China’s Free Trade Zones (FTZs) are a type of Special Economic Zone that is common in other countries, and they are an important tool in the Chinese government’s economic reform and liberalization policies. Special economic zones typically provide generous tax breaks for businesses and may also include preferential business and trade laws in order to attract foreign investment.
In China, free trade zones provide numerous economic benefits. FTZs in China contributed $400 billion USD in international commerce and investment in the first seven months of 2020 as a stand-alone timeframe. These zones significantly expanded the number of foreign firms by approximately 3,300, accounting for 17% ($13.3B USD) of all foreign investment in China.
In a nutshell, FTZs allow domestic action on foreign items prior to formal admission into the country. Every area or province in China is assigned a distinct economic aim based on the resources available to it. The precise reasons why various sectors are associated with certain places are still unknown, however this could be due to a variety of factors, such as government design or an otherwise well-planned economic strategy. FTZs in China are thus an expression of the country’s planned economy.
Free Trade Zones are governed by government agencies and serve as a testing ground for new policies, frequently rewarding certain industries with 9-15 percent corporation tax reductions, individual tax breaks for high-end talent, or large capacity for capital movement. More on the advantages follow. The government agencies in charge of supervising FTZs receive a portion of the corporate taxes paid within the FTZ — this is how they may pass along tax advantages to smaller organizations, such as your company. China has 21 Free Trade Zones as of 2022.
Where are the China Free Trade Zones located?
These 21 FTZs are located in Liaoning, Shaanxi, Henan, Hubei, Chongqing, Sichuan, Zhejiang, Hunan, Yunnan, Guangxi, Heilongjiang, Beijing, Hebei, Tianjin, Shandong, Jiangsu, Shanghai, Anhui, Fujian, Guangdong and Hainan.
Foreign Investment Law
One such complementary policy was the 2020 implementation of the Foreign Investment Law, which aimed to provide more legal certainty to overseas investors by clearly defining FDI, regardless of whether it came from a native individual or enterprise. It also serves as a consolidation of previously disparate FDI regulations, assisting in their national standardization.
What are the business benefits of Free Trade Zones in China?
China’s free trade zones can benefit your business in a variety of ways and across a wide range of industries. Continue reading to learn about six ways free trade zones can help your business in China.
1. Good business environment for foreign companies
China has made significant progress in terms of economic openness and FDI, some barriers that have been reduced in free trade zones still exist. Some industries, such as the financial sector, may only be fully foreign-owned if they are located within these zones. Tax breaks in China’s free trade zones, duty-free imports and exports, and streamlined and simplified customs procedures are all factors that contribute to a favorable business environment for foreign firms.
2. Streamlined Customs Clearance
While users of free trade zones frequently focus on exporting, many individuals are unaware of the domestic benefits these zones provide. Domestic FTZ use allows business owners to avoid customs duties by using FTZ-to-FTZ shipping and cross-docking. In free trade zones, payments and declarations are very efficient.
3. Intellectual Property (IP) Protections
One of the most serious problems for international firms operating outside of China that want to enter the Chinese market is intellectual property protection. Businesses in Chinese FTZs can establish a dedicated intellectual property office to assist them with IP claims such as copyright, trademark, and patent concerns. When establishing an intellectual property office, professional institutions might be contracted to give extra assistance in enforcement and IP mediation services.
The Shanghai Free Trade Zone, which was established in 2014, is one example of this. We can see an Intellectual Property Office here, which serves both law enforcement and administrative purposes. The office is responsible for resolving issues including multi-pronged enforcement, an uneven division of enforcement power, and split administration.
4. Indefinite Storage
Companies are permitted to hold their goods in a free trade zone for an indefinite period of time. This mechanism relieves business owners of the burden of quota restrictions. Inverted tariffs and scrap duty exemptions may help manufacturing enterprises.
FTZs are especially advantageous for trade enterprises with huge product volumes since they can export and stockpile their goods in Chinese FTZs without paying import taxes on the full lot. The import tax would be paid only when the company exited the FTZ (to consumers).
5. Duty Exemption on Re-Exports
Products can be imported and held in a Chinese FTZ until they are re-exported to their final destination, which is frequently a neighboring place such as East/Southeast Asia or Australia. Businesses that use FTZs would not have to pay any import duty into China and, as a result, no export duty.
FTZs allow manufacturing facilities to import raw materials and re-export completed goods without incurring import tariffs.
6. Free Exchange Rate
Companies that are registered in FTZs benefit from currency exchange at a 0% exchange rate. This is especially important for businesses involved in international trade or services.
7. Logistic Service Providers
Free Trade Zones typically have a diverse range of logistic service providers (3PL) from whom a company can pick. The following are some of the advantages of using a third-party logistics provider:
Hiring a third-party logistics provider can save money on hiring additional staff, installing technology, creating warehouse facilities, and enabling transportation in the long term. Domestic and international air travel, maritime freight, freight forwarding, and traffic management are all examples of transportation facilitation.
This has recently become a serious issue for global business as a result of COVID-19.
3PLs can include artificial intelligence into their services to help with duties such as inventory management, inventory visibility, and enhanced reporting.
3PLs can assist your organization in entering global marketplaces where it has previously had no presence. This enables non-Chinese enterprises to smoothly incorporate into the Chinese market.
It’s worth emphasizing that the above-mentioned advantages are linked to connections, industry, and individual interactions with governing organizations. Certain conditions must also be met by businesses. As a result, functions should be handled on a case-by-case basis. Not every foreign firm will be able to reap all of the benefits of an FTZ, but many will.
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