Foreign and Defense Policy, Asia

The new Shanghai Area of Free Trade or something

Kenneth Moore Photography (Flickr) (CC BY 2.0)

Kenneth Moore Photography (Flickr) (CC BY 2.0)

The “Shanghai Free Trade Zone” just opened yesterday and I’m already sick of it. It’s not free, it may not emphasize trade, and there are questions about its function as a zone. It does, fortunately, seem to be in Shanghai.

Notwithstanding undue attention, the 29-square-kilometer area will be important. The new Chinese government, led by Communist Party General Secretary Xi Jinping and Premier Li Keqiang, must adopt pro-competition reform or see the economy stagnate. The Shanghai zone will become a reform hotbed or a stark symbol of their failure.

Initial returns are negative, reinforcing the empty reform talk of the Xi-Li government to date. Nothing of any value changed the day the zone was opened. There are no breakthroughs in trade, investment, or finance, or clarity on when a breakthrough might occur.

For example, foreigners are supposed to have additional investment rights, but it’s uncertain whether they can extend business beyond the zone. This is a rather obvious limitation in medical care which bears more subtly on sectors such as finance. What transactions can a bank established under the zone’s looser regulations undertake in the rest of China? Recent, similar attempts at financial liberalization have gone nowhere.

It’s a disturbing start but we’re early in the first quarter. Xi and Li are barely six months into a scheduled 10-year term. The zone at least offers a means by which to implement reforms, along with changes in residency status and possible negotiations to join the Trans-Pacific Partnership.

A concrete illustration is the notion of a “negative list.” China has long preferred positive lists, where what the private sector is allowed to do is listed and everything else presumed off-limits. Among its many problems, a positive list stifles innovation, since the list-makers never keep pace with new commercial ideas.

A negative list, in contrast, disallows what’s listed and permits everything else. This greatly reduces uncertainty. Beijing has just begun discussing switching to a negative list with the US, as part of re-launched talks on a Bilateral Investment Treaty.

The Shanghai zone has a list of what’s not allowed. Its first iteration is awful – page after page of sweeping restriction alternated with depressingly vague language. Still, there is now a published negative list, one that has the potential to get shorter, include fewer restrictions, and offer clearer language.

The hype for the Shanghai free trade zone is premature at best. It merely shows that China wants to appear to reform. The zone’s current function is as a barometer, where improvements to features such as the negative list will indicate whether reform is genuine.

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