In the context of accelerating the construction of a new development paradigm and promoting a high level of openness in China, it is time to construct the upgraded version of pilot free trade zones (FTZs) to advance the role of the pilot FTZs as “national testing grounds,” especially as they play a leading role in high-level institutional opening up.

Promoting institutional innovation

Institutional innovation is central to the construction of the pilot FTZs. For example, reforms such as “minimalist approval” in the transformation of government functions, the system of “pre-establishment national treatment plus a negative list” in investment reform, the “single window” for international trade in trade transformation and upgrading, and the “free trade account” for financial opening up, are representative innovations.

The basic requirement for the construction of pilot FTZs is to produce replicable and extendable reform and trial practices based on institutional innovations. By the end of 2021, a total of 278 institutional innovations have been explored and formed in China’s pilot FTZs, and these interventions have been replicated and extended to the whole country.

The pilot FTZs must serve the national strategy. Among them, the Belt and Road Initiative (BRI) is the most obvious, and 10 pilot FTZs have proposed to serve the BRI construction.

The construction of pilot FTZs is centered on institutional innovation, which has resulted in reform dividends, allowing them to be new engines for regional economic development. At present, a total of 67 areas have been established in 21 pilot FTZs, which have strongly driven the economic and social development of the regions where they are located.

Strengthening top-level design

Due to a lack of national-level laws and plans related to pilot FTZs, their innovative explorations are yet to be fully authorized.

There is still a problem of overemphasizing trade in goods and ignoring trade in services in the pilot FTZs in line with international rules. For the new rules such as competition neutrality, environmental protection, and labor standards in the international high-standard economic and trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTTP), Trade in Service Agreement (TISA), and Digital Economy Partnership Agreement (DEPA), China’s pilot FTZs still need to strengthen pilot implementations.

Pilot FTZs lack groundbreaking institutional innovations. Institutional innovations have appeared homogeneous, duplicated, and fragmented.

Creating highland for opening up

First, greater reform autonomy should be given to the pilot FTZs. The legal system related to the development of the pilot FTZs should be constructed and improved. The inter-ministerial joint meeting for pilot FTZs’ work should be given greater authority. Coordination and linkage between institutional innovation of the pilot FTZs and other existing innovation pilots should be strengthened.

Second, we need in-depth connections between the pilot FTZs’ rules and high-standard international economic and trade rules. Early trials should be implemented to enhance governance capacity, to reform investment management system rules, to test rules for promoting trade facilitation, and to take the initiative to test other new issues and rules.

Third, institutional innovation should be strengthened in key areas. The function of cross-border financial services should be further expanded, and innovative pilots such as two-way cross-border RMB cash pooling should be further promoted, guided by the needs of multinational companies. In addition to the financial sector, we should also accelerate innovation in other areas of the open rule system, test digital trade rules at an early stage, and explore the “Chinese version” of the cross-border data flow system under the principle of security and control.

Fourth, the management system and pilot FTZs mechanism should be innovated. Drawing on the experience of the Hong Kong Trade Development Council and other institutions, we can explore the establishment of a statutory entity at the provincial level, which is mainly responsible for the professional, technical, or socially involved public services and management functions of the pilot FTZs. The pilot FTZs comprehensive regulatory system should be improved. It is advisable to decrease regulatory entities in the zones and avoid efficiency losses caused by multi-level management. The construction of electronic information systems in regulatory departments should be strengthened. To improve regulatory efficiency, the regulatory process in the zones should be simplified.

Fifth, expansion of the existing pilot FTZs should be steadily promoted. Expansion of the pilot FTZs can be carried out in a larger space for early and pilot implementation, to promote the extension of industrial chains and functional expansion. This would provide incremental development and new platforms for the overall promotion of reform and opening up.

Sixth, differentiated and innovative development of the pilot FTZs should be a focus. Coastal zones can focus on areas such as port shipping and opening up of the service industry. Inland zones can focus on high-end manufacturing industry cultivation and international inland port construction. Border zones can focus on system innovation for economic and trade cooperation with neighboring countries. On the basis of differentiated innovation, drawing on the common practices of internationally renowned free trade ports, the construction of the Hainan Free Trade Port will be used as an opportunity to explore the construction of a free trade port with Chinese characteristics. We will create a new highland for opening up with a higher level of openness, a better business environment, and stronger expansive effects.

Liu Xiaoning is a research fellow from the Institute of International Economics and Politics at Shandong Academy of Social Sciences.