Premier Li Keqiang proposed "exploring opening free trade ports, and working toward new heights in reform and opening-up" in the Government Work Report delivered at the first session of the 13th National People's Congress. This is an important and concrete manifestation of fully implementing the spirit of General Secretary Xi Jinping's report to the 19th National Congress of the Communist Party of China. The free trade port proposal has appeared several times in the government-approved plans for the Zhoushan Archipelago New Area and Shanghai Pilot Free Trade Zone. This time, Xi made the announcement that Hainan will be China’s largest free trade zone when delivering a speech at a gathering on April 13 to commemorate the 30th anniversary of the founding of Hainan province and the Hainan special economic zone.

In an article in the People's Daily on Nov 10, Wang Yang, newly elected chairman of the 13th National Committee of the Chinese People's Political Consultative Conference, said: "Free trade ports are located in a country's (or region's) territory but outside the customs, where goods, people and funds can enter and leave with great freedom, with the majority of goods exempt from duties. It is a special economic zone with the highest level of openness in the world at present." Based on this statement and the international experience in the construction of free trade ports, I would also like to discuss a few personal considerations on specific issues such as the significance, conditions and developmental choices of the construction of a free trade port with Chinese characteristics.

Significance

As Wang clearly pointed out, our country's coastline is long and its island resources are abundant. Exploring the construction of a free trade port with Chinese characteristics marks a new high point, and will foster a better business environment and a stronger supply chain, which are all of great significance in promoting the development of an open economy.

What has been the relationship between exploring the construction of a free trade port with Chinese characteristics and the reform and innovation of pilot free trade zones in recent years? Since 2013, China's pilot FTZs have seen many significant advances. These include the adjustment of government functions, the reform of foreign investment management systems, the transformation and upgrading of trade development and supervisory practices, the enhancement of financial transparency, and the betterment of the legal environment. All have helped bring about the formation of a number of innovations in institutions and mechanisms that have been replicated and promoted on a larger scale and provided impetus for deepening reforms and expanding openness.

According to Xi's report at the Party's 19th National Congress, the next step for free trade and pilot FTZs should focus on improving the quality of construction, implementing international advanced rules and strengthening systematic integration and implementation of reform measures. This will produce better results and further demonstrate the positive role of experimentation in reform and opening-up.

The establishment of a free trade port marks the further deepening and strategic extension of the ongoing reform and innovation. It represents an active exploration of creating a new level of openness, guided by the successful experience of high-standard FTZs around the world. To be specific, the FTZ is an experimental field for institutional exploration. It covers both special customs surveillance zones and noncustoms areas. The experience can be replicated and promoted nationwide.

Free trade ports should have in place special customs surveillance zones. They should be established in accordance with the highest-level internationally recognized trade and investment liberalization standards set for the area "outside customs jurisdiction and within the country's territory". The replication and promotion of construction models and experiences require applicability to specific regional conditions.

According to the overall requirements for establishing a special functional area with the highest level openness on a global scale, a free trade port with Chinese characteristics should have at least the following conditions:

• It should be supported by a large port near key international shipping lanes, with the conditions and potential to be a transit trade center and international shipping hub.

• It should set up a special customs surveillance zone as defined in the Kyoto Convention to allow the vast majority of goods to be freely imported and exported, stored in a bonded warehouse, collected, processed and displayed for sale within the zone. This would exclude arms, drugs and other items that potentially endanger public safety and/or the environment.

• It should put in place high-level international access to foreign investment and implement an offshore financial liberalization system, and the number of special management measures (negative list) should be kept to a minimum. Currency convertibility controls should be eased or lifted, and financial enterprises' access to investment within the zone should be simplified. Enterprises within the area should also be able to raise funds overseas without hindrance.

• The zone should implement preferential policies for exemptions of customs duties and other taxes (such as corporate income taxes and personal income taxes) on imported goods.

• The zone should enforce any policy giving free access to nonresidents and offering employment to needed talent.

• The zone and its surrounding areas should have a solid industrial foundation and be equipped with manufacturing and service capabilities.

• It should have a well-developed logistics and transportation network. The radiation and spillover effects of economic activities in the region to the domestic hinterland and international markets should be relatively vibrant.

• The area should establish a capable legal system adapted to the needs of constructing a special economic function zone.

The Way Forward

I believe there are three ways to explore the construction of a free trade port.

Path 1: Expand and transform existing bonded ports into international high-standard free trade ports. In the first phase, select a port in the Bohai Sea rim, the Yangtze River Delta and the Pearl River Delta to develop into free trade ports. In the second phase, extend the construction to land ports (integrated bonded zones), internal water ports or airports with strong port functions.

Path 2: Concentrate on building two to three State-level free trade ports patterned upon existing combined coastal ports, such as Shanghai-Ningbo-Zhoushan free trade port, Tianjin-Qingdao-Dalian free trade port and Guangzhou-Shenzhen free trade port. Over the long run, the coverage can be expanded through the connection model of free trade ports plus bonded transportation channels plus bonded warehouses plus bonded factories.

Path 3: Choose a large offshore island to build a port-city integrated free trade port with full-scale operability and high-level openness. For example, Hainan and Zhoushan can be potential candidates.

Among the three options, the first path is relatively sound. It is based upon existing pilot FTZs, and implementing international rules and practices to raise the level of offshore trade, investment and financial liberalization in the customs surveillance zones (bonded port zones). More momentum needs to be provided to deepen reforms and expand the opening up of the pilot FTZ.

Paths two and three require central government legislation and management that are more innovative and bold in terms of their contributions to deepening reforms and further opening-up. They should also be more conducive to the formation of new advantages in participating in and leading international competition and cooperation, as well as having long-term strategic significance in promoting high-quality development and building economic capability. However, related issues need to be further studied, carefully planned and designed.

On the whole, most of the current open discussion on free trade ports is similar to the first path. It is easy to reach consensus and most proposals are viable in an operational sense. I suggest that exploring the construction of a free trade port with Chinese characteristics can be implemented in the short term in accordance with the first path.

We can start from the transformation of bonded port areas in pilot FTZs. The key is to practice advanced international rules and comprehensively increase trade and investment liberalization and facilitation, while boosting high-quality development through increased transparency. At the same time, planned steps must be taken to steadily move forward construction and avoid a herd mentality phenomenon. After gaining experience, we can further expand opening-up, explore construction of combined ports or offshore free trade ports, and develop an institutional advantage in participating in and leading international competition and cooperation.

It is expected 2018 will mark the beginning of the construction of free trade ports with Chinese characteristics.

Zhao Jinping is a research fellow with the State Council’s Development Research Center. The views do not necessarily reflect those of China Watch.

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