Download 4.1 Background of Shanghai Free Trade Zone (SFTZ)

The Genesis of
China (Shanghai) Pilot Free Trade Zone
Duan Chen
Supervised by: Rasmus Gjedssø Bertelsen
Hao Min
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Contents
1.Introduction …………………………………………………………………………1
2. Methodology………………………………………………………………………...5
2.1 Core Concepts…………………………………………………………………5
2.1.1 Free Trade Zone…………………………………………………………5
2.1.2 Transition………………………………………………………………..6
2.2 Choice of Theories……………………………………………………………..6
2.2.1 Transition Economics……………………………………………………6
2.2.2 International Political Economy…………………………………………7
2.3 Case Study and Data Collection………………………………………………..8
2.4 Limitations……………………………………………………………………..9
2.5 Research Design……………………………………………………………….10
3. Theoretical Approach ……………………………………………………………...12
3.1 Transition Economics ………………………………………………………...12
3.2 International Political Economy………………………………………………..13
3.2.1 Realist Approach of IPE…………………………………………………14
3.2.2 The second image reversed………………………………………………15
3.3 Two-level Game Theory ………………………………………………………15
4. Empirical Data………………………………………………………………………17
4.1 Background of Shanghai Free Trade Zone (SFTZ) …………………………...17
4.2 Policies and Regulations of SFTZ …………………………………………...19
5. Analysis……………………………………………………………………………….23
5.1 Shanghai FTZ and China in Transition…………………………………………23
5.1.1 Initial Conditions and Challenges………………………………………...23
5.1.2 Shanghai FTZ as a Stragegy ……………………………………………..26
5.2 IPE Analysis of Shanghai FTZ…………………………………………………..29
5.2.1 Domestic institutions………………………………………………………30
5.2.2 International institutions…………………………………………………...33
5.2.3 Domestic interests…………………………………………………………35
5.2.4 International interests………………………………………………………36
6. Conclusion……………………………………………………………………………...37
Bibliography………………………………………………………………………………39
1
1. Introduction
The China (Shanghai) Pilot Free Trade Zone (hereafter Shanghai FTZ) has caught the world’s
attentions since its establishment on September 29, 2013.1 Some groundbreaking changes
have been launched for trial inside the Shanghai FTZ. The changes include new policies
concerning financial services, such as free Yuan convertibility under the capital account,
interest rates liberalization and cross-border use of RMB in its first free trade zone. 2
Moreover, the newly adopted “negative list” approach for investment approvals inside the
zone and the pre-establishment national treatment for foreign companies largely ease the
burdens of foreign investors.3 Besides, another five key areas, namely, shipping and logistics,
commercial trade, professional services such as law and construction, culture and
entertainment, and social services including education and healthcare, has been announced for
opening-up.4
The significance of Shanghai FTZ goes beyond regional economic and trade concerns. Its
establishment is considered the most important attempt at reform and opening-up following
Deng Xiaoping’s efforts to transform China to a market economy. As stated by Han Zheng,
secretary of the Shanghai Municipal Committee of the Communist Party of China (CPC), the
Shanghai FTZ is “part of a national strategy, a key decision that deepens reform, a
breakthrough that overcomes the main obstacles to reform” 5 . Thus, the purpose of
establishing Shanghai FTZ “is not for regional experiment but for long-term development”,
which entails that the reform measures conducted in the FTZ must be replicable to other
regions.6 The mission of Shanghai FTZ, as a trial ground for future economic reforms, is
further confirmed by media reports in January 2014 that proposals for another 12 free trade
1
“China Launches Pilot Free Trade Zone in Shanghai,” Shanghai Daily, accessed April 09, 2014,
http://www.china.org.cn/business/2013-09/29/content_30166167.htm.
2
“Framework Plan for the China (Shanghai) Pilot Free Trade Zone,” China (Shanghai) Piolot Free Trade Zone
Official Website, accessed April 09, 2014, http://en.shftz.gov.cn/FrameworkPlan.html.
3
“Framework Plan for the China (Shanghai) Pilot Free Trade Zone.”
4
“Framework Plan for the China (Shanghai) Pilot Free Trade Zone.”
5
Hu Shuli, “Han Zheng: How Shanghai’s Free Trade Zone Works,” Caixin Online, accessed April 10, 2014,
http://english.caixin.com/2013-11-14/100604877.html.
6
“Official Urges ‘replicable’ FTZ Reforms,” Global Times, accessed April 09, 2014,
http://www.globaltimes.cn/content/823350.shtml#.UqwQ40SWqlc.
1
zones has been given the nod by the central government.7 It is expected that free trade parks
will be built in these selected areas based on the current practices in Shanghai FTZ.
Regarding the key issues of reform, Han pointed out that the Shanghai FTZ is system
innovation rather than favorable policies to attract investment.8 Such system innovations
include the transformation of the government’s role, the promotion of market-oriented
economy, and further compliance with international rules.9 Aiming at further liberalizing the
flow of goods and services, as well as testing an alternative to the current way of
administration, the establishment of Shanghai FTZ corresponds with the central government’s
idea of “promoting reform through opening up” and “letting the market play the decisive role
in allocating resources”, which was proposed in the document of Decision of the CCCPC on
Some Major Issues Concerning Comprehensively Deepening the Reform.10 The new FTZ is
anticipated to bring about “a new round of growth potential through institutional
innovation”11.
Judging from above-mentioned official statements and speeches, it is possible to say that the
establishment of Shanghai FTZ is an important step taken by the new Chinese leadership to
seek further economic liberalization and administrative innovation. This statement entails
questions at three levels: the big one being “why is reform towards economic liberalization
important to China’s future development?”; the intermediate one being “why does reform take
the form of Shanghai FTZ?”;
the specific one being “what are the driving forces behind the
establishment of Shanghai FTZ?”. While the former two questions provide a general context
of discussion, the third question will be the focus of this thesis.
In order to answer the general questions regarding China’s tendency towards economic
liberalization and its choice of reform strategies, it is necessary to examine the background of
7
“China Approves 12 More Free Trade Zones,” Xinhua News, accessed May 08, 2014,
http://news.xinhuanet.com/english/china/2014-01/22/c_133066293.htm.
8
“Official Urges ‘replicable’ FTZ Reforms.”
9
Shuli, “Han Zheng: How Shanghai’s Free Trade Zone Works.”
10
“Decision of the CCCPC on Some Major Issues Concerning Comprehensively Deepening the Reform,”
China.org.cn, accessed May 08, 2014, http://www.china.org.cn/chinese/2014-01/17/content_31226494_7.htm.
11
“Shanghai FTZ Outlines Roadmap of New Reform,” Xinhua News, accessed April 09, 2014,
http://usa.chinadaily.com.cn/business/2013-09/29/content_17003561.htm.
2
China in transition. Transition, in the context of political economy, refers to the
transformation of economic system from a centrally-planned one to a market-based one.12
According to Hong Yinxing, reforms are specific means and measures by which transition is
achieved.13 Reforms are partial, while transition calls for systemic institutional changes. He
further points out that contemporary China is experiencing transition in four aspects: 1)
economic transition from a planed system to a market system; 2) societal transition from a
tradition one to a modern one; 3) shift in development model from a extensive one to an
intensive one; 4) degree of openness from closed to globalized.14 It is reasonable to say that
transition is at the core of every issue concerning reform and development in China.
With general context established, the specific question regarding driving forces behind the
formation of Shanghai FTZ comes into focus. As this question involves complex issues
concerning the political response to economic pressures from both home and abroad, it is
especially important to choose a suitable analytical framework that can incorporate
interdisciplinary factors. International Political Economy (IPE), as an interdisciplinary field
drawing on political science and economics, offers such a framework to study “the ways in
which political forces shape the systems through which economic interactions are expressed,
and conversely the effect that economic interactions have upon political structures and
outcomes”15.
An IPE approach to China’s domestic reforms and liberalizing policies was offer by the
collection of essays edited by David Zweig and Chen Zhimin. In the volume China's Reforms
and International Political Economy, Zweig and Chen presented various academic opinions
from both mainland and Western scholars, proposing that the explanatory factors could be
situated along two dimensions: one illustrates the relative impact of domestic versus global
forces; the other juxtaposes two alternative elements, that are, governmental or organizational
12
Gérard Roland, Transition and Economics (The MIT Press, 2000), xvii.
13
Hong Yinxing, Transition Economics[转型经济学] (Higher Education Press, 2008), II.
14
Yinxing, Transition Economics[转型经济学].
15
David N. Balaam and Michael A. Veseth, “Political Economy,” Encyclopaedia Britannica Online Academic
Edition, accessed May 06, 2014, http://www.britannica.com/EBchecked/topic/467600/political-economy.
3
forces versus market or society forces. 16 Since governmental/organizational forces are
concerned with institutions while market/society forces are concerned with interest, the
analytical framework can be further simplified into Table 1.1.
