In this Asia-Pacific Insight, Fabien Pacory explores the impact and influence of Free Trade Zones in China's Belt and Road Initiative. Free Trade Zones have more than a role to play in Beijing's strategy, he explains. In various countries, these zones serve various purposes, starting with an economic laboratory role and a pro-reform role which eventually help making the initiative stronger and stronger. There is a genuine strategy here, Pacory explains. The question is: which one?
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The BRI and the Free Trade Zones Strategy


The Bottom Line.

In this Asia-Pacific Insight, Fabien Pacory explores the impact and influence of Free Trade Zones in China’s Belt and Road Initiative. Free Trade Zones have more than a role to play in Beijing’s strategy, he explains. In various countries, these zones serve various purposes, starting with an economic laboratory role and a pro-reform role which eventually help to make the initiative stronger and stronger. There is a genuine strategy here, Pacory explains. The question is: which one?

Would you like more business trends and tips from regional Asia-Pacific experts? Read our latest Asia-Pacific Insights!


The BRI and the Free Trade Zones Strategy

[By Fabien Pacory]

In 2013, Chinese President Xi Jinping announced in Astana and Jakarta the launch of an ambitious initiative, the New Silk Roads, now known as the Belt and Road Initiative (BRI).

The first group in charge of developing the Initiative was formed at the end of 2014 and its leadership was made public in 2015. As of today, its committee reports directly to the State Council of the People’s Republic of China, which makes the project highly strategic. Yet, the question of what the BRI is about often comes up.

In essence, China seeks to develop new export zones to be less dependent on its exports to the United States or Europe. Of course, the BRI is also an opportunity to tackle China’s long-lasting overcapacity issue.

With the BRI, China is developing new land and sea routes, mainly thanks to the development of strong infrastructure investments. Hence, it is able to create powerful logistics corridors, new hubs and trade routes while developing new supply points for raw materials, better energy security, rare earth and hydrocarbons.

All in all, the Belt and Road Initiative is so significant that some experts point toward the emergence of a new type of 2.0 globalization. Beijing is creating new rules, new methods, a new (proprietary) ecosystem, a new regional economic deal and, above all, a new “foundation” in global geopolitics. And the trend is already having an impact.

The question is, what are the tools used by Beijing to develop such an undertaking? One of these tools is the recourse to a very elaborate Special Areas strategy built on a large regional scale.

The Belt and Road Initiative: in brief.

The BRI is an important new phenomenon in the Asia-Pacific region. Set up by Beijing, the trend is aimed to give China a better control of its borders upstream.

The BRI helps to build better relations with the neighboring countries and provides better control over Central Asia dynamics. It also fulfills commitments that allow a better understanding and a better dynamic on ASEAN, Africa a, d the Middle East.

In the main, China is investing in numerous port and rail infrastructures which, beyond facilitating trade, will create strategic port control opportunities for its Navy in many countries. There has in fact been a very strong increase in military spending since the BRI was set up.

Behind all this is also the establishment of a financial and banking system which facilitates the internationalization process of the CNY and its area of influence. In 2016, the Asian Investment and Infrastructure Bank (AIIB) was for instance created in Beijing to compete with the Asian Development Bank but also to establish an alternative to the World Bank founded by Western powers. The AIIB is also very close to the New Development Bank (NDB) created in 2014 by the BRICS members, and headquartered in Shanghai.

The BRI: Practically speaking…

Practically speaking, the amount of BRI-related projects remains unknown.

Having said this, some estimates suggest that there could currently be about 1,700 projects completed or underway in different types of sectors and industries, at the regional scale.

Financing.

To finance the initiative, a Silk Road Fund was created in 2014 by the State Administration of Foreign Exchange (SAFE) – which manages foreign currency reserves – together with the China Investment Corporation, the China Export and Import Bank and the Development Bank of China (CDB). With the China Insurance Investment Fund, this Fund finances a variety of projects under particularly favorable conditions, including by permitting companies and local governments to choose the CNY over the USD along the BRI.

Stakeholders.

Originally a unilateral project, the BRI has progressively created an ecosystem. The policies have nurtured the establishment of a myriad of Chinese private industrial investments, backed by companies, decision-makers, local, and provincial governments, all of which want to show their support for the project while taking advantage of rising opportunities.

In line with Beijing’s China 2025 Plan, the initiative therefore has several dimensions: environmental, legal, technological, normative, peaceful, and a soft power and/or sharp power dimension.

Ambitions.

