by factors in various aspects, some of the “40 Clauses for Financial Reform” haven’t been provided with detailed rules for implementation or innovation cases, which results in the slow progress of relevant work. For example, the detailed rules about launching the pilot project of overseas investment by qualified domestic individual investors, launching the pilot projects of convertibility within quotas in pilot free trade zones and allowing or enlarging investment by qualified institutions and individuals in both foreign and domestic securities and futures markets haven’t been actually put in place. Second, the functions of pilot free trade accounts need to be further expanded. In terms of purposes, free trade accounts are mainly used for current items, and the restrictions on capital and financial items remain strict. So, the results they produce are less than expected. As far as the whole country is concerned, although Shanghai has much experience in free trade accounts, the popularization of the experience meets with many difficulties in other pilot free trade zones. Third, innovation in the foreign exchange control system needs to be strengthened. Pilot free trade zones are tightening the foreign exchange control policies targeted at new forms of trade, which has big influence on trade settlement by enterprises.

2. The tax system reform that meets international practice needs to be advanced at a faster pace. Chinese pilot free trade zones still lag behind the high-standard free trade parks abroad in the tax system for offshore trade and finance, which curbs improvements in competitiveness. First, there is a big gap between China’s offshore trade tax system and corresponding international practice. As the pilot free trade zones impose a high income tax rate on offshore trade enterprises, they find it hard to attract multinational offshore trade enterprises; as tenant enterprises face a heavy commodity turnover tax burden and the tax policies are not unified reasonably, flows of goods within the free trade zones may generate additional tax burdens. Second, the current tax system design can’t meet the requirements of cross-border investment. For example, the provisions about “controlled foreign enterprises” in current tax laws greatly dampen the enthusiasm of enterprises for cross-border investment; Tenant enterprises can only make up for and use losses in the next five years, but there are no restrictions on the years for the use of losses internationally. Third, the tax system aimed to promote the development of the financial industry needs to be improved further. For example, exploration into the tax policies targeted at specific financial businesses (such as trust, funds and offshore financial derivatives) is still underway, and no preferential policies are available for the overseas gains of individual practitioners in the financial industry.

(III) The Systematic Integration of Institutional Innovation Needs

Improving

Construction of pilot free trade zones is a systematic project, and reforms in many fields are intrinsically related to each other and require coordinated collaboration among different departments and regions to be advanced comprehensively. There is much room for improvements in this respect. First, supporting policies and system integration are not yet put in place. Pilot free trade zones involve a wide range of institutional innovation, which is presently advanced by various departments based on the fields they take charge of. As a result, the innovation that concerns single departments and the micro-innovation aimed for optimized procedures are advanced fast, while cross-departmental and institutional reforms are advanced slowly. Second, the scope of pilot projects for some institutional innovation is relatively narrow. At present, some important institutional innovation results are typically tested by a handful of enterprises, which plays a limited role in nationwide duplication and scaling-up. For example, institutional innovation about the “single window” for international trade and classified regulation of goods relies on tests by the enterprises of a certain size rather than numerous SMEs. Third, the institutional design based on the global value chain is weak. The global value chain with intra-product specialization at the core has become the dominant form of the international division of labor. However, the current institutional design in Chinese pilot free trade zones is mainly targeted at a single part of the value chain rather than optimization of the whole value chain. That slows improvements of institutional competitiveness.

(IV) Pilot Free Trade Zones Face an Arduous Task in Legal

Construction

Pilot free trade zones have made great headway in legal construction, but face some problems in implementation as restricted by applicable legal frameworks and institutions. First, applicable laws and regulations are at a low level. Most institutional innovation moves taken by the pilot free trade zones are released as departmental regulations at a low legal level. That is a far cry from the strict legislation procedures followed by international free trade zones, and is not conducive to the authority of the legislation in pilot free trade zones. Second, there is little room for local legislation. In the pilot free trade zones, legislation about the experimental items in investment, trade, finance and taxation is exclusive to the central government, and local government can only develop rules for implementation rather than make laws. Third, legal construction in some fields is weak. The pilot free trade zones are still deepening the reform experiment. Laws and regulations in some fields need to be adjusted and improved, and legislation in some fields is blank. For example, the system aimed to safeguard investors’ rights and interests hasn’t been established, and applicable laws and regulations provide no “sunset clauses” or “irreversible clauses” intended to protect investors’ rights and interests.