The thesis author adopts the above-mentioned framework, and seeks to understand the forces
that shape the establishment of Shanghai FTZ from domestic and global perspectives with
interests and institutions as key explanatory factors. The upper left quadrant represents the
domestic institutional force that influences the establishment of Shanghai FTZ, namely, the
Chinese central government. The lower left quadrant reflects the external institutional forces
such as international norms and U.S. hegemony. The lower right quadrant sees the
explanatory role of global market forces as embodied by multinational corporations and the
global production chain. Finally, the upper right one envisions the role of domestic market or
social forces in shaping the policy.
Table 1.1
Institutions
Interests
Domestic
Government
Domestic market or social forces
Global
Global norms, US hegemony
Global market forces
Source: adapted from Zweig and Chen’s book chapter Introduction: International political
economy and explanations of China’s globalization
In sum, with the broad picture of China’s economic transition in mind, this paper seeks to
understand the formation of Shanghai FTZ by adopting the 2x2 framework. Therefore, the
problem formulation goes as follows:
To what extent did institutions and interests on domestic and global level
shape the establishment of Shanghai Free Trade Zone?
16
David Zweig and Zhimin Chen, eds., China’s Reforms and International Political Economy (Routledge,
2007): 12-13.
4
2. Methodology
This section aims at offering a referential framework of how the problem formulation is
understood and approached by the author. Departing from the observation that the
establishment of Shanghai FTZ is defined by the Chinese central government as a trial ground
for further economic reform, this paper seeks to understand the forces behind such
liberalization measures by adopting the 2x2 framework. In the following paragraphs, I will
expound on core concepts, choice of theories, research design, data collection and limitations
regarding this thesis.
2.1 Core Concepts
2.1.1 Free Trade Zone
Free-trade zone, also known as foreign-trade zone or free port, refers to an area created within
a country where “goods may be landed, handled, manufactured or reconfigured, and
reexported without the intervention of the customs authorities.”17 Accordingly, only when
“the goods are moved to consumers within the country in which the zone is located do they
become subject to the prevailing customs duties.”18 Simply put, free trade zone is an area that
is inside the territory of a country while outside the customs.
Free-trade zones are generally located around major seaports, international airports, and
national frontiers where geographical advantages for trade are identified. The main purpose of
a free-trade zone is to remove trade barriers caused by quotas, tariffs, high taxes and complex
customs regulations.19 Foreign goods can be brought into the free trade zone “without formal
customs entry for warehousing, assembly, manufacture, display, destruction or other
processing”20. The businesses inside the free trade zone can benefit from the reduction in
17
Encyclopædia Britannica Online, “Free-Trade Zone (international Trade),” accessed May 12, 2014,
http://www.britannica.com/EBchecked/topic/218417/free-trade-zone.
18
Encyclopædia Britannica Online, “Free-Trade Zone (international Trade).”
19
Encyclopædia Britannica Online, “Free-Trade Zone (international Trade).”
20
Philadelphia Regional Port Authority, “PRPA - Foreign Trade Zones,” accessed May 11, 2014,
http://www.philaport.com/ftz.htm.
5
customs examination procedures, which result in quicker turnaround of ships and planes.21
Other economic benefits include exemption from certain taxes, deferral or elimination of
customs duties, indefinite storage opportunities, etc.22
2.1.2 Transition
The word “transition” began to appear in academic terminology in the beginning of 1990s.
With the fall of the Berlin wall in 1989, the former socialist bloc members, notably the Soviet
Union, communist bloc countries of Europe and China, have abandoned central planning
economic order and sought to join the liberal international economy. 23 Development
economists regard these countries as special cases in the political economy of development,
and refer to them as transition economies.24
According to Oleh Havrylyshyn and Thomas Wolf, the process of transition often involves
liberalizing economic activity and market operations, developing market-based instruments
for macroeconomic stabilization, achieving effective enterprise management and economic
efficiency through privatization, imposing hard budget constraints to improve efficiency, and
establishing institutional and legal framework to secure property rights. 25 Economic
transition is also accompanied by governance changes, implying a shift in the role of the state
and the creation of different governmental institutions.26
2.2 Choice of Theories
2.2.1 Transition Economics
Transition economics, also known as transformation economics, is the field of study focusing
on the experience of former socialist bloc countries and their political and economic
21
Encyclopædia Britannica Online, “Free-Trade Zone (international Trade).”
22
The US. Small Business Administration, “Free Trade Zones: What Are They and How Can Small Businesses
Benefit?,” accessed May 11, 2014, http://www.sba.gov/community/blogs/community-blogs/
business-law-advisor/free-trade-zones-what-are-they-and-how-can-small-businesses-benefit.
23
Frieden and Lake, International Political Economy: Perspectives on Global Power and Wealth, 379.
24
Frieden and Lake, International Political Economy: Perspectives on Global Power and Wealth, 379.
25
Oleh Havrylyshyn and Thomas Wolf, “Determinants of Growth in Transition Countries,” Finance and
Development 36, no. 2 (1999).
26
International Monetary Fund, “Transition Economies: An IMF Perspective on Progress and Prospects,” 2000,
http://www.imf.org/external/np/exr/ib/2000/110300.htm#II.
6
liberalization. The questions that are brought about by transition, as well as the problem of
development in general, include “How, and under what circumstances, should countries seek
to integrate themselves into the international market? How can the international economy be
structured so as to fulfill the needs of separate nation-states? How does the international
economy affect politics within states?”27
As all the above questions are highly relevant to China’s economic liberalization and further
integration into the world economy, the thesis author believes that transition economics is
useful in explaining the two general questions proposed in the introduction, and thus provides
a broad context of discussion. Moreover, compared to the so-called “grand theories” in
international relations, transition economics is more related to China’s specific situations. In
this sense, theories in transition economics is especially important as it offers an analytical
tool to view specific case, such as the establishment of Shanghai FTZ, in the broad historical
context of China in transition.
2.2.2 International Political Economy
As the author explained in the introductory chapter, this thesis aims to discuss the internal and
external forces, as well as the interaction between interests and institutions behind the
establishment of Shanghai FTZ. The zone came into being as an economic arrangement, as
well as a political product. It embodies a political response of the Chinese central government
in coping with domestic and international challenges. Moreover, ever since the “reform and
opening-up policy” in 1978, these has seen an increasingly close tie between the Chinese
economy and the world economy. Thus, the formation of Chinese economic policies is
expected to incorporate more global economic concerns. In this sense, IPE is highly relevant
as it establishes a reciprocal connection between the exercise of political power and the
control of significant resources in the global market economy.28
In this particular thesis, a state-centric perspective in IPE will be adopted as the theoretical
point of departure for several reasons. Firstly, China today is characterized by a “strong state
27
Frieden and Lake, International Political Economy: Perspectives on Global Power and Wealth, 380.
28
Geoffrey R.D. Underhill, “Conceptualizing the Changing Global Order,” in Political Economy and the
Changing Global Order, ed. Richard Stubbs and Geoffrey Underhill (Oxford University Press, 2006), 3–23.
7
served by a powerful, efficient government, one with a plan for political, social and economic
transformations”29 It is believed that in a state-centered policy network, the state “emanating
from the public or some other sovereign, formulates policy which is an articulation of
collective interests” 30 . This network also allows state to “impose that policy over the
objections of particularistic interests”31. Thus, it is reasonable to say that state-centrism has
become an important feature of modern Chinese political thought. Secondly, since the
foundation of P.R. China in 1949, it has been a one-party state ruled by the Communist Party
of China (CPC). Though political power in China is somewhat diffused by a number of
bureaucratic and non-central government actors32, the central government still holds relatively
strong power in policy-making. Thirdly, if we take the Shanghai FTZ as a specific case, the
fact that it has received considerable level of support from the central government suggests
that its mission is closely related to the goals of the central government. In sum, realism in
IPE provides a suitable theoretical perspective in the discussion of Shanghai FTZ.
Another methodological question worth asking is, whether IPE theories developed under
historical context or based on the experiences of certain nation-states can be universally
applied. This question is especially salient when it comes to case studies that involve China.
As Shaun A. Breslin advocates in his analysis of China’s international political economy, “the
study of IPE needs to become more sensitive to case studies from the developing world, with
recognition of the different characters of ‘the state’ outside the advanced industrialized
world.”33 This thesis will evaluate the applicability of theories on empirical cases.
2.3 Case Study and Data Collection
The case study approach refers to the “detailed examination of an aspect of a historical
29
Edmund S. K. Fung, The Intellectual Foundations of Chinese Modernity: Cultural and Political Thought in
the Republican Era (Cambridge University Press, 2010), 25.
30
Peter Gourevitch, “The Second Image Reversed: The International Sources of Domestic Politics,”
International Organization 32, no. 04 (May 22, 2009): 901-902.
