FTZ PFTZ FTP FTA CBZ — What Are They? How Do They Differ?

FTZ stands for “Free Trade Zone” (保税区) [1], which is an enclosed and gated area under special supervision by the customs authority. Shanghai Waigaoqiao FTZ founded in 1990 is the first of its kind in China and China has 9 FTZs totally to date [2].

The major advantages of FTZs are favors in terms of import tariff (e.g. exemption or deferred payment). Business operations in FTZs may normally vary from international trade (e.g. entrepot trade), bonded warehousing, bonded processing, bonded exhibition to high-end manufacturing and modern logistics, etc.

In fact, FTZ is only one type of area under customs’ special supervision (海关特殊监管区域), which now includes also Bonded Port Zones (保税港区, 2 in total, i.e. Hainan Yangpu Bonded Port Zone and Zhangjiagang Bonded Port Zone), Export Processing Zone (出口加工区，1 only, i.e. Guangzhou Export Processing Zone), Cross-border Industrial Zone (跨境工业区，1 only, i.e. Zhuhai Subzone of Zhuhai-Macau Cross-border Industrial Zone) and, last but not the least, Comprehensive Bonded Zones (综合保税区, “CBZs”) to be elaborated in greater detail below.

The term “Pilot Free Trade Zone” (自由贸易试验区，“PFTZ” as abbreviated) might be misunderstood if just taken literally, as a matter of fact, PFTZ is not necessarily an area under customs’ special supervision in its entirety, although a PFTZ also has its clearly-defined geographical boundaries and may include one or more FTZs, below-mentioned CBZs or other types of area under customs’ special supervision.

Let’s take Shanghai PFTZ as an example first. Shanghai PFTZ was set up in 2013 and is (again) the first of its kind in China. Starting from a few areas under customs’ special supervision (e.g. Waigaoqiao FTZ), over less than ten years Shanghai PFTZ has already developed into a zone of 120.72 square kilometers embracing Lujiazui Financial Subzone, Jinqiao Development Subzone and Zhangjiang High-Tech Subzone in addition. Likewise, Beijing PFTZ is now comprised of three subzones as planned, i.e. Sci-Tech Innovation Subzone, International Business Services Subzone (which includes Beijing Tianzhu CBZ) and High-end Industries Subzone, occupying a land area of 119.68 square kilometers in aggregate.

As you may realize, in fact PFTZs are not intended by China central government to simply play the role of “conventional” free trade zones which feature primarily relaxations in import tariff, etc., instead, PFTZs are now positioned predominantly as “experimental fields” of institutional innovations, where baskets of “breakthrough reform practices” (including some “high-standard” international trade/investment rules to which China is contemplating to accede) are tested for possible rollout in the rest of the country at a later stage, such reforms normally cover those in government regulatory regime, foreign exchange control, customs supervision, market access, investment, trade, financial services, etc., among which the most well-known “fruits” are the “Negative List for Foreign Investment Access” and the “Single Window of International Trade”.

Up to now China has 20 PFTZs in total throughout the country which are developed mainly on provincial [3] basis, virtually covering all the most economically dynamic areas in China. Trials in the PFTZs are now seen as good bellwether of nationwide policies moving China’s reform and opening-up forward.

Hainan used to be one of the PFTZs and is now “upgrading” to the first ever (and the only by far) Free Trade Port (自由贸易港, “FTP”) in China, which will come into full operation in 2025.

In comparison to PFTZs, what makes Hainan FTP stand out the most are the Master Plan for the Construction of Hainan Free Trade Port (the “Master Plan”) released in 2020 and the Hainan Free Trade Port Law (the “Law”) enacted in 2021, which, complemented with a cluster of implementing regulations [4], are laying a sound groundwork for the building of Hainan FTP in a stepwise manner.

