THE DEVELOPMENT PROCESS, FUNCTIONAL

EVALUATION, AND IMPLICATIONS OF

WORLD FREE TRADE ZONES
Xia Lu

Xia Lu is Assistant Researcher at the Marxist Research Institute,

Shanghai University of Finance and Economics, China. Her
specialist research field is the contemporary capitalist economy and
the distribution of wealth. Email: [email protected]

Abstract: The Free Trade Zone (FTZ) in the modern sense is one of the important forms of the
realization of economic globalization. The purpose of this article is to explore the nature and
characteristics of the FTZ and its significance by studying its development from free ports and
export processing zones up to the new FTZs with integrated functions. Through the comparative
analysis of the Irish Shannon Free Zone, the Taiwan Kaohsiung Export Processing Zone, and the
US Foreign Trade Zone, this article focuses on the pros and cons of FTZs for a country or region
and points out their five strengths and four weaknesses. For the construction of the Shanghai
Pilot FTZ and other potential zones, this article puts forward several proposals that may provide
useful reference material.

Key words: free port; export processing zone; foreign trade zone; functional strengths and
weaknesses

China officially launched a Pilot Free Trade Zone (FTZ) in Shanghai on

September 29, 2013, taking a solid step forward to boost reforms in the world’s
second-largest economy. Since then, many discussions and analyses of the
connotations, functions, and system design of FTZs have started and are under
way. People have high expectations for their role in promoting the deepening of
China’s economic reform. By November 22, 2013, data on the official website of
the China (Shanghai) Pilot FTZ show more than 1400 new companies coming into
the zone with a total registered capital of nearly RMB40 billion1 (approximately
US$6.6 billion). But as is well known, FTZ management that is “inside the border

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while outside the customs territory” (i.e., tax exemptions, tax rebates and tax bonds)
is not new. There are about 3500 FTZs located in 135 countries, and more than
170 active foreign trade zones (i.e., FTZs) in the USA alone (Bolle and Williams
2013). And more specifically, world-renowned free ports (one type of FTZ) like
Singapore and Hong Kong, as well as typically business-based FTZs like Dubai
in the United Arab Emirates and Colon in Panama, are now at the highest level of
FTZ, with integrated functions. Therefore, the Shanghai Pilot FTZ can learn from
these world-renowned FTZs by playing to their strengths and rising above their
weaknesses. Only in this way can we ensure the correct path for China’s opening
up and fundamentally promote its long-term economic development.

1. History and Current Situation of the World’s FTZs

According to the Kyoto Convention signed by the International Customs Council

in 1973, a FTZ is defined as follows: it “refers to a part of the territory of a
Contracting Party where any goods introduced are generally regarded, insofar as
import duties and taxes are concerned, as being outside the Customs territory.”
In layman’s terms, it means being “inside the border while outside the customs
territory,” which is fundamentally different from being “inside the border and
inside the customs territory” like a bonded zone. In terms of nomenclature, FTZs
are also called free ports, foreign trade zones, free zones, free economic zones,
export processing zones, and so on in different countries and regions. In fact, the
world’s FTZs have experienced various forms of evolution and have different
characteristics due to differences in geographical location, stage of economic
development, and categories of goods and services. So it is necessary for us to
investigate their emergence, development, and current situation, so as to fully
understand the nature and characteristics of different types of FTZ.

1.1. Free Ports: Starting in Europe, with Transit Trade as Their Main Function
The FTZ was first created for trade facilitation. In 1547, the world’s first free
port—Leghorn (Livorno) Free Port appeared in the Gulf of Genoa, northwestern
Italy (now Tuscany, near Pisa). At that time, the basic functions of free ports were
to attract foreign merchant ships and engage in transit trade, that is, to import
foreign goods and then re-export them to foreign countries without processing
and to provide tariff exemptions for the cargo vessels plying their trade. They
mainly played the role of collection and distribution of goods, thus contributing
to the economic development of the country or region adjacent to the free port.
For example, the second-largest port in Europe, Hamburg, which was founded in
1189, was one of the world’s largest transit ports for coffee, cocoa, spices, and
carpets. This prototype of free ports in the modern sense mainly provided cargo

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handling and storage in the transit trade and required relatively little land. But the
main advantage of free ports is that the majority of the foreign goods are duty-free,
although the types of trading goods are relatively simple.

