The Free Trade Zone that Ate Shanghai

The Shanghai Free Trade Zone (SFTZ) came into being in 2013. Since its birth, it has scored accomplishments such as faster customs processing times and easier business establishment. Overall, however, it has disappointed, failing to deliver notable breakthroughs with respect to its negative list, free currency flows, or financial sector liberalization. Recently, China’s State Council moved to enhance the SFTZ’s allure by enlarging its size two times by adding a new area called Lingang (where Tesla’s factory is located) and promising various incentives. The latter includes lower income tax rates, duty free treatment of goods flowing into a bounded area in Lingang, no taxes on goods and services transactions within the area, subsides for talent attraction, and moneys for infrastructure. China further will offer special policies pertaining to data flows and customs clearance. The plan is for Lingang to draw in “frontier technologies,” promotes clusters, and facilitates “free flow[s] of investment, trade, capital, transportation and employment.” One major gain from incorporating Lingang into the SFTZ is that it endows the SFTZ with the space to host large-scale manufacturing (e.g., aviation, pharmaceuticals, and semiconductors). China’s latest moves may have to do with its desire to find inter alia ways to promote growth, ameliorate its trade war with the United States, and address the disillusionments of foreign investors. Given this, there are reasons to be encouraged by the SFTZ’s enlargement in geographic and policy terms. Yet many of the factors that impeded the blossoming of the “original” SFTZ remain. These include Beijing’s statist impulses, its fears about the fallout of financial sector liberalization, and its anxieties about capital flight (the latter two have only become heightened in the current international and domestic environment). Adding Lingang has made the SFTZ bigger, but it remains to be seen if it will make it better.