Free Trade Zones (FTZs) are scattered around the globe, serving vital economic purposes in many of the world’s largest cities. China is no exception. Business in China is highly impacted by such special economic zones and – those who utilize often reap benefits from being acquainted with FTZs. There are many economic benefits of free trade zones in China. In the first seven months of 2020 as a standalone timeframe, FTZs in China contributed $400B USD in foreign trade and investment. These zones also increased the number of foreign enterprises by roughly 3,300 and account for ~17% ($13.3B USD) of all foreign investment across China.
How do FTZs in China function?
In short, FTZ’s authorize domestic activity on foreign products prior to a formal entry into the country. In China, every region or province is assigned a specific economic goal pursuant to the resources available to it. The exact reasons as for why specific industries are attached to certain regions is currently unknown, but this could be due to a number of reasons, perhaps government design or an otherwise forethought economic strategy. FTZs in China, then, are a manifestation of China’s planned economy.
Free Trade Zones themselves are run by government agencies and function as a way for businesses to test new policies, often incentivizing certain industries with 9-15% corporate tax breaks, individual tax subsidies for high-end talent, or extensive capacity for the flow of capital. More on benefits below. The government agencies who are in charge of overseeing FTZs receive a cut of the corporate taxes that are paid within the FTZ – That’s why they’re able to pass along tax breaks onto smaller entities, like the business you’re running. As of 2022, there are 21 Free Trade Zones in China.
What are the business benefits of Free Trade Zones in China?
Free trade zones in China can help your business in a variety of ways and in various realms. Read on to find six ways free trade zones can benefit your business in China.
1. Streamlined Customs Clearance
While free trade zone users often focus on exports, many people are unaware of the domestic benefits these zones carry. With domestic FTZ use, business owners are able to evade customs duties by taking advantage of FTZ-to-FTZ transport and cross-docking. Payments and declarations are especially more efficient in free trade zones.
2. Intellectual Property (IP) Protections
One of the biggest concerns for foreign enterprises outside of China who participate in the Chinese market is regards intellectual property protections. In Chinese FTZs, businesses can set up a dedicated intellectual property office which can assist a business in IP claims including copyright, trademark, and patent concerns. Setting up an intellectual property office can contract services from professional institutions to provide additional assistance in enforcement and IP mediation services.
One example of this can be seen in the Shanghai Free Trade Zone, which was established in 2014. Here, we can see an Intellectual Property Office which provides both law-enforcement and administrative functions. The office resolves matters related to multi-pronged enforcement, an uneven division of enforcement power, and divided administration.
3. Indefinite Storage
Companies are authorized to store their merchandise in a free trade zone for an unlimited amount of time. This mechanic takes quota restriction burdens off of business owners. Manufacturing firms may benefit from inverted tariff and scrap duty exemptions.
FTZs are particularly useful for trading companies with high volumes of products, since they can export and stockpile their goods in Chinese FTZs without paying import taxes on the entire lot. A business would only pay the import tax upon departure from the FTZ (to consumers).
4. Duty Exemption on Re-Exports
Products can be imported and stored within a Chinese FTZ until further re-exportation to its final destination, often nearby locations, such as East/Southeast Asia or Australia. Businesses utilizing FTZs would not be required to pay any import duty into China and subsequently, no export duty.
Manufacturing facilities within FTZs can import raw materials and re-export finished products without paying import duties.
5. Logistic Service Providers
Free Trade Zones generally exhibit a wide array of logistic service providers (3PL) for a company to choose from. Some benefits of contracting a third party logistics provider are:
They save money:
In the long run, hiring a third party logistics provider can save on hiring additional labor, technology installation, building of warehouse facilities, and facilitating transportation. Some examples of transport facilitation include domestic and international air flight, ocean freight, freight forwarding, and traffic management
In recent times due to COVID-19, this has been a major issue for business on a global scale.
3PLs can incorporate artificial intelligence into their provided services, and can assist with tasks relating to inventory management, providing inventory visibility, and advanced reporting.
3PLs can aid your business in placing itself into foreign markets to which your company has had no prior presence. This allows for companies foreign to China to seamlessly integrate itself into the Chinese market.
Free Exchange Rate
Companies who are registered within FTZs gain the benefit of currency exchange at a 0% exchange rate. This is particularly useful for entities involved in either international trade or services.
It may be worth noting that the benefits discussed above are tied to connections, industry, and individual relationships with governing bodies. Businesses also must meet certain requirements. Therefore, functions should be taken on a case-by-case-basis. Not every foreign company will be able to take advantage of all FTZ benefits, but many companies are able to. Schedule a consultation with us today so we can help your business thrive in China!