1.2. Post-War Export Processing Zones, with Attracting Investment and

Employment as Their Main Function
After World War II, countries around the world gradually turned their attention to
economic development, so the FTZs began to change from focusing on transit trade
to attracting investment, creating jobs, and promoting the export of manufactured
goods. The Irish Shannon Free Zone and Kaohsiung Export Processing Zone are
two typical examples.
The Irish Shannon Free Zone, which was first set up in 1959, is generally
considered to be the world’s first FTZ in the modern sense. It was no longer
established on the basis of famous harbors, but on Ireland’s Shannon International
Airport. At its inception, the free zone quickly gained an advantage by attracting
large-scale investment from US companies by making export processing goods
duty-free and having low transaction costs. This is one of the most important
differences between the Shannon Free Zone and early free ports.
The Kaohsiung Export Processing Zone was established in Taiwan Province of
China in 1966. It is well known as the first FTZ to be called an export processing
zone. It has three main features. First, it is specially designed for manufacturing,
processing, and assembling commodities that are intended for export. Second, it
provides enterprises in the zone with a range of preferential treatment in importing,
manufacturing, and exporting, such as the reduction of tariffs and other operating
conveniences. Third, it no longer has transit trade as its main feature but regards
foreign trade as an opportunity to develop the manufacturing sector, increase
employment, promote technological progress, and upgrade management levels.
With the great success of the Kaohsiung Export Processing Zone, the
1960s–1980s became a golden age for the world’s export processing zones, and
nearly 200 export processing zones emerged in many countries throughout Asia,
Africa, North America, and South America. Overall, as a new model of FTZ,
export processing zones’ main purpose has been to promote production by means
of foreign trade, so the tax reductions and exemptions are mainly limited to the
processing of raw materials for import and export and are not for all goods. This is
one important difference between export processing zones and free ports.

1.3. Comprehensive Development of Modern FTZs in the 21st Century

Accompanied by the Functional Upgrading of Seaports
FTZs are usually based on seaports or airports, whether in the form of free ports
or export processing zones. Therefore, the evolution of FTZs is closely related to

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the transformation of port functions. With the advent of the 21st century, many
countries have made great efforts to upgrade their major ports to attract and promote
the development of foreign trade in order to win a profitable position in the global
industrial chain. Therefore, port functions have been greatly diversified and have
integrated many new elements. This is mainly manifested in the following:
First, ports have gradually developed to be deep-water and operated with highly
mechanized equipment due to the ever larger scale of container ships and oil and
dry bulk cargo ships, as well as the improvement of port infrastructure.
Second, ports are changing from distribution hubs to one part of the supply chain
and are becoming more refined and externally integrated. The aim is to maximize
the value added to the whole logistics network by lowering service costs. These
trends have led ports to develop high-end integrated logistics services.
Third, ports are becoming comprehensive hubs that integrate the flow of cargo,
capital, information, and technology, etc.
Thus, the functional upgrading of the ports is definitely bringing about the
integrated development of port-based FTZs, becoming an important feature of
today’s FTZs.
1.4. The US Foreign Trade Zone: A Unique Mode of FTZ Composed of General-
Purpose Zones and Subzones
The US FTZ Program was created by the US Foreign Trade Zones Act in 1934 in the
midst of the Great Depression. It was designed to accelerate US trade in the wake
of the restrictive impact of the Smoot–Hawley Tariff Act of 1930, which raised US
tariffs on imported goods as high as 53 percent. It was not until 1999 that USFTZs
developed rapidly, when the original “Foreign Trade Zone Act” was amended to
allow certain companies to establish a subzone dedicated to manufacture.
Generally speaking, there are two major advantages in the US type of FTZ.
One is its openness, that is, any public or non-profit company can apply for the
establishment of a foreign trade zone. Geographically, it is easy to apply for, as long
as there are customs authorities located within less than a 90-minute ride. Another
advantage is flexibility. Both the general-purpose zone and the subzone have a
complete entry and exit mechanism which means that they can temporarily “sleep”
(cease operations) until they are “deactivated” (completely abolished). You can
also “reactivate” them within a certain period (resume operations), thus eliminating
“idle” foreign trade zones to achieve a dynamic allocation of foreign trade zones.
And so the US Foreign Trade Zones have effectively promoted the economic growth
of the USA, making this model of FTZ a highlight among modern FTZs.