(V) The Risk Control System Based on Openness and Innovation

Needs to Be Further Improved

Risk control abilities are important to the width and depth of openness. In general, pilot free trade zones have initially put in place risk control systems amid the open economic environment, but some systems are not sufficiently implemented.

1. The security review system and antitrust review system haven’t been effectively implemented yet. Take Shanghai Pilot Free Trade Zone for example. Although the security review system and antitrust review system were established as early as the free trade zone was set up, they haven’t been fully executed so far. There are two main reasons behind that: First, according to internationally accepted rules, the functions of foreign investment security review and antitrust review are mainly assumed by the central government, and the Administrative Committee of Shanghai Pilot Free Trade Zone, as a local government administration, finds it hard to take up the responsibilities due to limited information, labor, resources and authority. Second, at the State level, the security review system and antitrust review system are implemented by the joint meeting led by the Ministry of Commerce and the National Development and Reform Commission, rather than a standing review organization consisting of full-time workers, which features rigid standards for case review, unclear scope of review and vague functions. No special organization or workers have been arranged at the municipal level, and the uncertain definition of responsibilities curbs the implementation of the systems in a large part.

2. The comprehensive regulatory system needs to be completed. While restrictions on access are loosened, the comprehensive regulatory system is still weak, in which information is not fully shared and synergy among departments is insufficient, which makes regulation less effective. At present, the scope of fields for inter-departmental information exchange and application is narrow, and the communication, sharing and use of information are insufficient. The conditions are hard to change in the short term. For example, the system about annual report publicity and abnormal operation lists is not much of a deterrent. According to rules, the enterprises that fail to publicize annual reports on time will be included in the abnormal operation list. As the severest punishment, the enterprises that fail to fulfill their obligation in publicity for three years will be included in the list of enterprises in severe violation of laws, and their legal representatives cannot act as the legal representatives of other enterprises in three years. But in fact, there is an alternative to that. For example, they can make relatives or friends nominal legal persons without losing the actual power to control the enterprises.

(VI) The Linkage Mechanism between Pilot Free Trade Zones and

National Strategies Need to be Strengthened

The newly expanded pilot free trade zones are not only strategically aligned with the strategies including the revitalization of the old industrial bases in Northeast China, western development, rise of Central China, the Yangtze River economic belt and the “One Belt, One Road” initiative, but also consistent with the overall strategic layout for China’s new round of reform and opening-up. But at present, the linkage between construction of the pilot free trade zones and major national strategies needs to be intensified, and the pilot free trade zones should serve the overall situations of the country in a wider scope of fields. On one hand, the free trade zones are not sufficiently linked to the national strategies such as the “One Belt, One Road” initiative, and have unclear positioning and functions in the “One Belt, One Road” move; On the other hand, the synergy among different pilot free trade zones in China needs to be strengthened. The interconnectivity among different pilot free trade zones needs improving, and the mechanism for the normalization of information sharing should be established as soon as possible, so as to create an integrated environment for cooperation. Although the 11 pilot free trade zones are not close to each other geographically, a step can be taken forward in the interconnectivity of institutional arrangements.

III. Outlook of China’s Pilot Free Trade Zones

China has stepped into a key stage in which construction of pilot free trade zones is advanced deeply. Internationally speaking, with the relative changes of different international forces and increasing global challenges, it’s the general trend to increase the say of emerging markets and developing countries and advance the reform to the global governance system. China will participate in the definition of global governance issues with a more confident stance and have more say in the formulation of international economic and trade rules. This raises the bar for the pilot free trade zones that are working to explore the systems and rules geared up to the international practice as first movers; Nationally speaking, the further advance of national strategies, including the “One Belt, One Road” initiative, the Yangtze River economic belt and Beijing-Tianjin-Hebei synergic development, and the deepening of the supply-side structural reform urgently require pilot free trade zones to play a bigger leading role. In its 13th Five-Year Plan, China explicitly proposes to “improve the construction of the pilot free trade zones, deepen their efforts in the opening-up of service sectors, financial openness and innovation, investment and trade facilitation and operational and post-operational regulation as first movers and duplicate their successful experience in a wider scope”. Next, the pilot free trade zones shall further emancipate the mind according to requirements of the central government, push forward institutional innovation with greater courage and wisdom and give further play to their roles as the test fields in China’s reform and opening-up.