31
Gourevitch, “The Second Image Reversed: The International Sources of Domestic Politics.”, 92.
32
Kerry Dumbaugh, Understanding China’s Political System (DIANE Publishing, 2010), 1.
33
Shaun A. Breslin, “Beyond the Disciplinary Heartlands: Studying China’s International Political Economy,” in
China’s Reforms and International Political Economy, ed. David Zweig and Zhimin Chen (Routledge, 2007), 22.
8
episode to develop or test historical explanations that may be generalizable to other events” 34.
In this thesis, the author considers the establishment of Shanghai FTZ as a case to be
examined, and wishes to generate explanations on its driven forces. George and Bennett point
out a case study is “a well-defined aspect of a historical episode that the investigator selects
for analysis, rather than a historical event itself”35. Accordingly, the thesis author chooses to
examine the underlying impetus for the establishment of Shanghai FTZ, rather than the
Shanghai FTZ itself.
This thesis will primarily be a qualitative research that seeks to understand positions behind
given policies. The goal of qualitative inquiry is “to add insight and understanding and to
create theory that provides explanation and even prediction to a phenomenon”36. To better
understand the Shanghai FTZ as well as Chinese economy in general, both qualitative data
and quantitative data are collected. Such quantitative data as China’s economic figures are
collected through official or academic sources for the sake of accountability. Qualitative data,
which take more varied forms, are obtained from academic articles, new reports, official
websites, books, etc. Both primary and secondary sources are used in order to conduct the
research. Primary sources include official websites of Shanghai FTZ, as well as official
statements and formal information. Secondary sources such as media reports, research papers,
journal articles, and electronic newspapers and magazines, are used in order to collect data
that are not easily accessible from primary sources. Secondary sources are valuable also
because they offer processed data that are more organized and comprehensible. However, it is
fairly important to verify the reliability of secondary data as they have been subjected to
reinterpretation.
2.4 Limitations
This research paper is facing limitations from several aspects. Firstly, since the topic is
34
Alexander L. George and Andrew Bennett, Case Studies and Theory Development in the Social Sciences
(MIT Press, 2005), 5.
35
George and Bennett, Case Studies and Theory Development in the Social Sciences, 18.
36
Lyn Richards and Janice M. Morse, README FIRST for a User’s Guide to Qualitative Methods [Paperback]
(SAGE Publications, 2012), 81.
9
relatively new and still in progress, academic literature and relevant data on Shanghai FTZ
have yet fully developed, which leads to certain difficulties in data collection. The current
research is based on the data available at the moment, which might be incomprehensive and
biased.
Secondly, the research does not fully explore the interaction between the central and the local
government, as well as the bargaining process of different domestic interest groups. This is
because credible materials are lacking concerning the domestic politics behind policy-making
process. Media reports are the only accessible materials on this issue; yet the facts and
opinions presented by the media are diverse, sometimes even contradictory, depending on the
stance of the author. Thus, discussions on domestic politics will be limited with the awareness
of its limitations.
2.5 Research Design
The flow chart below (Chart 2.1) shows the research design of this paper. The introduction
chapter presents the core features of Shanghai FTZ and introduces the 2x2 analytical
framework proposed by Zweig and Chen, which naturally leads to the problem formulation.
Methodology section aims at illustrating the core concepts, choice of theories, the structure of
the project, sources of data and limitations of the research. Next chapter introduces theories
that are relevant to the thesis, specifically, the major points and basic assumptions of
International Political Economy, transition economics, realist approach, etc. The subsequent
section is devoted to the collection of empirical data concerning Shanghai FTZ, including its
historical origin, background information, and detailed rules and regulations. The analysis
section is key to the thesis as it combines the theories with empirical data, offering logical
arguments to understand the driving forces behind Shanghai FTZ. A discussion on the broad
context of China in transition comes first, which will be followed by an IPE analysis of the
Shanghai FTZ from four aspects, as was shown in the 2x2 framework. Finally, the thesis
briefly summarizes the findings and leads to a conclusion.
10
Introduction
Methodology
Empirical Data
Theory
Broad context:
China in transition
IPE analysis
Domestic
Institution
International
Institution
Domestic
Interests
Conclusion
Chart 2.1
11
International
interests
3. Theoretical Approach
3.1 Transition Economics
In transition economics, two main paths are identified from the beginning of the transition
process, which have shaped both policy recommendations and research schemes. 37 According
to Gérard Roland, the first vision is the Washington Consensus represented by the Soviet
Union and its allies in Central and Eastern Europe, which is also labelled as the big bang or
shock therapy view; the second is called the evolutionary-institutionalism strategy represented
by China, also known as gradualist or incrementalist view.38
Roland pointed out that the Washington Consensus view is intellectually rooted in the
standard neoclassical price theory, standard macroeconomics of stabilization policy, and
knowledge in comparative economic systems “emphasizing both the complementarity of the
constitutive institutions of economic systems and the disappointing experiences with partial
reform in Central and Eastern Europe.”
39
On the other hand, the evolutionary-
institutionalism strategy is rooted in the institutionalist perspective in modern microeconomic
theory, an evolutionary approach to economics, and a philosophical scepticism emphasizing
men’s relative ignorance of economic and social systems and their transformation.40
There are several core issues that the Washington Consensus view and the evolutionaryinstitutionalism view disagree on. Firstly, regarding the question of sequencing of transition,
the former insists an agenda that prioritizes the democratic reform and mass privatization of
ownership, while the latter prioritizes the market economic reform and incremental changes to
ownership. Secondly, with respect to the scope of transition, the former view, rested in
neo-liberalism, advocates the leading role of the market in pushing forward reforms and seeks
to minimized the intervention of the government; while the latter contends the government
should actively involve in the reform by making industrial and social polices that are
favorable to the establishment of a market-based economy. Thirdly comes the question of
37
Gérard Roland, Transition and Economics (The MIT Press, 2000), 328.
38
G Roland, “The Political Economy of Transition,” The Journal of Economic Perspectives 16, no. 1 (2002):
30.
39
Roland, Transition and Economics, 329.
40
Roland, Transition and Economics, 329.
12
pace. The former view favors a fast and comprehensive reform that attempts to create
irreversibility; on the other side, the latter view advocates a gradualist strategy, which is
expected to provide demonstrated success to build upon, thus creating support for further
reforms.41 Historically, China’s reforms always took the gradualist approach of transition, as
represented by the dual-track system of price liberalization.
3.2 International Political Economy
IPE emerged as a distinct subfield in the 1970s as a response to the developments in the
studies of economics and international relations. 42 Traditional international relations
approaches have emphasized a clear distinction between the dynamics of politics at the
domestic level and international level. However, as the market economy system becomes
increasingly internationalized and consequently outside the control of individual states, it
becomes necessary to understand the interaction of domestic and international levels of
analysis.43 On the domestic level, material economic interests of different interest groups are
expressed as policy preferences, representing a diverse range of state and non-state actors. On
the international level, governmental bargaining and existing international institutions
function to shape domestic decisions, at the same time, provide a means for domestic politics
to be projected into the international domain.44
Thus, IPE theories, though varied in origins and emphasis, are based on several basic
premises: 1) political and economic domains cannot be separated; 2) the state and the market
are not operating in contrasting realms; instead, political interaction is the means by which
economic structures are established and in turn transformed; 3) there exists intimate
connection between domestic and international levels of analysis.45
The most commonly used way of categorizing competing schools is Robert Gilpin’s
41
Wang Zhengyi, General Theory of International Political Economy [国际政治经济学通论] (Beijing: Peking
University Press, 2010), 457-458.
42
John Ravenhill, Global Political Economy, 3 edition (OUP Oxford, 2011), 19.
43
Underhill, “Conceptualizing the Changing Global Order”, 5.
44
Underhill, “Conceptualizing the Changing Global Order”, 6.
45
Underhill, “Conceptualizing the Changing Global Order”, 4.
13
trichotomous categorization of realism, liberalism and Marxism.46 However, this approach
has been frequently criticized for drawing rigid lines of demarcation and lumping together
approaches with diverse origins under the same label.47 For instance, under the realist label of
IPE, one can also finds terms such as statist, nationalist, or mercantilist being used. Thus,
Matthew Watson contends that a classification based on historical and disciplinary origins
should be applied.48
3.2.1 Realist Approach of IPE
In IPE, “realism” and “statism” are often used as acceptable synonyms49 since the intellectual
lineage of both approaches can be traced to the realist tradition in international relations50.