2. Functional Strengths and Weaknesses of FTZs

Judging by how the FTZ is established and developed, we can be quite clear that
its original target was to promote free trade in goods, so that the economy of the

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 WORLD FREE TRADE ZONES 363

heartland and the nation where it was located could make substantial progress.
From the free ports of the past to the comprehensive FTZs at present, worldwide
FTZs have contributed greatly to the world’s and the nation’s trade liberalization.
However, the modern FTZ has gradually developed into liberalizing investment,
finance, and transportation as well, which does benefit the nation or region where
the FTZ is established, but also brings along with it potential risks. The following
parts will discuss FTZ’s functional strengths and weaknesses from an economic
perspective.

2.1. Functional Strengths

2.1.1. Lowering the Costs of Production and Transaction
1. Low taxation delivered by various preferential taxation policies. Although
the functions and the regulatory policies of the modern FTZ vary from country
to country and region to region, one of their central metrics is to provide tax
preferences. There are various kinds of tax deductions and exemptions in FTZs,
such as tariffs, corporate and individual income taxes, and turnover tax (value-added
tax (VAT) rebates included). For example, besides the general tariff reduction and
exemption, there are tax preference terms like delayed tariff payments and tariff
shifts in the US foreign trade areas. A delayed tariff payment occurs when goods
are transferred among zones and the customs duty can be deferred and paid when
the goods finally enter the customs territory from the last zone; an inverted tariff
means that the manufacturers are free to choose to pay the tariffs according to the
materials and components and parts at the relatively low tax rates of the zone, so
that they can enjoy lower taxes. As for income tax, corporate income tax generally
has a preferential tax rate which is less than the country’s standard tax rate or even
less than other countries’ tax rates: the corporate income tax in Ireland’s Shannon
Free Zone is only 12.5 percent compared with 28 percent in the UK, 40 percent in
the USA, 29.37 percent in Germany, and 25 percent in China (Cui 2013). There are
also specific policies, such as exempting some specific merchandise and services
from tax, offering preferential import VAT, and so on. Ultimately, low tariffs, low
income tax, and low turnover tax have come to be the core criteria for reducing
companies’ production and transaction costs and have brought those companies in
a FTZ their greatest “dividend.”
2. Trade convenience and cost savings under supply chain management. Companies
in an FTZ can enjoy a number of convenient trade policies besides tax preference,
including exemption from cargo declaration procedures, centralized declaration,
and efficient computerized customs. Most importantly, many FTZs with ports
alongside have moved from being simple distribution centers to the supply chain
management model, which means optimizing the flow of cargo, capital, and

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information to reduce costs in the processes of storage, processing, distribution,

and transportation and to save companies’ production and transaction costs.
3. Subsidies for specific products and services. If companies’ strategies correspond
to the nation’s or region’s long-term development goal, in order to boost that
industry, the zone will subsidize it to reduce its costs. Generally speaking, the
zones have subsidies for product research and development (R&D), workforce
employment, and skills training.

