I was talking with a China lawyer based in Beijing the other day and at one point he mentioned that he had recently been to a talk on Shanghai’s Free Trade Zone. When I asked what he had learned from that talk, he said something like the following:

Three people talked about the FTZ. One person from a big accounting firm, one from a big law firm, and one from the FTZ itself. They all essentially talked about how great it was and about how great it would be but really, neither I nor anyone else there with whom I talked could figure out one concrete reason why to bother with it.

I thought of that today after receiving a link to a Financial Times article that pretty much says the same thing. The article is entitled, Benefits of Shanghai free-trade zone still shrouded in mystery, and it pretty much says exactly what my lawyer-friend said. That a bunch of people with an interest in seeing the Shanghai FTZ become something important are out there proclaiming its importance, but when pressed on why it is important, they have no answer.

I am also reminded of a friend of mine who is in-house counsel at a very large tech company in China who is always getting calls from people at his company complaining that their company isn’t doing more with the Shanghai FTZ, especially in comparison to other foreign companies. My friend says he responds by asking what more they should be doing and what exactly other companies are doing that is leaving his own company in the dust. He says that these questions produce either stammering or silence and he has yet to receive a real answer.

So tell me everyone, why is the Shanghai FTZ so important, or is it really just not?

  • bystander

    The original idea was that it would be outside the internet controls and the currency exchange controls. If that had happened, it would have been something. But it was a non-starter; those ideas were dropped like hot potatoes when it realized first that Chinese netizens were not going to take kindly to the gov’t giving foreign companies internet access that locals don’t have. And the currency control thing is just too important an instrument of control to the gov’t for them to let go of it. So what do you have left? The freedom to travel to the zone without a visa, basically. But first, it’s not hard to get a visa. Second, if you want to go out of the zone to meet a customer or have a drink downtown Shanghai, you still need a visa. So: there isn’t much left that I can see.

  • drllau

    For me, I’m wondering how far they will relax the rules on extra-territorial as that may influence jurisdiction and thus transaction costs. For example duty, if something is in bonded warehouse, then needs to be mated with parts is it considered an export? or change in tarrif code trigger say a tax event? I know NZ is trying to negotiate some special deal under its existing free trade agreement so I’m keeping an eye.

    Most civil law jurisidictions tend to be proscriptive and thus pedantic (see EU where I heard that worm farms were classified as abattoirs and had strange rules on blood troughs). If the attitude is that shanghai is more laisez faire, then people will push the boundaries in unexpected ways.