All in all, the ambition behind the BRI initiative is straightforward: China aims at transforming its overall geopolitical and economic situation.

>> Related reading: Daniel De Blocq Van Scheltinga: Insights on Chinese M&A markets.

To make its economy more dynamic, it strives to create new types of models and protocols that go well beyond the historical “Go Out Policy”. The China-Pakistan (CPEC) and Bangladesh-China-India-Myanmar (BCIM) economic corridors are good examples of this démarche.

From a BRI ecosystem to a new form of multilateralism.

All this suggests that China is developing a new type of multilateralism and that, somehow, it is at the center of new cooperation challenges, of better regional integration.

As a matter of fact, the World Pensions Council does recognize that the BRI could transform the global economic order. In practice, estimates already suggest that between 2014 and 2016 China’s trade volume with countries along the New Silk Roads reached USD 3 trillion, results which flow from a carefully elaborated strategy.

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The Free Trade Zones (FTZ) strategy.

Amongst the tools used to implement the BRI policy is the development of a very elaborate Free Trade Zones (FTZ) strategy.

As early as 1978, China began to define Special Economic Zones (SEZ) to attract foreign investment. At the 5th Congress, in 1980, the Standing Committee of the Political Bureau designated four coastal cities (Shenzhen, Zhuhai, Shantou, and Xiamen) as the first Special Economic Zones with preferential economic policies.

Today, Special Economic Zones are numerous in China and all have several specificities and names.

There are 17 EPZ (Export Processing Zones), 54 Economic Technological Development Zones, 53 High Technology Development Zones and 15 Border Economic Cooperative Areas which includes Free Zones, Duty FZ, Free Ports, Foreign-Trade Zones, Industrial FZ, Export FZ, Qualifying Industrial Zones, Duty Free EPZ, Hybrid FTZ, Petrochemical FTZ, etc.).

In sum, the strategy has materialized into an extremely practical network, which is already bringing some change to the regional and global chessboards.

Change is coming.

In effect, a new form of economic globalization policy has appeared with the emergence of these special economic zones and Free Trade Zones (FTZs).

The 3rd plenary session of the 18th CPC National Congress in 2013, for instance, called for the acceleration of the implementation of an “FTZ strategy” with China’s neighboring countries to lay foundations for the creation of a high-standard global network of free trade zones.

From a macro perspective, the goal is to better seize the opportunities of new economic trends and to enable better relations and foreign affairs strategies.

From a very business-oriented and practical perspective, FTZs must facilitate investment and trade, allow better access for Chinese companies to international markets, and inject new dynamism into a new space for better Chinese economic development.

Reform engines.

Free Trade Zones are also very important tools which enable China to better anticipate and participate in the formulation of international rules and standards on trade and tariff conditions, to acquire greater institutional power and global economic governance and to increase its interests.

>> Related reading: Asia-Pacific Trade Insights.

Said differently, the latest generation of Free Trade Zone is made-up of Pilot Free Trade Zones (PFTZ), which clearly operate as internal economic reform engines.

In the 13th Plan (2016-2020), the words “Free Trade Zones” or “Free Trade Areas” appear more than 11 times, and PFTZs are described as platforms and laboratories to experiment with new rules for institutional, commercial or tactical innovations.

PFTZs furthermore allow the safe testing and examination of new initiatives in confined spaces, before successes can be replicated on a national scale to build an improved version of the Chinese economy.

The latest generation of PFTZs, that is to say, are very well thought-out and orchestrated. They are genuine multi-purpose and multi-modular vehicles with several functions, from system-testing with regards to financial innovation, to change management in relation to internal market reform. They allow simulating different scenarios, they permit to practice and training, they foster sounder investments in the BRI area, so forth and so on.

Integrated approach.

As suggested earlier, the national PFTZ strategy also matches the policies put into place to foster the internationalization of the CNY, to set up a more commercial structuring of foreign investment reforms, or to stimulate the country’s reactivity.

Ultimately, the key purpose of the PFTZ strategy is to promote economic reforms but the whole initiative also seeks to boost growth by creating poles of convergence for the various industries, service providers, logistics, supply chain or financial services, in order to achieve the standards desired by the 13th five-year plan.

Domestic and international reach.

The Special Zones strategy is also about participating as quickly as possible to the deployment of the BRI through the permanent upward stimulation of the areas surrounding the PFTZs, whether domestically and internationally.