2.1.2. Promoting the International Flow of Production Factors and the Efficient
Allocation of Global Resources
Trade liberalization has ended up propelling the liberalization of investment under
globalization. One function of the modern FTZ is to drive investment by open
policies and regulations in the FTZ which optimize resource allocation.
1. The zones have become the distribution and allocation centers for bulk cargo
(crucial productive resources). A lot of FTZs across the world that feature transport
interchange or integrated functions provide a convenient international flow of the
factors of production. Take the world famous Port of Rotterdam, for example; its
annual cargo throughput hit 442 million metric tons in 2013, among which coal,
ore, petroleum, and grains were the main products.2 The zone is an international
transfer station where bulk cargoes are stored, distributed, and processed, and
then sent to the Netherlands and places all over Europe by road, rail, waterways,
air freight, and sea transportation. Because of its advanced port facilities and
distribution equipment and its convenient communication with inland Europe,
Rotterdam is able to provide manufacturers, shipping companies, and distribution
companies with global logistics support. In this case, more than half of American
and Japanese companies have built their European distribution center here.
Singapore and Hong Kong in Asia, the UAE’s Dubai, and Colon in South America
are all important transfer stations for such international cargoes.
2. The FTZ makes full use of the law of “comparative advantage,” and takes part
in the international division of labor so as to develop competitive industries and
increase resource utilization. The FTZ in Africa that is export processing oriented
usually chooses industries with a comparative advantage as its leading industries
and then mobilizes global resources to realize joint production, maximizing its
revenue. For example, the export area funded in Kaohsiung, Taiwan, only exported
labor-intensive products at the very beginning, due to its cheap labor resources,
as that was then the most important way of allocating local resources. In addition,
the zone’s leading industry was also adjusted in accordance with the competitive
environment of the international market, upgrading its industry structure. The

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 WORLD FREE TRADE ZONES 365

export area in Kaohsiung restructured its industries to be capital- and technology-

intensive and high value-added in the 1980s.
3. Zones are competing to deregulate and open the investment market, and
trade liberalization has been extended to the liberalization of investment so as
to attract international investment and foster the international flow of the factors
of production. The main approaches include relaxing restrictions on the inflow
of foreign capital, exchange freedom, capital account liberalization, and offshore
financial operations; these are the main characteristics of the modern FTZ and its
future trend. All of the above have a positive effect on maximizing profit from
global capital flows and upgrading resource utilization. More importantly, the
trade and investment liberalization of FTZs have demonstration and projection
effects on that of the hinterland, accelerating the capital flows of the country or
region where the zone is located and also making full use of capital.

2.1.3. Increasing Consumer Welfare

Since the advent of the 21st century, many investors in FTZs have gradually
transformed their functions. They invest in imported materials, and after a certain
amount of processing and assembly, the output is then sold on the domestic
market, benefiting consumers. For instance, American Foreign Trade Zones (also
known as FTZs) are divided into general-purpose zones and subzones, and the
export function of the latter has now been weakened as its leading industry has
changed to become import processing. Companies there purchase cheap raw
materials (petroleum and fuel products included) and parts from abroad, and then
do the processing and assembling in the subzones, which has reduced the prices of
domestic products and helped to sustain a low inflation rate, benefiting consumer
welfare. The USA’s cheap gasoline is a prominent outcome of such actions. The
subzones in the US import barrels of crude oil from the Middle East and then sell
them to the domestic markets after deep processing. In addition, this makes cars
and electronics much cheaper for consumers.

2.1.4. Substitution Effect on Bilateral and Multilateral Trade Agreements and

Complementary Effect on Trade
In the development framework of economic globalization, a series of
organizations, like the World Trade Organization (WTO), European Union (EU),
North American Free Trade Area (NAFTA), and the Association of Southeast
Asian Nations (ASEAN) are the result of world economic integration and regional
economic integration. They set up free trade agreements mainly by negotiations
between countries or regions, so that the members within the organization can
enjoy reciprocal trade. At the same time, the agreements exclude the countries
outside the organization, which becomes a major obstacle to their entry into the

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international market. The Trans-Pacific Partnership Agreement (TPP) and the

Transatlantic Trade and Investment Partnership (TTIP) that the USA has recently
tried to establish were both this kind of agreement. Therefore, one way to break
down such barriers is the offer of favorable policies by host countries, which will
have a substitution effect on trade and investment. The substitution effect can be
well demonstrated by the case of the 1940s–1950s, when bilateral and multilateral
agreements among the USA, Brazil, and Belgium were substituted for the US
Foreign Trade Zone. This held back its growth considerably. It was not until the
1970s that foreign trade zones soared to be the US major force in competing with
Japan and the EU.