(I) Intensifying the Integration of the Institutional Innovation System in Pilot Free Trade Zones

The reform and opening-up of pilot free trade zones involve many fields and departments. As the reform enters a deep-water zone, it concerns many aspects, and the integration and synergy of the reform and innovation become increasingly important. In terms of institutional design, systematic integration shall be focused on, and efforts shall be made to strengthen the intrinsic relationship among different fields of the reform and different systems and improve the management system and work advancing mechanism.

1. Efforts shall be made to improve the institutional innovation system that matches the open economy. China’s pilot free trade zones have made important progress in investment, trade and financial openness, and need to focus on the key fields and further deepen and improve the reform in such fields. First, the institutional innovation for investment management with management of the negative list at the core shall be improved. Besides the establishment of the security review system, the number of industries in which foreign investment is banned or restricted shall be increased; besides equity limitations, restrictions on most-favored-nation treatment, performance, senior executives and boards of directors shall be adopted in a targeted manner. The pilot free trade zones shall be geared up with international standards in the form, including six core elements, i.e. departments, sub-departments, industrial breakdown, types of reservation clauses, government levels and measures. The procedures for the change of the negative list shall be more transparent. Second, the institutional innovation for trade regulation with trade facilitation at the core shall be improved. Construction of the “single window” for international trade shall be further advanced to improve customs clearance efficiency. Classified regulation of goods shall be deepened, taking into account the origins of goods as well as their direction of flows and purposes to realize more reasonable classification of goods and more flexible modes of regulation. Third, innovation in financial openness shall be advanced in a vigorous and prudent manner. Financial openness and innovation has its particularity and will not necessarily be implemented in a comprehensive fashion for the time being. Shanghai Pilot Free Trade Zone shall play its role as the first mover in this respect, expanding the functions of free trade accounts, accelerating construction of the international financial trading platform and exploring construction of the RMB international service center. Fourth, a tax system that meets international practice shall be established at a faster pace. China’s pilot free trade zones presently have no tax design to encourage offshore businesses, and the tax system for overseas equity investment is a far cry from that in developed countries. We suggest establishment of a tax system targeted at offshore businesses and overseas equity investment as fast as possible to levy low taxes on offshore trade and offshore financial businesses.

2. Efforts shall be made to improve the governance system adaptive to the market-oriented reform. The further advance of the opening-up and market-oriented reform requires bigger breakthrough in government management. Efforts shall be made to meet the requirements of open economy, accelerate transformation of government functions and build law-based and service-oriented governments. First, the move to streamline administration and delegate power shall be pushed forward in a deeper manner. Pilot projects about the negative list for market access shall be carried out vigorously and market players shall be given more initiative. The reform to the business registration system shall be deepened, and the transparency and predictability of administrative permits shall be increased to remove the institutional bottleneck facing enterprises’ market access. Second, the operational and post-operational system shall be put in place comprehensively. Information exchanges and resources sharing among different departments shall be promoted, and unified market regulation and comprehensive enforcement of law shall be advanced to improve regulatory effects. The public credit system shall be further improved and punishment for breach of laws and regulations shall be strengthened, to increase the cost of dishonesty. Third, innovation in government service management shall be intensified. The mode of “Internet + government affairs service” shall be implemented to advance restructuring of the government service management process through information-based means. The PPP mode shall be popularized vigorously, and social capital shall play a bigger role in public utility investment and operation to improve the efficiency of public service supply.

3. Efforts shall be made to improve the legal security system that supports pilot free trade zones. We suggest development of the Law of China’s Pilot Free Trade Zones at the State level to improve the unification and authority of the legislation for pilot free trade zones and provide guidance to the legislation for the problems at a deeper level that dampen the legal construction of pilot free trade zones across China. Efforts shall be made to change the current practice that “specific discussions are held for specific legal affairs” in pilot free trade zones, develop convenient procedures for the suspension of the implementation of relevant laws and regulations and execute relevant reform measures as soon as possible. Besides judicial litigation, a diversified dispute solving mechanism including arbitration, negotiation and conciliation, shall be developed vigorously. The international legal service system, particularly the international legal investigation mechanism, shall be improved to provide overseas legal investigation service for the business case judgment by the courts of the pilot free trade zones. Efforts shall also be made to beef up cooperation with both foreign and domestic legal service providers, attract famous legal institutions from abroad and intensify training for legal service talents.