Departing from realist beliefs in IR that emphasize “the anarchic nature of international affairs,
the primacy of the state and its interests in international affairs, and the importance of power
in interstate relations”51, statist /realist strand of IPE assumed that 1) national interests are the
sole concern of states when taking stance in international economic negotiations; and 2) states
tend to avoid triggering retaliatory actions from other states by acting in line with the
prevailing international economic norms.52 In present day, such concerns include respect for
the right of other to participate in free trade and a commitment to liberalizing financial flows
and capital accounts.53
Stephen Krasner, one of the leading advocates of realist approach, believes that states are the
ontological givens in the system while other actors such as corporations and regulatory
institutions are merely subsidiaries to the states. 54 Robert Gilpin further specifies the
46
Lisa Martin, “International Political Economy: From Paradigmatic Debates to Productive Disagreement,” in
Conflict, Security, Foreign Policy, and International Political Economy, ed. Michael Brecher and Frank P.
Harvey (The University of Michigan Press, 2002), 245.
47
Matthew Watson, Foundations of International Political Economy (Palgrave Macmillan, 2005), 32.
48
Watson, Foundations of International Political Economy, 32.
49
Matthew Watson, Foundations of International Political Economy (Palgrave Macmillan, 2005), 34.
50
Watson, Foundations of International Political Economy, 33.
51
Robert Gilpin, Global Political Economy (Princeton University Press, 2001), 14.
52
Watson, Foundations of International Political Economy, 33.
53
Watson, Foundations of International Political Economy, 33.
54
Stephen D. Krasner, “International Political Economy: Abiding Discord,” Review of International Political
Economy 1, no. 1 (March 1994): 18.
14
significance of national governments as they “make the primary decisions regarding economic
matters; they continue to set the rules within which other actors function, and they use their
considerable power to influence economic outcomes”55. In this sense, realist approach of IPE
necessarily prioritizes state actions in the study of international economic affairs.
Another key issue is the delineation of national interest. Gilpin contends that national interests
and policies are determined by the dominant political elite and the pressures of interest groups
within a national society.56 He admits there can be subjective elements in an elite’s definition
of national interests; however, objective factors such as the “geographic location” and the
“physical requirements of the economy” are still core concerns.57
Realist approach of IPE also assumes that national security is and always will be the primary
concern of states in international political economy; hence states must “constantly guard
against actual or potential threats to their political and economic independence”.58 Regarding
Richard Rosecrance’s argument that the rise of “trading states” is challenging the importance
of national security, Gilpin insists the success of these states has been made possible “by the
security system provided by the alliances between the United States and its allies in Europe
and Asia”59.
3.2.2 The second image reversed
In his 1978 paper The Second Image Reversed: The International Sources of Domestic
Politics, Peter Gourevitch examines the relationship between international and domestic
politics.60 As the title implies, his main focus is reversing Waltz’s second image by looking at
how international politics affect domestic structure. For Kenneth Waltz, the “second image”
refers to an explanation of international politics at the domestic level. 61 For instance, in
second-image perspectives, the causes of war are explained by the features of states, including
55
Gilpin, Global Political Economy, 18.
56
Gilpin, Global Political Economy, 18.
57
Gilpin, Global Political Economy, 19.
58
Gilpin, Global Political Economy, 19.
59
Gilpin, Global Political Economy, 19.
60
Gourevitch, “The Second Image Reversed: The International Sources of Domestic Politics.”
61
Kenneth Neal Waltz, Man, the State, and War: A Theoretical Analysis (Columbia University Press, 2001), 14.
15
their domestic institutions and policy-making processes. While Gourevitch’s second image
reversed marks an opposite analytical perspective, focusing on how external factors might
influence the state’s basic institutions and policy-making processes. He contends that there are
mainly two sets of international systems affect domestic regimes: the international state
system that distributes power, and the international economy that distributes economic
activities and wealth.62
Gourevitch further examines several strands of theories, finding that the forces of economic
environment influence domestic structures, though in various ways and forms. He then
reached to the conclusion that the “international system is not only a consequence of domestic
politics and structures but a cause of them. Economic relations and military pressure constrain
an entire range of domestic behaviours, from policy decisions to political forms. International
relations and domestic politics are therefore so interrelated that they should be analyzed
simultaneously, as wholes.” 63 In this sense, “the second image reversed” framework is
illuminative in analyzing how and to what extent international institutions and market forces
affect China’s domestic politics and economic policies.
62
Gourevitch, “The Second Image Reversed: The International Sources of Domestic Politics.”, 882-883
63
Gourevitch, “The Second Image Reversed: The International Sources of Domestic Politics.”, 991.
16
4. Empirical Data
4.1 Background of Shanghai Free Trade Zone (SFTZ)
The idea of further opening-up the country by setting up free trade zones on the basis of
existing bonded areas was proposed back in 2003 by Cheng Siwei, former Vice Chairman of
the Standing Committee of the National People's Congress.
64
By the year 2005, several cities
including Shanghai, Shenzhen and Tianjin, submitted proposals to the State Council and its
ministries for the establishment of free trade zones.65 The central government initiated the
research on these areas; however, no further moves were taken.
Shanghai has long been the economic and trade center of China. In 2006, former President Hu
Jintao visited Shanghai and proposed an ambitious “Four-Centers” initiative, that is, to build
the city into global financial, trade, shipping and economic center through innovation-driven
development and structural readjustment.66 Thereafter, Shanghai took a series of steps to
fulfill this goal. However, due to the closed financial system in China and the RMB not being
a freely convertible currency, Shanghai can hardly become a global financial center. The only
way to break the deadlock is through economic and financial reform.
In 2009, the “Four-Centers” initiative was again brought up by former Premier Wen Jiabao in
the beginning of his second term, prioritizing the internationalization of Shanghai to the level
of national development strategy. 67 With the outbreak of global financial crisis, the
competition for business between Asian-pacific port cities became increasingly fierce.
Shanghai was facing the challenges of securing its competitive edge and boosting the regional
economy. The local government in Pudong district of Shanghai entrusted the Chinese
64
"Shanghai Free Trade Zone Establishment Timeline,” Beijing Review, accessed May 10, 2014,
http://www.bjreview.com.cn/Cover_Stories_Series_2013/2013-09/03/content_565080.htm.
65
"Shanghai Free Trade Zone Establishment Timeline.”
66
Liu Jing, "China's Financial Reform Would Fail If the Plan for Shanghai FTZ End in Falirue [上海自贸区计
划若难产,整个中国金融改革都会失败]," International Business Times, 2013,
http://economy.caijing.com.cn/2013-08-16/113182521.html.
67
Yu Ran, “Shanghai to Lure Multinationals,” China Daily, accessed May 10, 2014,
http://usa.chinadaily.com.cn/china/2013-01/28/content_16178666.htm.
17
Association of Productivity Science (CAPS) to workout a plan so as to cope with the current
situation. CAPS came out with the report “Suggestions on the Establishment of a Free Trade
Zone in Pudong District”, which later received positive responses of Premier Wen Jiabao.68
The National Development and Reform Commission and State Council then sent an
inspection group to Shanghai and the Shanghai Free Trade Zones Administration was
established, overseeing three free trade zones, namely, Waigaoqiao Free Trade Zone,
Yangshan Free Trade Port Area and Shanghai Pudong Airport Free Trade Zone. This turned
out to be the predecessor of the China (Shanghai) Pilot Free Trade Zone.69
Two years later in 2011, Shanghai applied to build an inclusive Free Trade Zone in order to
implement even bolder reforms. In November 2011, the World Free Zone Convention was
held in Shanghai, introducing the development of China’s free zones to the world.70 However,
the preparation work of establishing free trade zone in Shanghai met considerable resistance
and the plan was shelved for a time with nothing concrete achieved before Wen Jiabao’s
retirement.71
Not until 2013 when Li Keqiang took office as the Premier, was this proposal again put on
agenda. Li was resolute to carry on reforms and openly supported the establishment of
Shanghai Free Trade Zone. Moreover, he regarded Shanghai as a testing ground for further
economic and financial reforms. 72 In March 2013, Premier Li Keqiang visited the
Waigaoqiao FTZ, and encouraged the local government to set up a free trade pilot zone in
Shanghai. 73 Various news reports indicated that the Shanghai Municipal Government is
awaiting approval from the State Council to launch the pilot zone. Later in May, the plan was
officially sent to the central government for approval, and on July 3rd 2013, the State Council
68
Jing, "China’s Financial Reform Would Fail If the Plan for Shanghai FTZ End in Falirue [上海自贸区计划若
难产,整个中国金融改革都会失败]."
69
Zhang Hao, “Background of Shanghai FTZ,” CCTV News, accessed April 10, 2014,
http://english.cntv.cn/program/bizasia/20130926/101804.shtml.
70
Hao, “Background of Shanghai FTZ.”
71
Jing, "China's Financial Reform Would Fail If the Plan for Shanghai FTZ End in Falirue [上海自贸区计划若
难产,整个中国金融改革都会失败].”
72
Jing, “China’s Financial Reform Would Fail If the Plan for Shanghai FTZ End in Falirue [上海自贸区计划若
难产,整个中国金融改革都会失败].”
73
Hao, “Background of Shanghai FTZ.”