2.1.5. Promoting Regional and Even National Employment

Whether it is Shannon Free Zone, the Taiwan export processing zone, or the US
Foreign Trade Zone, they all play an indispensable role in creating jobs for their
regions or even the whole country. FTZs, with their low tax rates, low costs, and
various subsidies and preferential policies, definitely attract a large amount of
investment as well as creating employment. A FTZ like Shannon, though facing
transitional problems, has already hosted over a hundred companies, employing
more than 7000 people (Shi 2014). While in the USA, since permanent residence is
not allowed in the zone and employers are required to hire local workers, statistics
showed that in 2010 alone, the FTZs in the USA created 320,000 jobs (Luo 2013).
The FTZ does promote employment substantially.

2.1.6. Boosting the Fictionalization and Diversity of the Regional Economy

Basically, a country can establish several FTZs, with each executing different
industrial development strategies. Thereby, it will stimulate the fictionalization
of the regional economy, and provide a good plan for regional development
nationwide to diversify the nation’s economy. For instance, general-purpose zones
and subzones in the USA have different responsibilities, with the subzones’ setting
up being consistent with the needs of industry and company strategy. New York,
where the first US Foreign Trade Zone was located, is famous for its financial
services and many other high-end services, dominating the industry with over
40 percent of the world’s financial capital, and Silicon Valley is second to none
in the world’s hi-tech industry. Similarly, in Dubai, there are many active FTZs,
including Jebel Ali Free Zone, Dubai Airport Free Zone, Dubai Internet City,
Dubai Media City, Gold and Diamond Park, Dubai Auto Zone, Dubai Knowledge
Village, and so on, with each occupying a different economic field. To avoid the
overuse of resources and vicious competition, a diversified FTZ construction plan
plays a coordinating role in achieving the goal.

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2.2. Functional Weaknesses

Despite the positive effect a FTZ has on a nation or region’s economic development,
it is by no means trade liberalization, but a result of economic liberalization, which
contains within it financial liberalization and deregulation. Therefore, it is the
weaknesses of economic liberalization itself that have caused the weaknesses of
the FTZ.

2.2.1. Overtrading, Overconsumption, and the Hollowing-Out of Industry

The FTZ practices a policy of “inside the borders while outside the customs
territory,” which has created an open foreign trade environment. With low tariffs
and low costs, goods in the zone have a relative price advantage, and this is a great
stimulus to foreign trade. On one side, the FTZ has increased countries’ dependence
on cheap imported goods, leaving no room for domestic companies and related
industries, which will ultimately cause the hollowing-out of industry. On the
other side, with millions of cheap merchandise flowing in, people will easily over
consume. This is not only a waste of natural resources, but also does great harm
to capital accumulation and impedes further economic growth. Trade-oriented
FTZs (strong in trade, while weak in adjacent industries) will usually present the
above functional weaknesses worldwide. For example, Hong Kong is a typical
free port with a duty-free and quota-free trade market. Since the market there has
no industry backup and puts too much emphasis on pure trade and services, Hong
Kong has suffered an economic downturn and been in the doldrums for some
years. To sum up, generally, only with the support of substantial industries can the
FTZ fully play its positive role.

2.2.2. Financial Liberalization and Capital Flight

Along with the development of FTZs worldwide and the upgrading of ports, FTZs
have transformed themselves from simply offering tariff reductions and exemptions
to giving greater free access to the trade market, especially the service industry,
including liberalization of finance, shipping, commerce and trade, culture, and so
on. In the modern FTZ, relaxing control on market access and setting up offshore
finance businesses are two of the most important features. However, financial
liberalization is closely related to capital flight.
First, if there is a net interest spread between local and foreign currency,
opening the capital account will drain out a large amount of local currency. Under
these circumstances, international hot money without any real trade backup will
take advantage of the policies offered by FTZs, conducting arbitrage without any
regulation, which usually will be a huge shock to the local capital market and the
real economy.