Domestically, the Zones are essential and perfectly complementary to the last six major reforms: trade and investment liberalization, administrative system reform, financial system reform, the new tax policy for FTZ and the new pilot cross-border e-commerce policy.

But the PFTZs are also key organizations for cross-border cooperation and for greater and better use of the CNY, as many PFTZs provide better solutions or financial benefits.

Cross-border e-commerce is also a real challenge for the economy, the export value of Chinese e-commerce was USD 5,500 billion in 2016, or nearly 10% of the total exported and nearly 18% in B2C exports.

To this extent, FTZs allow a high degree of responsiveness in supply chain management, logistics, inventories, consolidation, packaging, marking, tracking and storage, inspections and customs declarations. Furthermore, many import/export customs protocols are optimized and continuously improved whilst PFTZs collect taxes and allow better control of taxes at identified crossing points. Win-win.

FTZs as BRI pillars.

Let us provide some numbers here.

In 2016 alone, the 4 PFTZs of Shanghai, Guangdong, Tianjin, and Fujian generated more than CNY 409 billion in taxes.

In 2017 there were eleven Free Trade Zones in mainland China, not to forget the development of the Hainan province. Considered as pilot areas, these shared rather similar rules even though some had more geostrategic functions, such as revitalizing northeast China, supporting the development of the Great West, strengthening the balance of growth in central China.

The FTZ of Henan Province is for instance very focused on trade with the BRI in Central Asia nowadays, while the FTZs of the coastal areas support the Yangtze River Economic Belt and Greater Bay Area effort in the south, and participate to the Maritime Silk Roads effort.

These FPTZs are increasingly interconnected and have very efficient and sophisticated exchange and cooperation processes. Their orchestration is at the forefront of engineering and metadata management. As the Chinese President recently repeated on the PFTZ of Shenzhen – Qianhai – Hong Kong Cooperation Zone, the goal is to allow for “advanced industry and services” to prepare Made in China 2025.

Exporting the model.

Thanks to their expertise, the Chinese have deployed FTZs on many strategic axes in the BRI area.

Turnkey systems are made available in many countries in Central Asia and Africa, including models and protocols. China is also working on creating new methodologies to facilitate its own coordination policy. Much more than just industrial parks, China’s Overseas Economic & Trade Cooperation Zones are new forms of mixed management systems on which are built tomorrow’s trade corridors.

Political message.

Above all, China wishes to set an example.

Now that it has real know-how, China is able to provide both user-friendly FTZs and the related optimal use guidelines to emerging countries.

The operating system of their FTZs is reliable and they succeed in concluding local partnerships with the main regional and global actors, especially since they come along with joint infrastructure projects such as rail networks, deep-sea ports, and so on.

Africa: trade and resources.

China is, for instance, deploying Special Economic Zones in Africa.
In July, it inaugurated the largest African FTZ – Djibouti International FTZ (DIFTZ) – a 4,800 ha zone worth USD 3.5 billion in investment.

Four priority industries are being targeted – Trade/Logistics, Export, Business, and Financial Services with a Manufacturing and Duty-free Merchandise/Retail division.

Overall, however, this zone aims to promote economic cooperation with Rwanda, Sudan, Somalia, Ethiopia, whilst starting operations with the African Union as a whole.

China signed and invested USD 620 million in October 2018 for the first phase of Uganda-China Free Zone of International Industrial Cooperation, bordering Rwanda, Kenya and Tanzania.

South East Asia.

In South East Asia, China supports the development of communication axes.

The close ties that China wishes to further strengthen with ASEAN and more particularly the Mekong area give rise, for example, to an FTZ located on the border between Laos and Thailand.

This is the first time that China has canceled customs duties and VAT on border transactions between countries that do not share borders with China.

Eurasia: a new deal.

The challenges for China with the BRI are also multiple and diverse when it comes to Eurasia in general.

The interplay of alliances and combinations between the Eurasian Economic Union, China and the BRI countries using FTZs is creating a new geopolitical situation.

The Eurasian Economic Union (EUEA) and China have agreed to create a common convergence between the BRI and the EUEA, which entered into force in 2015. In 2014, as a reminder, the EUEA had produced more than 15% of the world’s oil production and more than 20% of the world’s gas production.

The future of special areas.

China is successfully implementing a unique architecture with the BRI, and the interest of FTZs is all the more obvious when we talk about the Digital Silk Highway, what some already call the “Telecom or Cable Global Empire”.

In order to make the BRI a highly efficient digital environment, the integration of data, artificial intelligence, and the Internet makes it possible to better develop and control smart cities and/or smart areas.