18
approved the plan and decided to build a pilot zone in Shanghai.74
On Sept. 29, 2013, China officially launches the pilot free trade zone (FTZ) in Shanghai,
marking “a solid step forward to boost reforms in the world’s second-largest economy”75. The
official mission of this zone is “to promote reform and opening-up under the new situation
and undertake a major task to explore new ways and accumulate new experience for
deepening of reform and opening up in an all-round way ”76. As declared by the state-run
media, financial reforms are the key driving force behind the Shanghai Free Trade Zone. And
successful reform in the region could pave the way for China’s financial reform for the next
decade.77
4.2 Policies and Regulations of SFTZ
The newly established free trade zone integrates four existing bonded zones, namely,
Waigaoqiao Free Trade Zone, Waigaoqiao Free Trade Logistics Park, Yangshan Free Trade
Port Area and Pudong Airport Comprehensive Free Trade Zone. 78 New regulations are
announced in Shanghai FTZ, the goals of which fall into five broad categories: reforming the
administrative system, liberalizing the investment regulation, changing the pattern of trade
development, transforming the financial management, and optimizing the institutional
environment.79 Below is a summary of the major tasks and policies of the Shanghai FTZ. All
the information is based on the Framework Plan for the China (Shanghai) Pilot Free Trade
Zone published by the State Council.
4.2.1 Reform in administrative system
74
Hao, “Background of Shanghai FTZ.”
75
“China Launches Pilot Free Trade Zone in Shanghai.”
76
Zhang Lei, "Shanghai FTZ: Pivot for the New Round of Reform and Opening-up [上海自贸区：新一轮改革
开放的重要支点]," People's Daily, May 2014, http://paper.people.com.cn/rmrb/html/2014-05/05/
nw.D110000renmrb_20140505_2-16.htm.
77
“China Launches Pilot Free Trade Zone in Shanghai.”
78
“Advantageous Location,” China (Shanghai) Pilot Free Trade Zone Official Website, accessed May 11, 2014,
http://en.shftz.gov.cn/location.html.
79
“Framework Plan for the China (Shanghai) Pilot Free Trade Zone.”
19

Functional transformation: The new administrative system should accommodate to
the international standards in trade and investment. The focus of management will
shift from prior approval to mid-event control and subsequent supervision.

Efficiency and Transparency: A joint supervision and enforcement system will be
implemented to enhance efficiency. An information disclosure mechanism is
design to elevate the transparency in administrative management.
4.2.2 Investment management

Opening up service sector: Six areas of service industry will be open-up to foreign
actors, including financial, shipping, commerce and trade, professional, cultural
and social services.

“Negative list” approach: The Shanghai FTZ will use a negative list approach for
foreign investment, meaning any sector not specifically prohibited by the list will
be permitted and only subject to a simple filing with the Shanghai FTZ authorities.
In the Shanghai FTZ, foreign companies enjoy pre-establishment national
treatment, meaning that they will be treated the same as domestic investors from
the start of their business activities in China. Approval procedures for foreign
investment will also be simplified, as Shanghai authorities have issued a regulation
to replace the review and approval procedures for foreign-invested enterprises with
filing procedure. This measure greatly reduced the time and cost for foreign
companies to operate in China.

Outbound investment: Filling system will also be applied to outbound investment
in order to simplify procedures. Various types of investors in Shanghai FTZ are
encouraged to conduct outbound investment; especially those specialized in
overseas equity investment. Qualified investors are encouraged to establish fund of
funds for offshore equity investments.
4.2.3 Trade management
20

Transformation in trade development model: Shanghai FTZ seeks to increase
China's competitive advantage in the global trade value chain by focusing on the
development of technology, brands, quality and service. MNCs are encouraged to
set up headquarters in Shanghai FTZ, and enterprises inside the zone are
encouraged to develop offshore business.

Shipping service: Based on Waigaoqiao Port, Yangshan Deep-Water Port and
Pudong International Airport, Shanghai FTZ seeks to further enhance its global
competitiveness and build Shanghai into an international shipping center. Shipping
related services such as shipping financing, international ship transportation,
international ship management, and international ship brokerage, will be
proactively encouraged. Additionally, the application procedures will be simplified
so as to achieve efficiency.
4.2.4 Financial management

Financial deregulation: Firms in the Shanghai FTZ will be able to freely convert
RMB under capital account, while interest rates and exchange rates will be
liberalized. The Shanghai FTZ will allow the market to decide the prices of
financial institutions’ assets.

Permitted financial services: Inside the Shanghai FTZ, banking, commodity futures
trading, Sino-foreign banks and financial leasing will be gradually open to foreign
companies and foreign capital.
4.2.5 Institutional environment

Legality perfection: New administrative regulations and provisions will be
developed to serve the needs of Shanghai FTZ. The Shanghai Municipal
Government will establish an administrative system through local legislation in
response to the demands of the Shanghai FTZ.

New supervision model: The supervision model will operate under the principle of
“Frontier Opening and Second-tier Effective and Efficient Control”. Frontier refers
21
to the commodities flow inside and outside the zone from overseas, while
second-tier means the goods flow between the zone and domestic areas. The new
supervision model is designed to simplify the entry and exit procedures while
keeping the risk under control.

Tax benefits: Certain income taxes will be paid in installments over five years, such
as enterprise income tax triggered by overseas investments or asset restructuring
through non-monetary assets. Export taxes and consumption tax will be refunded
on a trial basis for goods that financial leasing companies or their subsidiaries lease
to overseas customers through financial leasing.
In sum, China (Shanghai) Pilot Free Trade Zone is a “national strategy aiming to expedite the
functional transformation of government, explore administrative innovation, stimulate trading
and investment facilitation, and accumulate experience on achieving a more open Chinese
economy.”80 The reform takes an experimental approach under the principle of “moving
forward step by step with risks under control” 81 . It aims to develop a framework in
accordance with the international norms for investment and trade.
80
“Framework Plan for the China (Shanghai) Pilot Free Trade Zone.”
81
“Framework Plan for the China (Shanghai) Pilot Free Trade Zone.”
22
5. Analysis
This chapter contains two levels of analysis. The first level aims to answer such big questions
as why does China need to reform and liberalize its economy, and why does the reform take
place the way it did as represented by the Shanghai FTZ. This is to provide a grand contextual
framework for the following IPE analysis of Shanghai FTZ. Transition economics is highly
relevant as it provides an overall explanation to the policy preferences of certain
administration in the historical dynamics of transition.
Hereafter, a detail IPE analysis will be conducted in response to the problem formulation “To
what extent did institutions and interests on domestic and global level shape the establishment
of Shanghai Free Trade Zone?”82 Taking a state-centric approach of IPE, four possible
elements of explanation will be discusses respectively, so as to form a comprehensive answer
to the problem formulation.
5.1 Shanghai FTZ and China in Transition
Though the possible scenario of the new FTZ needs time to tell, its materialization and the
policies it holds indicate China’s transition towards further economic liberalization and
administrative innovation. This section first establishes the current conditions and challenges
to China’s development so as to illustrate why reform is needed, and then moves on to explain
why the central government chooses to promote reform by building a free trade zone in
Shanghai.
5.1.1 Initial Conditions and Challenges
Every transition process finds its root in the historical context it is situated. As Gérard Roland
pointed out, the outcomes of transition are greatly dependent on the initial conditions that
form the starting point, which cannot be neglected “because any process of change must take
that starting point and the initial economic behavior and expectations of agents as given.”83
Regarding the case of Shanghai FTZ, the initial conditions can be identified from both
82
Duan Chen, “The Genesis of China (Shanghai) Pilot Free Trade Zone” (Aalborg University, 2014), 5.
83
Roland, Transition and Economics, Introduction, xx.
23
domestic level and global level. Domestically, China’s growth in the past 30 years is
characterized by investment-driven, export-oriented, labor-intensive and energy-exhaustive.
The investment rate in China has been persistently high during the past 30 years as a result of
high saving rates, considerable investment returns, and optimism for sustained growth.84
China’s GDP growth has also been very dependent on external trade, with the share of exports
and imports increased rapidly especially between 2001-2007.85 Another force driving the
strong growth of China’s economy lies in the abundant rural labor, which has lowered wage
growth and enhanced profits. 86 In addition, the energy consumption rates were ever
increasing in the past 30 years; yet the resource utilization rate is rather low. In 2007, China
used 15% of the world’s energy consumption to produce 5.5% of the global GDP.87
Such model of growth, however, is unsustainable in several ways. The advent of an aging
society, the escalation of environmental problems and depressed overseas markets all posed
great challenges to the current economic development pattern. 88 China’s “demographic
dividend” is diminishing due to the aging population, which implies a decreasing labor supply
growth and increasing labor cost. 89 Under such circumstances, the growth model
characterized by low consumption and high investment supported by cheap labor is unlikely
to sustain. China’s high export-dependence ration also makes it more likely to be affected by
the global economic performance. Following the global financial crisis, China experienced a
significant decline in its exports, leading to an economic slowdown. Furthermore, China’s
constraints in terms of resources and environment are ever-growing. In 2009, China’s had
surpassed the U.S. as the largest energy consumer and the biggest carbon dioxide emitter in
84
Lu Ding, “Can China Avoid the Middle Income Trap?,” East Asian Policy 3, no. 4 (2011): 10.