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The offshore financial market is another central means of capital flight.

Offshore financial markets can be classified into three types: one is a mixture of
external and internal services, i.e., there is no separation of domestic and foreign
financial transactions, as in London and Hong Kong; another has a separation of
external and internal services, i.e., a non-resident account is distinguished strictly
from a domestic account, as in Singapore and New York; and the last is a “tax
haven,” i.e., it only offers registration for offshore companies without any actual
operations, like the British Virgin Islands and Cayman Islands. One property the
three types share in common is that companies there can avoid financial regulation
where they are based and can have perfect capital mobility. Therefore, offshore
financial centers are often an important channel of capital flight. Massive amounts
of domestic money can be drained out rapidly through offshore finance; at the
same time, foreign hot money also takes offshore financial centers as its main
channel to evade financial regulation when engaging in legal or illegal capital
export, which results in rapid monetary inflows and outflows. In the British
Virgin Islands, e.g., preliminary statistics from the United Nations Conference on
Trade and Development showed that in 2013 alone, the total amount of foreign
investment the Islands attracted hit US$92 billion, ranking fourth in the world
and exceeding that of Brazil and India.3 But for the Islands, most of the capital
is only rapidly transferred from one account to another or internally within an
international company; this has made them the breeding ground of international
corrupt money, money laundering, and tax evasion.

2.2.3. Homogeneous Competition among FTZs and Waste of Resources

The core tool the FTZ holds is the advantage brought by the policy of “inside the
border while outside the customs territory,” since companies there can enjoy tariff
exemption, tax preference and convenient examination and approval. But this one
strength can be easily copied by other nations’ FTZs, leading to identical FTZs
all over the world. Many of them have been forced to transform themselves or be
weeded out. The Shannon Free Zone is quite an appropriate example. Although
the first FTZ in the world, it has experienced ups and downs during past decades
and had to adjust its strategy when the corporate income tax was reduced to
12.5 percent in the 1980s, so as to answer the competition from other FTZs.
If there are several FTZs within a nation, homogeneous competition will surely
result in different jurisdictions’ racing to provide better policies, which is not good
for the development of all the FTZs and is a terrible waste of resources. In addition,
there is a substitution effect between the FTZ and FTZs in a broader sense. For
instance, the once world famous German Port of Hamburg lost its raison d’être
under the policy of European integration and was at last abolished, with its barriers

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 WORLD FREE TRADE ZONES 369

being dismantled. So whether FTZ homogeneous competition is among nations or

within nations or regions, all sides will suffer.

2.2.4. Contradictions with Urban Planning

FTZs’ advantages lie in encouraging international trade, exempt from tariffs or
consumption tax; but they may also conflict with urban planning development.
For example, an enclosed FTZ can cause traffic jams in the port, going against
logistical efficiency. Besides, relevant customs management rules may override
the authority of local urban construction in a way that is not coordinated with the
long-term planning of urban development.

3. Stimulus to the Construction of Shanghai Pilot FTZ

China officially launched a pilot FTZ in Shanghai last year, with the intention of
speeding up its financial and trade reforms. Basically, the Shanghai Pilot FTZ has
around 29 square kilometers overall, covering four related areas under special
customs supervision: Waigaoqiao FTZ, Waigaoqiao Free Trade Logistics Park,
Yangshan Free Trade Port Area, and Pudong Airport Comprehensive FTZ. Within
the zones, foreign-funded enterprises, Chinese-foreign equity joint ventures, and
Chinese-foreign contractual joint ventures do not need to go through administrative
approval; the zones make use of the registration system instead. According to the
outline program, the zone will go beyond greater liberalization of trade to take
in investment and financial services, including a trial of free convertibility of the
RMB with controlled risks.
However, as mentioned above, the FTZ is not a new thing. Although it promotes
the liberalization of trade and investment, it also has many weaknesses. Therefore,
not only should we give full play to its functions of reducing transaction costs,
promoting the allocation of resources, accelerating industrial upgrading, etc.,
we should also avoid the potential disadvantages that accompany excessive
liberalization. The inspiration for the Shanghai Pilot FTZ may be found in the
following.

