A Short History of Shanghai’s Free Trade Zone

Started in 2013 as a response to new trade pacts like TPP, the FTZ has helped remake the Chinese economy.

Ten years ago, China’s reform and opening-up was at a crossroads. Dissatisfied with the stagnant World Trade Organization system, a handful of developed nations began pushing for new regional investment and trade agreements, including the Trans-Pacific Partnership (TPP), the Transatlantic Trade and Investment Partnership (TTIP), and the Trade in Services Agreement (TiSA).

Compared to traditional trade agreements focused on tariff reduction and customs clearance, these regional agreements sought to resolve what are known as “behind the border” measures, including labor and environmental protections, intellectual property, investment rules, and the role of state-owned enterprises, among others. These comprehensive and high-standard trade agreements, which were envisioned to cover much of the world’s population and economic output, heralded a radical change in the global economy.

As the world’s second-largest economy and largest exporter, China naturally needed a response. In addition to starting negotiations on trade agreements like RCEP, the country set up the Shanghai Pilot Free Trade Zone in September of 2013. Officially tasked with “exploring new paths and accumulating new experience for comprehensively deepening reform and further expanding opening-up,” the Shanghai FTZ was designed to benchmark high-level economic and trade rules and explore new and replicable solutions to the challenges posed by the shifting global economy.

This method of piloting potential future reforms through a mix of top-down design and local trials dates back to the opening of the Shenzhen Special Economic Zone in 1980 and the Pudong New Area in 1992. The Shanghai FTZ is smaller than these earlier programs, but no less vital. The core of the FTZ was a set of new rules on foreign investment designed to align China’s market access with international norms.

Prior to the FTZ’s founding, foreign investment in China was restricted to a whitelist of designated sectors; the Shanghai Pilot Free Trade Zone took the lead in establishing a “negative list” approach, allowing investment in all but a handful of sensitive sectors. Over the past 10 years, that negative list has shrunk from 190 items to 27, and negative lists were written into Article Four of the national Foreign Investment Law that came into effect in 2020.

Similarly, the FTZ also piloted a new, more efficient commercial registration system, which has greatly simplified the process of setting up a business. In the past, starting a company in China required a prospective entrepreneur to first obtain numerous permits from government agencies before applying for a business license. The Shanghai FTZ began offering licenses prior to permits in 2014, separating operating permits from business licenses in 2016, and consolidating various licensing requirements in 2021, all of which have significantly shortened the approval process.

As a result, the local business environment has improved rapidly. Interestingly, the biggest beneficiary may be an American company: Tesla. The EV manufacturer’s Shanghai Gigafactory went from commencing construction to delivering its first car in less than a year thanks to strong local government support and a streamlined bureaucratic approvals process.

It's not just manufacturers that have gained from the FTZ’s rules, however. After taking various measures to facilitate trade, the time produce spends in customs has been significantly reduced. For example, the time it takes for Chilean cherries to reach Chinese supermarket shelves has been reduced from the original 7 days to just 48 hours.

In short, the FTZ has effectively stimulated market vitality and promoted China’s economic transformation. It’s no wonder, then, that the program has been expanded elsewhere, with 21 FTZs and Hainan Free Trade Port currently operating in China.

Yin Chen is a professor of economics and the secretary-general of the Research Institute of China (Shanghai) Pilot Free Trade Zone at Fudan University.

Editor: Lu Hua; portrait artist: Wang Zhenhao.

(Header image: An aerial view of the China (Shanghai) Pilot Free Trade Zone, Sept. 9, 2023. VCG)