(II) Advancing the Implementation of High-Standard International Investment and Trade Rules as First Movers

Developed American and European countries are presently accelerating a new round of restructuring of the global economic and trade rules. That highlights the trends of the new round of service and investment opening-up, such as high levels of liberalization, and puts unprecedented pressure on China’s opening-up and institutional reform. Based on the changes in international situations, pilot free trade zones shall carry out experiment with a series of important issues under the conditions of risk controllability, so as to provide experience for China’s participation in international economic and trade negotiations.

1. Efforts shall be made to advance the experiment with the latest issues for economic and trade negotiations. The world will see new changes in economic governance rules in the future. If the TPP can’t take effect, relevant countries will seek alternatives. This somewhat provides an opportunity for China to advance the RCEP, and requires the pilot free trade zones to strengthen experimentation with high-standard investment and trade rules, give better play to their role as first movers and take the lead to experiment with the issues that meet China’s reform objectives. First, the pilot free trade zones shall put in place the competitive neutrality system. In particular, they shall establish the fair competition review system, reviewing the measures that may cause unfair competition and clearing the contents that go against competitive neutrality in applicable laws and regulations. Preferential policies in project acquisition and financing for competitive State-owned enterprises shall be cancelled step by step to improve independent competitiveness. Second, IPR and environmental protection shall be intensified. The pilot free trade zones shall introduce a stricter system for IPR protection and law enforcement, improve the law enforcement system for environment regulation, and advance the environment protection contracting system to encourage enterprises to sign agreements higher than legal requirements with governments. Third, the pilot free trade zones shall explore establishment of the investor objection review system. When investors consider that relevant laws, regulations or documents violate the international treaties China acceded to or international practice, they can file an application for objection review, which also serves as a reference for China in its participation in international economic and trade negotiations.

2. Efforts shall be made to improve the risk control system for opening-up. Taking for reference the experience of developed countries, the pilot free trade zones shall strengthen risk monitoring and operational and post-operational regulation to improve risk control abilities while further opening themselves to the outside world. First, efforts shall be made to improve the industrial risk control system, and particularly accelerate improvement of the national security review system and antitrust review assistance working mechanism. Collaboration among relevant departments shall be intensified within the scope of local authority to increase information sharing, synergetic judgment and law enforcement assistance and secure the actual implementation of the systems. Support shall be given to relevant departments, so as to establish the industrial warning system that matches the open environment, release industrial warning information in a timely manner, take effective measures and avoid damage to domestic industries by excessive access of foreign investment. Second, efforts shall be made to improve the financial risk control system. According to the requirements of the macro prudential assessment system, the pilot free trade zones shall establish a comprehensive financial regulation mechanism adaptive to financial openness and innovation, strengthen monitoring and analysis of large-scale flows of short-term capital across borders, beef up coordination of regulation over cross-departmental and cross-industrial financial businesses and information sharing, and enhance the ability in the synergetic control of financial risks.

(III) Paying Attention to the Synergy between the Pilot Free Trade Zones and Major National Strategies

The pilot free trade zones have a unique and important position in national strategies. We shall proceed from the overall situations, and give full play to the synergy between the pilot free trade zones and the national strategies like the “One Belt, One Road” initiative and the Yangtze River economic belt, so as to make them support and promote each other.

1. The pilot free trade zones shall strengthen their role in the “One Belt, One Road” strategy as a pivot. China’s “One Belt, One Road” strategy is aimed to promote the interconnectivity among Asian, European and African continents and their neighboring oceans, develop interconnected networks in all the dimensions and at all the layers and achieve the common development of the countries along the route. China’s pilot free trade zones assume irreplaceable unique functions in the implementation of the “One Belt, One Road” strategy, and shall become hubs and platforms that serve execution of the strategy. First, they shall be developed into the hubs of trade services for the “One Belt, One Road” initiative. Based on construction of an Asia-Pacific free trade zone, they shall develop the future-oriented digital network that combines Internet and cross-border free trade zones and provide Internet-based cross-border trade enterprises with public service platforms for Internet of Things, cloud computing, big data, electronic certification and product tracking, etc. They shall explore the development strategy that integrates the “One Belt, One Road” initiative and free trade zones, and promote construction of the comprehensive transport hubs that serve the “One Belt, One Road” initiative. Second, they shall be developed into the hubs of financial services for the “One Belt, One Road” initiative. Shanghai Pilot Free Trade Zone plays a very important role in this respect. Based on construction of Shanghai as the international financial center and with the further play to the role of Asian Infrastructure Investment Bank and BRICS Development Bank, it shall increase cooperation with the financial centers along the “One Belt, One Road” and build the cross-border investment and financing platform that serves the “One Belt, One Road” strategy.

