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Free Trade Identity Crises

Discussions with local government officials in “Free” Zones that ease customs duties on exporters revealed conflicts of interests and identity crises that, according to local administrators, Central Government is aware of and is currently addressing. Much of the discussion revolves around the usefulness of Free Trade Zones and Export Processing Zones.

Essentially, current government thinking goes, what is the use of a Zone that makes it easier to export when China is moving away from an export-driven economy? A fundamental shift in the balance of export-led business came when China reduced the VAT rebate from 14% to 3%, trimming profit margins off the balance sheets of many low-cost exporters. On the local level, cities for the last year along the east coast have not wanted export companies to come to their areas, since the local governments are responsible for paying the national rebate out of their local pockets.

Compounding the conflicts of interest are the various flavors of export-friendly zones: Free Trade Zones; Export Processing Zones; Bonded Zones; Free Trade Ports, and the like. As one government official put it to me, “There is a great deal of overlap between the zones.” The Government is set to harmonize them all.

In a nutshell, according to past descriptions at www.cadz.org.cn, Free Trade Zones:

1. Are more preferential than those of Export Processing Zone. When foreign investors set up production-oriented enterprises in the Zone, no proportion of domestic sales and export sales will be prescribed to their products. There is no limitation to business scopes of enterprises in the Zone unless prohibited with decree by the State. They can handle import & export trade, entrepot trade, processing trade, bonded storage and related business serving the above functions such as commodity exhibition and sales.

2. There is no restriction on setting up processing projects of imported restricted commodities in the Free Trade Zone.

3. When Goods enter or leave from the Free Trade Zone to foreign countries or from foreign countries to the Zone, there is no declaration at the Customs, only registering in the Customs. No import & export quota and licenses are required except passive export quota is needed.

4. Processing enterprises can develop their bonded processing business by way of entrusting enterprises outside the Zone to process or accept processing deal from enterprises outside the Zone after being approved by the Customs if their main production processes are conducted in the Zone.

5. Being approved by the Customs, enterprises in the Zone can import and export their bonded goods from other ports after going through procedures in the Free Trade Zone Customs.

6. Enterprises in the Zone are allowed to buy out products from non-Free Trade Zone companies with import and export rights to export, and sell imported goods to non-Free Trade Zone companies with import and export rights.

7. There is no limitation on time and kinds to store goods in the Zone unless otherwise stipulated by the State. Enterprises in the Zone are allowed to simply process bonded goods in bonded warehouses or workshops such as repackaging, grading, labeling, dividing and so on.

Meanwhile, according to the same source, EPZs:
1. Companies in EPZs are considered to be” within China’s territory but outside the customs boundary”, so:
(1) No bank deposit system, no customs registration system, no value-added tax or consumption tax on processed products and no I / E quota or export license are to be imposed on those engaged in processing business in the zone.
(2) Duty exemption is applicable to the following items:
a. The machines, equipment and blocks to be used in production; or spare parts and components needed for fixing or repairing of the machines;
b. Machines and equipment to be used in the construction of the infrastructure; or the building materials to be used for the construction of factory buildings and warehouses;
c. Reasonable amount of office ware imported for self-use by the enterprises and administrative institutions;
d. Final products, leftover pieces, defective or wastes which are processed in the zone and are to be sold abroad;
(2). Raw materials, spare parts, components, packaging materials and expendables imported for processing export products are bonded for the total value.
(3). Goods sold to companies within EPZs are considered to be exported and are eligible for tax return. Final or semi-final products turned out by the companies within the zone can be moved freely to companies outside the EPZ for further processing.

Now, compare and contrast.