Under the Master Plan and the Law, Hainan FTP as a whole is designed to be a huge area under customs’ special supervision (which is a major difference vis-a-vis those PFTZs), however, what will be taking place in Hainan FTP in the forthcoming years will go far beyond “zero tariff”. By granting Hainan more autonomy in local reform and more authority in local legislation, the Master Plan and the Law aim primarily to have various trade and investment liberalization and facilitation practices well institutionalized, including e.g. free movement of goods between overseas and FTP (with exceptions), cross-border trade in services (subject to the negative list) following the principle of equal treatment for both domestic and foreign players, more streamlined “negative list for foreign investment access” and more liberalized “list of market access”, approaches of “minimalist approval” and “entry upon commitment”, etc.; also importantly, the Master Plan and the Law both place great emphasis on facilitating free and convenient cross-border flows of such “factors of production” as capital, personnel and transportation as well as secure and orderly cross-border flow of data.

Equally noteworthy here is that the Master Plan and the Law authorize Hainan to implement “special tax system arrangements” in the FTP, which, apart from “zero tariff” to be applicable to most goods imported, includes also corporate income tax cuts available to named industries and qualified enterprises as well as individual income tax cuts in favor of eligible talents, etc.; further, by the time Hainan island is entirely sealed off for its independent customs operation in 2025, such taxes and fees as value-added tax, consumption tax, vehicle purchase tax, urban maintenance and construction tax and education surcharges will be streamlined and combined, sales tax will be levied at the retail phase. [5]

Above all the aforesaid, the Master Plan and the Law have charged Hainan FTP with an ambitious mission to continuously optimize its business environment with rule by law, internationalization and facilitation and optimize its market environment with fairness, uniformity and efficiency, all of which are to be safeguarded by a highly-efficient social governance system and a fully-fledged legal system.

In a nutshell, Hainan FTP is now advancing at the forefront of China's endeavors to further integrate into the global economy.

FTA, either standing for Free Trade Area or Free Trade Agreement (e.g. RCEP), differs vastly from the other concepts addressed here and falls essentially into the sphere of international treaties, hence FTA will not be discussed in detail here.

CBZ, as already mentioned above, is the short form of Comprehensive Bonded Zone (综合保税区). CBZ of Suzhou Industrial Park inaugurated in 2007 is the first CBZ in China. Through 15 years CBZ has now developed into the top tier of the areas under customs’ special supervision in terms of its openness and comprehensiveness. Over recent years, quite a number of pre-existing areas under customs’ special supervision such as export processing zones, bonded logistics parks, cross-border industrial zones, bonded port areas as well as some free trade zones have been successfully consolidated and upgraded to CBZs through integration and optimization, although some non-CBZ areas under customs’ special supervision remain at present as mentioned above.

By end of 2021, China has 155 CBZs nationwide, accounting for the overwhelming majority of China’s 168 areas under customs’ special supervision, and almost every province has one or even more CBZs; some CBZs are situated within PFTZs (e.g. Shanghai Pudong Airport CBZ is a part of Shanghai PFTZ, Beijing Tianzhu CBZ is a part of Beijing PFTZ), while some are not, e.g. Lhasa CBZ (in the Tibetan Autonomous Region) is standalone and not within any PFTZ.

A recent ordinance of China General Administration of Customs (“GAC”) taking effect on April 1, 2022 [6] expressly expands and depicts the functions of CBZs with an aim to facilitate trade and to drive the industrial chain to reach to higher-end. Under the new ordinance, enterprises in a CBZ may be engaged in such comprehensive businesses operations as R&D, processing, manufacturing and remanufacturing, testing and repair, storage of goods, logistics and distribution, finance leasing, cross-border e-commerce, merchandise display, international entrepot trade, international transshipment, port operations, bonded delivery of futures, etc.

CBZs throughout the country are now playing an increasingly active role in China’s trade with the overseas, recent statistics of GAC show that 155 CBZs achieved a total import and export value of RMB 5.9 trillion (around USD 0.925 trillion) in 2021, with a year-on-year increase of 23.8%, contributing 15.1% of China's total yearly foreign trade [7].

FTZs, PFTZs, FTP and CBZs, though performing varying functions and roles, are all in the vanguard of China’s on-going reform and opening-up, the developments in the legislations, policies and practices of such zones well deserve the devotion of  constant attention by investors, traders and other professionals both in China and from the rest of world.