85
Ed Dew et al., “China’s Changing Growth Pattern,” Bank of England Quarterly Bulletin Q1 (2011), 49.
86
Paul Hubbard, Samuel Hurley, and Dhruv Sharma, “The Familiar Pattern of Chinese Consumption Growth,”
The Treasury of Australian Government Economic Roundup, 2012,
http://www.treasury.gov.au/PublicationsAndMedia/Publications/2012/Economic-Roundup-Issue-4/HTML/articl
e3.
87
Paul Hubbard, Samuel Hurley and Dhruv Sharma, “The Familiar Pattern of Chinese Consumption Growth”,
The Treasury of Australian Government Economic Roundup, Issue 4, 2012, accessed November 27 2013,
http://www.treasury.gov.au/PublicationsAndMedia/Publications/2012/Economic-Roundup-Issue-4/HTML/articl
e3.
88
“China Needs to Transform Economic Growth Pattern,” Xinhua News, accessed May 12, 2014,
http://www.chinadaily.com.cn/business/2011-01/11/content_11828135.htm.
89
Ding, “Can China Avoid the Middle Income Trap?”.
24
the world.90 This growth pattern of heavy exploitation and overdrafting natural resources has
reached its limits.
Domestic conditions mentioned above have created incentives for economic transition, the key
to which is to develop an economy that relies on higher productivity rather than on
quantitative expansion of inputs. The improvement to productivity “comes from efficiency
improvement and technological advancement”.91 Thus, innovation is crucial. As stated in the
National Medium and Long-Term Program for Science and Technology Development
(2006-2020), “China must place the strengthening of indigenous innovative capability at the
core of economic restructuring. … Building an innovation-oriented country is therefore a
major strategic choice for China’s future development.”92 Moreover, a rebalance of industrial
structure is in urgent need, from growth mainly driven by the secondary industry to a more
balanced growth among primary, secondary, and tertiary industries. This calls for a
reallocation of resources from low-productivity to high-productivity sectors, especially those
ones formerly heavily controlled by the central government.93 Premier Li Keqiang’s speech at
the opening ceremony of Summer Davos outlined the economic policies of the new
administration, stating that structural reform and opening-up is essential for China’s
modernization, while innovation provides an inexhaustible motive.94
Besides domestic challenges, global economic situations in front of China also transformed
greatly in recent years. According to World Economic Situation Prospects 2014 released by the
United Nations, the global economic growth in 2013 continue to underperformed with most
developed economies struggling with the aftermath of global financial crisis.95 Emerging
economies, including China, also experienced a notable slowdown. The low economic growth
experienced globally has further dragged down the world merchandise trade.96 With regard to
international trade negotiations, limited agreements have been achieved in Doha Round; in
90
Ding, “Can China Avoid the Middle Income Trap?”, 14.
91
Ding, “Can China Avoid the Middle Income Trap?”, 16.
92
Wayne M. Morrison, “China’s Economic Conditions” (US Congressional Research Service, 2012), 6.
93
Wayne M. Morrison, “China’s Economic Conditions” (US Congressional Research Service, 2012), 6.
94
Zhu Ningzhu, “Premier Li Attends Opening Ceremony of Summer Davos in Dalian,” Xinhua Net, accessed May 13, 2014,
http://news.xinhuanet.com/english/photo/2013-09/11/c_132712610.htm.
95
World Economic Situation Prospects (New York: United Nations publication, 2014), v.
96
World Economic Situation Prospects, vi.
25
contrast, regional trade agreements (RTAs) continue to boom. Most noticeably are the two
large RTAs, namely, the Trans-Atlantic Trade and Investment Partnership (TTIP) between the
United States and the European Union, and the Trans-Pacific Partnership (TPP) involving 12
countries including Japan and the United States.97 These regional FTAs cover a majority of
world trade and have the potential to induce a transformation in global trade patterns. In the
meantime, there have been concerns over the negative effects, such as the marginalization or
decrease in competitiveness, that are brought to the non-member developing economies.98
Moreover, doubts have been express on whether these mega-RTAs led by the U.S. would
actually promote trade liberalization given their “discriminatory market-distorting trade-offs
(concessions and preferential market access)”99.
In sum, challenges from both home and abroad call for immediate and effective reforms in
China’s growth model, administrative system and institutional innovation.
5.1.2 Shanghai FTZ as a Stragegy
It can be argued that the Shanghai FTZ is a strategy adopted by the Chinese government in
dealing with above-mentioned challenges. Domestically, Shanghai FTZ corresponds with the
need for structural reform in growth, further opening-up, and innovation in both administrative
systems and in industrial strategy. The newly built FTZ bears the mission of exploring a new
replicable growth model. Firstly, the Shanghai FTZ opens up six service sectors including
financial, shipping, commerce and trade, professionals, culture and public services to foreign
investors, which aims to promote reform in China’s growth pattern. Such emphasis on service
industry is to change the economic structure based on low-tech manufacturing, which is not
sustainable due to rising costs in raw material and labor, pressure from RMB appreciation,
resources depletion, environmental degradation, and frequent trade friction. Moreover,
Shanghai FTZ also seeks to change the trade development model by focusing on the
technology, brands and services, aiming to increase China’s competitiveness in the global
97
World Economic Situation Prospects, vi.
98
World Economic Situation Prospects, vi.
99
World Economic Situation Prospects, 59.
26
market and move towards the upper-end of the value chain. If this shift in growth model is
successful, the Shanghai FTZ can be expected to lead the nation in further adjustment in
industrial structure.
The opening-up polices in Shanghai FTZ also promote the reform in administrative system,
the essence of which lies in decentralization and deregulation. This can be clearly seen in the
ease of control in the accession of foreign capital. The focus of the new management system
shifted from prior approval to mid-event control and subsequent supervision. This means a
shift in governmental functions from administration to providing services. The efficiency and
transparency of the administrative system are also expected to increase. In this sense, the new
regulations in Shanghai FTZ can be seen as the CPC Central Committee’s endeavor to explore
new ways of improving management, advancing the transformation of government functions,
and deepening reform.
Externally, China needs to cope with the challenges of not being a member of the America-led,
mega-FTAs such as TPP and TTIP. Scholars suggested that such mega-FTAs as TPP and TTIP
are intended to form alternatives to the deadlock of Doha Round negotiations and update
current trading rules.100 However, the rules on intellectual property rights (IPR), state-owned
enterprises, labor laws, environmental protection, and currency manipulation are rather
controversial, and has come under criticism for creating accession barrier for emerging
economies especially China.101 The establishment of such FTAs will certainly benefit their
member states; yet the gains come at the losses of non-members. Petri and Plummer estimate
that, if China remains outside of TPP, by 2025 it could mean losses of 46.8 billion US
dollars.102
While China’s scenario of joining TPP and TTIP is still unclear, policies and regulations in
Shanghai FTZ apparently show that the central government is making efforts to keep in line
100
David Pilling and Shawn Donnan, “Trans-Pacific Partnership: Ocean’s Twelve,” Financial Times, accessed
May 14, 2014, http://www.ft.com/intl/cms/s/0/8c253c5c-2056-11e3-b8c6-00144feab7de.html#axzz31qR8
W57h.
101
Miles McKenna and Ian Gillson, “TPP & TTIP: More Questions Than Answers,” Worldbank.org, accessed
May 14, 2014, https://blogs.worldbank.org/trade/tpp-ttip-more-questions-answers.
102
Peter A. Petri and Michael G. Plummer, “The Trans-Pacific Partnership and Asia-Pacific Integration: Policy
Implications” (Washington, DC: Peterson Institute for International Economics), 6.
27
with the emerging international trade and investment norms as represent by TTP and TTIP.
Chinese scholar Wang Jinbo suggests that the intentions of America’s new round of trade and
investment talks are to reshape global rules and norms, as well as to maintain its status in the
international economic system.103 Wang argues “pre-establishment national treatment” and
“negative-list approach” are two major points of the new trade and investment rules. These
two polices are tested in the Shanghai FTZ, revealing the government’s intention to further
accommodation to emerging international practices. The experiences gathered from Shanghai
FTZ are of great value to China’s future trade negotiations.