>> Related reading: China tech: where do we stand?

On the occasion of the 5th anniversary of the BRI, the Ministry of Commerce published this autumn the main forthcoming projects. Between 2020 and 2025, China will start connecting Free Trade Ports to its PFTZs as “Global Innovation Shipping Centers”.

Among its main needs, China must create “consensus”. It knows that it must first and foremost be able to create new governance mechanisms, crucial issues that will allow it to be very tactical.

In its next stages, the BRI may complement or even compete with the G20 or APEC, the first stage being the holding of summits or forums just as respectable as Davos.

At the same time, China is also in the process of extending new concrete policies such as the Greater Bay Area integrating Hong Kong and Macao to the Guangdong province.

The bottom line.

The BRI is overall a landmark initiative, which will likely be successful and complicated, given the vastness of the project.

Interestingly, the emergence of China as one of the main actors in regional security results from its economic initiatives.

In a more global governance role, more present on issues related to diplomatic, defense and international trade affairs, China is now a crucial actor in the creation of new standards, new treaties, exchanges, and bilateral agreements, and we must get used to talking about China Standard 2035.

The World Bank takes BRI projects very seriously, in fact, and has already invested more than USD 80 billion in various infrastructure projects. The Bank, in fact, recently recalled that: “BRI is 66 countries, 30% of the world’s GDP, 62% of the world’s population and 75% of known energy reserves. BRI must undoubtedly be able to improve regional cooperation and connectivity to generate growth and reduce poverty”.

The bottom line is, therefore, that the BRI and its FTZs are the largest intercontinental infrastructure program the world has ever seen.

Competing alternatives (indopacific or other) remain limited in view of the scale and coordination effort of the BRI. We are, as a result, facing a new situation, i.e. the emergence of a new ecosystem in constant evolution with risks and opportunities. In fact, the Chinese Prime Minister went as far as announcing that China would invest USD 250 billion in South America over the next ten years.

In order to take advantage of growth strategies, it is therefore extremely important to understand the interconnections and to position ourselves to make real adjustments.

Ultimately, the Chinese and Confucian logic is such that we must also know how to play the game. That is, how to share risks, how to show our commitment to these new protocols, in order to be respected, heard and to be able to benefit from real matches. The major strategic balances are being reconfigured and Chinese ambitions revealed, it is time to become aware.

>> Related reading: Eurasia means we need a new business mindset.

>> Related Reading: An EU strategy on connecting Europe to Asia.

Originally published in « La Lettre de la Chine Hors Les Murs » n 26, 21/11/2018.

Sources:

Washington post – Belt and Road projects direct Chinese investment to all corners of the globe. What are the local impacts? (Sept. 2018)

European Bank for Reconstruction & Development – Belt & Road Initiative Database.

Deloitte Insights – Embracing the BRI ecosystem in 2018
Navigating pitfalls and seizing opportunities (Feb 2018)

CNBC HSBC – Where is the funding for a $26 trillion initiative coming from? (March 2018).

South China Morning Post – China’s Xi Jinping hails his free-trade zone policy as a milestone in country’s reform (Oct 2018)

Merics – MERICS Belt and Road Tracker

Chinese General Office of the State Administration of Taxation – Taxation Facilitates Reforms in Free Trade Zones

FOCAC.org – Uganda: China to Invest $620 Million in Uganda’s Largest Mining Project

China Daily – Vast Hainan free trade port stiff challenge for HK (April 2018)

World Bank – Belt and Road Initiative (March 2019)

Financial Times – China’s Li Keqiang seeks big deals in Brazil (May 2015)

 


Fabien Pacory | Entrepreneur, Managing Director at Legend Company Ltd, China.

 

Asia Pacific Circle expert Profile Fabien Pacory

Fabien Pacory is an entrepreneur in South China, located in Guangzhou and Shenzhen since 2004. He is the Co-Founder and Managing Partner of Legend Exhibition and Trading Company specialized in sourcing for famous brands and European retailers.

Fabien is also a Board Member and Head of Business Strategy and Operations of Shenzhen Fuliwei Supply Chain Management Company, and a French Foreign Trade Advisor providing feedback to the French Trade Commissions and supporting initiatives promoting trade between France and China.

 

– Read more insights by Fabien Pacory 


Disclaimer: The views expressed are those of their author(s) only and do not reflect those of The Asia-Pacific Circle or of its editors unless otherwise stated.


 

 

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