Concerns persist about role of FTZ in reform across the nation

The entrance of the China (Shanghai) Pilot Free Trade Zone. Skepticism about the zone's role and future still exists about six months after it was launched. Reuters

About half a year after the China (Shanghai) Pilot Free Trade Zone was launched amid much fanfare, skepticism and confusion about its role and future persist.

The mixed sentiment was reflected earlier this month during a panel discussion at the Boao Forum for Asia, which brought together officials, entrepreneurs and academics.

Panelist Nouriel Roubini, a professor at New York University's Stern School of Business, raised a key question. Since the FTZ is meant to be a model for reform across the nation, he asked, how and when will its practices be disseminated?

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It's a question many continue to ask. Will the zone become an oasis for arbitrage, given that the rest of China will continue to operate under a system of partly regulated interest rates and limited capital-account convertibility? The zone is supposed to be a three-year trial of reforms that will be copied nationwide, but the time lag is feeding concern that the FTZ will be a haven for speculation during that period if regulators fail to keep up with change.

Long Yongtu, a former vice-minister of commerce who led the negotiations over China's entry into the World Trade Organization, responded to Roubini's question by offering an alternative perspective. Stressing that the experiment in Shanghai will spread nationwide, he gave another important clue about the FTZ's role in China's economic development.

That is, the Shanghai FTZ will be a place for China to "make up its mind" about embracing a new round of trade and investment agreements. These pacts include the strategically important US-China Bilateral Investment Treaty, the European Union-China BIT and the Regional Comprehensive Economic Partnership, all of which are under negotiation.

It's also possible that China will join the Trans-Pacific Partnership, Premier Li Keqiang recently indicated.

Long said that at the end of last year, China made a "substantial compromise" on the US-China BIT, agreeing to accept "pre-establishment national treatment" and "negative list" principles.

China's accession to the WTO made it compulsory to give "national treatment" to overseas investors, but that was limited to the phase after foreign companies received licenses to operate within the nation. But China remains hesitant to adopt the principle of "pre-establishment national treatment", which will give foreign companies equal treatment prior to that stage.

The issue, along with the long negative list China has offered so far, has frustrated its US counterparts and prevented a breakthrough during years of negotiation for the BIT.

"In a certain sense, the Shanghai FTZ provides preparation for the treaties China is negotiating with the US and EU. Shanghai could experiment in advance. Then, we'll get a clue as to how much we can promise to our negotiating partners. Once China signs a BIT with the US, it becomes law, and that law will not be enforced only in the Shanghai FTZ, but nationwide," Long said.

In that light, the significance of Shanghai FTZ goes beyond domestic reform and extends to China's stated commitment to further opening-up.

The FTZ's fate is thus critical to whether China will join other broad, bilateral or multilateral service industry-oriented agreements.