Another point in case is the introduction of an e-commerce platform that embraces the
principles of consumer protection and IPR protection. Previously, these two issues are the
major thresholds that impede China from joining America-led FTAs. The appearance of such
elements in Shanghai FTZ can be understood as a gesture that China is seeking to engage in
the new round of international trade negotiations and is willing to adjust to new norms and
standards in the global trade and investment. In sum, the establishment of Shanghai FTZ is
meaningful in coping with challenges posed by current mega-FTAs. On one hand, the zone
functions as a testing ground for China to evaluate its capacity in accommodating the new
rules and standards in global trade; on the other hand, it sends positive gestures to express
China’s interest in joining current international trade institutions.
From above analysis, it is possible to tell the functional significance of Shanghai FTZ in
China’s reform and transition. In the meantime, its methodological and strategic importance
cannot be ignored. Historically, China adopted the gradualist view in its transition from a
planned economy to a market-based one, following Deng Xiaoping’s incremental approach,
also known as “crossing the river by feeling for the stones” approach. The use of pilot zones
to test reforms is a traditional bureaucratic strategy in China. Three distinctive features can be
identified in China’s gradualist approach of reform: 1) focusing on incremental reform while
avoiding stock reallocation, 2) dual-track system of partial reform, 3) clinical experiment
103
Wang Jinbo, "Development Tendencies in International Trade Norms and China's Response [国际贸易规则
发展趋势与中国的应对]," China International Studies 2 (2014).
28
before general application.104 This gradualist attitude is fully embodied in the formation of
Shanghai FTZ.
First of all, the mission of the zone is to test innovative ways of growth and governance under
new situations. Though opening-up strategy has been proved effective in Chinese history, the
gradualists do not seek to implement this strategy nation-wide all at once. Instead, Shanghai is
chosen as a trial ground to accumulate replicable experiences that can be adapted to other
regions. This “learning by doing” attitude is the core of gradualist approach of transition.
Moreover, unlike advocates of big-bang approach for whom the political economy emphasis
of transition is to push forward reform as fast as possible so as to create irreversibility,
gradualist advocates insists a step by step approach to reform “relying on the flexibility of
experimentation, with an adequate sequencing of reforms, to possibly reverse reforms that do
not work and try other ones.”105 This corresponds with the principle of Shanghai FTZ, which
emphasizes “moving forward step by step with risks under control”.106 Step by step approach
is especially important for key areas like financial liberalization. It thus can be argued that
that the establishment of Shanghai FTZ proves to be a gradualist approach of transition in the
new era.
5.2 IPE Analysis of Shanghai FTZ
Academic explanations on China’s reforms and economic transition have been dominated by
studies focusing on domestic factors.107 Yet with China’s deeper engagement with the global
economy, international forces have been identified to have ramifications for China’s
opening-up. 108 These forces are covered in the four quadrants in the 2x2 analytical
framework proposed in the introductory chapter, namely, domestic institutions, global
institutions, domestic interests, and global interests. They serve as the departure point of
104
Cao Zijian, “Revisiting Gradualist Reform[重新审视‘渐进式改革’],” Xinhua Net, accessed May 18, 2014,
http://news.xinhuanet.com/newmedia/2005-08/11/content_3330733.htm.
105
Roland, Transition and Economics, 329.
106
“Framework Plan for the China (Shanghai) Pilot Free Trade Zone.”
107
Zweig and Chen, China’s Reforms and International Political Economy, 1.
108
Zweig and Chen, China’s Reforms and International Political Economy, 2.
29
analysis in this section.
The thesis author has chosen to apply state-centric realist approach in IPE, which entails the
emphasis on the state as the principal actor in international affairs. State-centric view does
acknowledge the existence of other influential actors such as multinational corporations,
international institutions, and nongovernmental organizations; yet non-state actors are
considered subsidiary to the decisions and activities of states. Since the Shanghai FTZ is a
top-down state-led experiment for future economic reforms, realist IPE is instructive as it
allows the discussion of how the state, as the central actor, responds to domestic and
international pressure of both institutional and social/market forces.
5.2.1 Domestic institutions
The evolutionary history of the Shanghai FTZ indicates that the Chinese central government
is the primary domestic institutional force behind the establishment of the zone. While
governments at provincial and municipal level may submit proposals for the establishment of
free trade zone, the final examination and approval authority lies in the central government.
Regarding other non-state actors, such as private business sector or multinational corporations,
it is believed that they are more reactive than proactive in the decision-making process. These
observations somewhat verifies Gilpin’s statement that national governments hold the ability
“to set the rules within which other actors function, and they use their considerable power to
influence economic outcomes”109.
Moreover, according to state-centric realist approach of IPE, the economic and foreign
policies of a society should “reflect the nation’s national interest as defined by the dominant
elite of that society”110. Realists acknowledge that there may be subjective elements in an
elite’s definition, however, objective factors, such as the “physical requirements of the
economy”111, are of great importance in determining the national interest. China’s central
authorities have announced their strong support for the Shanghai FTZ. From the measures and
policies taken inside the Shanghai FTZ, it is possible to tell that China’s new administration
109
Gilpin, Global Political Economy, 18.
110
Gilpin, Global Political Economy, 18.
111
Gilpin, Global Political Economy, 18.
30
sees economic liberalization and further integration into the world economy as key to China’s
long-term development. Premier Li Keqiang and other top governmental officials recognize
that China’s current growth model is unsustainable, and that reforms are needed to boost
China’s economy so as to step out of economic downturn. The establishment of Shanghai FTZ
then reflects the central government’s determination in transforming China’s growth pattern.
According to Yang Xiong, mayor of Shanghai, “the focus of the new free trade zone will be to
facilitate investment rather than just achieve good trade figures, as China explores deeper
reforms in its investment system”
112
. Reforms in regulatory principles, such as
pre-establishment national treatment, negative-list approach for investment and simplified
approval procedures, are taken, marking the new mindset to bridge global standards and to
promote growth.
Realist approach of IPE also assumes that nation-states in international political economy will
always consider national security as their primary concern.113 Despite its mission of seeking
financial liberalization and administrative deregulation, Shanghai FTZ holds some policies
and regulations that contain national security concerns. It is stated in the negative list that
foreign investments are subject to special control measures in 18 industries that involve key
national interest, including seed production, oil and gas exploitation, rice and corn processing,
transportation and logistics, news and media service, real-estate, etc. 114 These control
measures correspond with realist idea that national security concerns remain very important to
nation-states in the age of globalization.
Studies on China’s political model suggest that “economic reform and rapid growth have been
important components of continued political legitimacy” 115 for the CPC-led government. It
has been established previously that China’s growth model for the past 30 years is now facing
severe challenges from both home and abroad. The Shanghai FTZ then can be seen as a key
112
Wei Tian, “Reform, Not Incentives, to Drive Expansion,” China Daily, accessed May 18, 2014,
http://english.people.com.cn/90778/8342180.html.
113
Gilpin, Global Political Economy, 17.
114
“Shanghai FTZ Negative-List Published[上海自贸区负面清单公布],” Reuters, accessed May 18, 2014,
http://cn.reuters.com/article/chinaNews/idCNCNE98T00P20130930?pageNumber=3&virtualBrandChannel=0.
115
Sadik Ünay, “From Engagement to Contention: China in the Global Political Economy.,” Perceptions:
Journal of International Affairs XVIII, no. 1 (2013): 143.
31
step of economic reform, aiming at a fundamental shift in the development pattern so as to
achieve sustainable and balanced economic growth. Thus, it is reasonable to argue that the
Shanghai FTZ embodies the central government’s attempt to reform the national economy and
maintain high growth, which is key to establishing political legitimacy.
Similarly, the measures concerning administrative innovations can also be argued as attempts
by the Chinese government to renew its legitimacy under new situations. Currently, China is
facing a transition from a manufacturing-based economy to an innovation-driven and
service-oriented economy. Yet, the Chinese government is aware that its current
administrative system is not flexible and efficient enough to meet the demands of the new
economic structure. Under such context, the new FTZ serves as a testing ground for the
central government to explore new models of administration that is suitable for country’s
long-term development.
Though the new leadership is resolute in carrying out reforms, some other ministries, such as
the financial industry regulators, are reported to have voiced concerns about the government’s
ability in risk management if the long-protected financial industry is suddenly open to
efficient global competitors. According to South China Morning Post, financial regulators,
“including the China Banking Regulatory Commission (CBRC) and China Securities
Regulatory Commission (CSRC), openly disagreed with Li's plan to open Shanghai's financial
services sector to foreign investors”116. As previously mentioned, financial reform inside the
new FTZ is the key focus of economic liberalization. At the same time, it is also the toughest
area for reforms to carry on. China has previously planned to put on trial the liberalization of
interest rates and Yuan capital accounts in some special regions such as Wenzhou financial
reform pilot zone. However, the attempts were eventually given up due to concerns about risk,
worrying that opening China’s financial system without proper controls could pose risks to the
country’s economy. The final establishment of Shanghai FTZ and its measures concerning
financial liberalization mark a cornerstone in China’s history of financial reform.
