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Experimental Free Trade Zones and their links with One Belt, One Road Initiative

By Kheng Swe Lim ( Updated: 2015-05-26 15:33

Three new Experimental Free Trade Zones (EFTZ) have recently opened in Guangdong. The first, located in the Hengqin district of Zhuhai, will act as a financial center linking the Guangzhou-Macau-Hong Kong regions. The second, in the Nansha district in south Guangzhou, will serve as a logistics zone. The third, in the Qianhai district of Shenzhen, will allow Chinese consumers to buy goods from Hong Kong duty-free.

The zones aim to integrate the Pearl River Delta region, pulling together Guangdong, Hong Kong and Macau into one economic unit. In these special regions, Chinese mainland businesses would be allowed to borrow from overseas lenders, and Hong Kong businesses can set up shop. Through these, China hopes to bring some of what makes Hong Kong special into Mainland China.

The EFTZs are not isolated examples. China is developing similar zones in Shanghai, Fujian and Tianjin. The Shanghai zone opened in September 2013. Much as the Guangdong zones seek closer integration with Hong Kong, the Fujian zone will take advantage of Taiwan’s economy, and the Tianjin zone will use the city’s position as the major port of the Bohai region.

Synergies with the One Belt, One Road Initiative

The EFTZs have the potential to synergize with China’s new grand economic policy experiment: the One Belt, One Road (OBOR) initiative. This is also a cornerstone of the government’s foreign policy, and will be implemented incrementally over the coming years. The OBOR, while outwardly focused, will be rooted in China’s domestic economy. The EFTZs, by their very nature, aim to make it easier for China to interact with the outside world. As the contours of the OBOR become clearer, there is a strong chance that it will link up with developments back in China, including the EFTZs.

For now, these zones are targeting a narrow range of regions. This is not surprising, as that they are still at an early stage of development, and will focus on integration with the “easy targets” of the Hong Kong and Taiwanese economies. However, in the future, they may, for example, target investments from specific regions, such as Southeast Asia or Europe. They could also serve as nodes for China’s outward investment to countries along the OBOR path. Furthermore, the zones are all located in major port cities in China, allowing them to serve as logistics hubs for the trade generated by the OBOR.

Deepening China’s internationalization

It must be remembered that the EFTZs and the OBOR are merely the latest phase of China’s habit of policy experimentation, which has roots dating back to the beginning of the reform and opening up period. The most striking examples are the Special Economic Zones, established in the 1980s as test cases for market policies. With the runaway success of these experiments, these policies were eventually applied nation-wide, ushering in a new era of globalization for China. If successful, the EFTZs and the OBOR could together have similarly wide-ranging impacts on China’s economy, deepening its internationalization even further.

Therefore, China’s economic policies cannot be looked at in isolation. The OBOR initiative would boost China's integration into the wider world, while the EFTZs would make it easier for the world to come to China. Just as importantly, they must be viewed in light of China’s history of policy experimentation and opening up, which has had transformative effects on the Chinese economy and on the world.

The author is a research analyst at RSIS China Program, Nanyang Technology University. The opinions expressed are the author's own.

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