3.1. Focus on Building the Shanghai Pilot FTZ into a Global Platform for Trade
and Financing
The establishment of the Shanghai Pilot FTZ is an attempt by China to further
promote economic reform and opening upon the basis of the original bonded areas.
At the same time, it also aims to break up the Western countries’ monopoly in the
trade and financial field. From the perspective of the overall strategy, the Shanghai
Pilot FTZ should thus be neither a mere platform for import and export, nor a
mere regional opening platform; rather, it should focus on creating a global trade

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and financing platform so as to promote the full-scale development of China’s

financial, trade, transportation and manufacturing industry.

3.2. The Supportive Role of Advanced Manufacturing Industries for the Zone
Should Be Maintained
In the construction of the Shanghai Pilot FTZ, we should not only be concerned
about the abolition of current restrictions on market access but should also base
the liberalization of trade and investment on the foundation of the complete and
coordinated development of related industries, especially advanced manufacturing
and high-tech industries. For example, FTZs in New York put great emphasis on
the integration of technology, industry, and commerce. Therefore, it is necessary
for the Shanghai Pilot FTZ to give support to the development of those industries
with advanced productivity. Only in this way can we realize the sustainable
development of both trade and investment, and promote industrial upgrading in
Shanghai and our country as a whole.

3.3. Reducing the Risks of Financial Liberalization and Avoiding Its Potential
Impact on the Real Economy
A good financial regulatory framework is needed for any FTZ promoting financial
liberalization because it enables it to appropriately avoid potential financial
risks. Finance is one of the most important foundations of modern economic
development and it has a direct bearing on the economic prosperity and stability
of other sectors of the economy. However, the financial industry is typically one
with high risks and uncertainties. Therefore, we must pay more attention to the
construction of the legal framework of the financial system in relation to FTZs.
At the same time, because of the strong externalities of the financial industry, not
only is the supervision of individual financial institutions necessary, but overall
macroprudential financial supervision and international supervisory cooperation
should be emphasized.

3.4. Implementation of Differential Development Strategies in Different

Domestic FTZs
In addition to the Shanghai Pilot FTZ, China also plans to extend the experience
of the Shanghai Pilot FTZ to other areas and establish more FTZs in other cities
of China so as to promote further opening up and economic development. But we
should draw on the USFTZ model and that of the United Arab Emirates; that is,
we should implement differential development strategies in different FTZs and
reduce the vicious competition among FTZs within one country that results from
their having almost the same preferential tax policies. So an overall opening up
framework should first be set up for the organization of all FTZs in China.

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 WORLD FREE TRADE ZONES 371

Notes
1. See http://www.shftz.gov.cn/WebViewPublic/item_page.aspx?parentId=625&id=633.
2. See http://www.mofcom.gov.cn/article/i/jyjl/m/201312/20131200435269.shtml.
3. See Zaobao Website, January 29, 2014, http://www.zaobao.com/realtime/world/story20140129-
304937.

References
Bolle, M. J., and B. J. Williams. 2013. “U.S. Foreign-Trade Zones: Background and Issues for
Congress.” Congress Research Service Report. http://www.fas.org/sgp/crs/misc/R42686.pdf.
Cui, D. 2013. “Research on the Construction of the Shanghai Pilot Free Trade Zone—Learn from the
Experience of Western FTZs.” [In Chinese.] Jiangsu Commercial Forum, no. 6: 38–44.
Luo, Y. 2013. “Current Situation and Experience of the Construction of the US FTZs.” [In Chinese.]
China Economic News. Accessed August 13, 2013. http://www.cet.com.cn/ycpd/sdyd/938581.
shtml.
Shi, Y. 2014. “Ireland’s Shannon: A Great Rebirth Story of an Old Free Trade Zone.” [In Chinese.] 21st
Century Business Herald, January 4.

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