2. The pilot free trade zones shall give full play to their role in influencing and driving development across the Yangtze River economic belt. Efforts shall be made to strengthen institutional innovation in pilot free trade zones, launch more duplicable and scalable innovative moves and advance the popularization and sharing of the innovation fruits across the Yangtze River basin. Efforts shall also be made to deepen construction of the “single window” for international trade, accelerate the cross-departmental construction and management of electronic ports, improve port regulation and clearance processes, increase cooperation on clearance among the ports across the Yangtze River basin and advance integration of clearance in the Yangtze River economic belt. The access to the domestic financial market shall be widened for overseas investors, so as to improve the capability of the domestic financial market in the allocation of resources both at home and abroad and provide the enterprises in the Yangtze River economic belt with more convenient financial services. Interconnectivity across the Yangtze River economic belt shall be increased, including the interconnectivity of infrastructures, credit information and enterprise information.

3. The pilot free trade zones shall increase linkage with other major national strategies. China presently has 11 pilot free trade zones, which assume respective functions corresponding to national strategies. For example, Tianjin Pilot Free Trade Zone is intended for the synergetic development among Beijing, Tianjin and Hebei; Guangdong Pilot Free Trade Zone is aimed to deepen the economic cooperation between mainland China and Hong Kong and Macao; Fujian Pilot Free Trade Zone is designed for the economic cooperation across the Straits. Among the seven provinces where pilot free trade zones were newly set up, Liaoning aims to improve the overall competitiveness of northeastern China’s old industrial bases; Zhejiang intends to explore construction of Zhoushan Free Trade Port and advance bulk commodity trade liberalization; Hubei hopes to give play to its demonstration role in the rise of Central China and construction of the Yangtze River economic belt; Chongqing expects to move forward the in-depth implementation of the western development strategy; Sichuan aims to build itself into an open economic highland in the inland areas of China; Henan intends to construct the comprehensive and modern transport hub that serves the “One Belt, One Road” strategy; Shaanxi hopes to give full play to the role of the “One Belt, One Road” strategy in driving western development. Besides increasing their linkage with the “One Belt, One Road” initiative and the Yangtze River economic belt, the pilot free trade zones shall also be closely combined with other major national strategies, make clear their role in specific national strategies and take targeted strategic moves to drive forward overall development.

(IV) Coordinating the Cooperation among and Differentiated Exploration by Nationwide Pilot Free Trade Zones

In China, the free trade zones have entered a new stage of construction characterized by linked development. They shall form a landscape in which each has distinctive features and complements each other under the guidance at the State level.

1. Pilot free trade zones shall be encouraged to highlight respective characteristics. At present, the pilot free trade zones are located in different regions, including both coastal and inland areas and both eastern and western areas. During institutional innovation, China shall not only offer unified guidance, but also arouse the enthusiasm and initiative of local areas, encourage each pilot free trade zone to advance differentiated experiment and development based on actual situations. To this end, it shall further streamline administration and delegate power as much as possible and give pilot free trade zones bigger room for decision-making and innovation. Meanwhile, we suggest establishment of the fault-tolerant mechanism for the reform and innovation in pilot free trade zones, so as to stimulate the enthusiasm of local governments for innovation, reduce their worries and provide institutional guarantee for their bold innovation.

2. Linkage and synergy among different pilot free trade zones shall be increased. The pilot free trade zones face many common problems in the course of construction. So, during institutional innovation, they shall increase exchanges about common problems and relevant information in a timely manner and improve the overall efficiency of institutional innovation. Different pilot free trade zones shall focus on different aspects of institutional innovation and beef up coordination and interconnectivity. Is it possible for an enterprise that’s registered in a certain pilot free trade zone to be equally treated in other pilot free trade zones? As one pilot free trade zone covers about 120 sq km at present, the integration of 11 pilot free trade zones at home means some 1,400 sq km of areas are geared up to the international economic and trade rules, and the overall effect of institutional innovation formed in the integration process will be huge.

(Source: Scientific Development, January 2017, by Xiao Lin, Director of the Development Research Center of Shanghai Municipal People’s Government and member of the Affair Committee of Shanghai Academy set up between the Chinese Academy of Social Sciences and Shanghai Municipal People’s Government)