116
George Chen, “Exclusive: Li Keqiang Fought Strong Opposition for Shanghai Free-Trade Zone Plan,” South
China Morning Post, accessed May 18, 2014, http://www.scmp.com/news/china/article/1282793/li-foughtstrong-opposition-shanghai-free-trade-zone-plan.
32
Thus it can be concluded that the Chinese central government is the key driving-force behind
the Shanghai FTZ, though some debates and negotiations have been going on among different
institutions.
5.2.2 International institutions
The establishment of Shanghai FTZ is a sign that China is seeking further engagement with
the global economy. It is especially noteworthy that this engagement process happens “within
a hegemonic system of global rules dominated by the ‘Washington Consensus’ on free trade
and unfettered capital markets”117. Therefore, it is possible to argue that with China’s further
integration into the world economy, international institutions are expected to have stronger
influences on China’s economic policies.
The analytical framework of this section is closely related to Gourevitch’s “second image
reversed” view, which studies the role international situations function to shape political
economic decisions of a given country. He contends that international systems are not only the
consequences of domestic politics performed by different nation-states, but a cause in itself
that can shape and constrain domestic behaviours. This section aims to examine to what
extent did international institutional forces shape the decision on the establishment of
Shanghai FTZ. Two critical elements thus are involved, namely, international institutions and
domestic structure. The former can be defined as “persistent and connected sets of rules
(formal and informal) that prescribe behavioral roles, constrain activity, and shape
expectations”118, while the latter refers to “the political institutions of the state, to societal
structures, and to the policy networks linking the two”119. Regarding the interaction of the two,
Su Changhe argues, “international institutions can prescribe any state’s activity in different
ways and to different degrees, regardless of whether the target state is a member of the
institution or not. But the channels that international institutions use to affect domestic affairs
are mainly based on the state’s domestic structure.”120
117
Zweig and Chen, China’s Reforms and International Political Economy, 4.
118
Robert Keohane, International Institutions and State Power (Westview Press, 1989), 3.
119
Thomas Risse-Kappen, Bringing Transnational Relations Back In: Non-State Actors, Domestic Structures
and International Institutions (Cambridge University Press, 1995), 20.
120
Zweig and Chen, China’s Reforms and International Political Economy, 65.
33
As previously mentioned, currently, international institutions such as Trans-Pacific
Partnership Agreement (TPP) and the Trans-Atlantic Trade and Investment Partnership (TTIP)
led by the U.S. have the potential to evoke a huge shift in global trade patterns. The influences
of these American-led mega-FTAs on China come as two folds. For one thing, TPP and TTIP
is reshaping the norms and rules in the international trade, thus creating an environment that
impels China either to conform to its standards, or take the risk of being marginalized in the
global market. For another, the U.S. made efforts to upgrade TPP into a comprehensive
economic and strategic union by selectively absorbs its military alliances into the agreement.
The dominant role U.S. played in TPP corresponded with its shift of strategic pivot back to
Asia-Pacific region. Therefore, there have been wide speculations that U.S. engagement with
TPP has another intention, which is to mitigate China’s economic and trade influence in East
Asia. Furthermore, it is believed by some scholars that the U.S. has the intention of balancing
China’s influence and reshaping the regional economic cooperation order. 121 In the past
decade, the regional integration in East Asia has seen a boom, with various regional
institutions established, a case in point being the ASEAN-led regional institutions.122 Along
this process, China emerged to paly a leading role in East Asia integration, thus challenging
the U.S. hegemony in this area. Against this background, the U.S.-led TPP negotiations can be
understood as “the means for reasserting American economic supremacy in Asia” 123 .
According to former US national security adviser Tom Donilon, the TPP agreement possesses
the strategic intention that “would solidify US leadership in Asia and, together with the
negotiations over a free trade pact in Europe, put the United States at the centre of a great
project: writing the rules that will govern the global economy for the next century.”124
Taking a state-centric realist perspective, it thus could be argue that the Shanghai FTZ is a
response from the Chinese government that seeks to cope with external pressures imposed by
the international regimes such as TPP and TTIP. On one hand, the Shanghai FTZ serves as a
121
Pang Zhongying, “Rebalancing Relations between East Asian and Trans-Pacific Institutions: Evolving
Regional Architectural Features,” in Apec and the Rise of China (World Scientific, 2011), 45.
122
Zhongying, “Rebalancing Relations between East Asian and Trans-Pacific Institutions: Evolving Regional
Architectural Features.”, 47.
123
Peter Symonds, “Obama’s Tour to Reinforce ‘Pivot to Asia,’” Global Research, accessed May 18, 2014,
http://www.globalresearch.ca/obamas-tour-to-reinforce-pivot-to-asia/5378689.
124
Symonds, “Obama’s Tour to Reinforce ‘Pivot to Asia.’”
34
window for China to further accommodate to international standards and norms. As China is
seeking to abandon its energy- and labor-intensive development model and move towards a
more sustainable one, the experiment in Shanghai FTZ is valuable as long as its experiences
can be replicated to other regions of China. This compliance to international standards will
also benefit China since it will bring about a wider range of opportunities.
On the other hand, the external pressure for opening-up provides an impetus for promoting
domestic reform. This logic is termed as “promoting reform through opening up” as was
proposed in the Decision of the CCCPC on Some Major Issues Concerning Comprehensively
Deepening the Reform.125 It is expected that the administrative innovations generated under
the pressure of international norms and regimes will help to accelerate the reform of the
administrative system and build a service-oriented government.
5.2.3 Domestic interests
The policies inside the Shanghai FTZ will have different influences on domestic enterprises of
various types. The establishment of Shanghai FTZ will break up state monopolies in several
industries that are formerly controlled. Monopolies are negative to national economy since
they hinder efficiency and creativity, widen the wealth gap and distort distribution of social
and economic resources. However, measures on cracking the state monopolies are likely to
meet stiff resistance from vested interest groups. Under this backdrop, Shanghai FTZ eases
entry barriers for private and foreign investors and allow their capital to invest in several
formerly state-dominated sectors. This is to create competitiveness inside these industries, so
as to push the state-owned enterprises to take on reforms and enhance efficiency.
As for private enterprises, the opening up of previously controlled industries will bring about
fresh opportunities. If China moves forward to build a market-oriented system of resource
allocation, private enterprises can be expected to compete in a more equal environment and
achieve higher efficiency. Moreover, the reform in financial sector will also benefit the private
enterprises, as this may enable them to enjoy better financial service. However, it is important
to keep in mind that the establishment of Shanghai FTZ is primarily a top-down experiment
125
“Decision of the CCCPC on Some Major Issues Concerning Comprehensively Deepening the Reform.”
35
launched by the central government. This means the private enterprises have little to do with
the decision-making process. Therefore, they cannot be counted as a major force that shape
the establishment of Shanghai FTZ.
5.2.4 International interests
Global market forces can influence the domestic policies of certain nation through several
channels. Firstly, by integrating a country into the global production chain, thus creating a
relation of dependence or interdependence, the economic performance of this particular
country will be influenced by international market performance. This entails that the domestic
policies need to adjust accordingly. As Saskia Sassen argues, “the strategic spaces where
global processes are embedded are often national; the mechanisms through which new legal
forms, necessary for globalization, are implemented are often part of national state
institutions.” 126 In other words, globalization has added the number of actors that are
involved in policymaking process and has increased the power of external actors. Secondly,
globalization might leads to ideology and ideational change among the policy-makers of
certain country. This means key elites “altered their policy preferences and accepted the
neo-liberal project as the best method of achieving growth”127.
Regarding the case of the Shanghai FTZ, however, it is difficult to argue that global market
forces has changed the institutional balance of power in the Chinese bureaucracy system. The
Chinese central government remains the primary actor in making policies regarding the
Shanghai FTZ. One may argued that the globalization process is changing the mentality of
Chinese elites. However, it should be noted that the reform and opening-up measures in the
Shanghai FTZ are mainly designed to address realistic problems, as well as the domestic and
international challenges that China’s is currently facing. As previously mentioned, the
legitimacy of Chinese government largely lies in its ability to promote development and
economic growth. Thus, the establishment of Shanghai FTZ is better understood as a means
for further economic growth, rather than a result of ideational change.
126
Saskia Sassen, “Embedding the Global in the National,” in States and Sovereignty in the Global Economy,
ed. David Smith, Dorothy Solinger, and Steven Topik (Routledge, 1999), 159.
127
Zweig and Chen, China’s Reforms and International Political Economy, 30.
36
6. Conclusion
From various official documents and statements, one can see that the newly established
Shanghai FTZ is not merely a free trade zone that aims at boosting regional economy. Instead,
it is a testing ground launched by the Chinese central government for experimenting new
growth model, innovative administration systems, as well as further compliance to
international norms and standards.
This thesis aims at answering the problem formulation as proposed in the beginning of the
paper, “ To what extent did institutions and interests on domestic and global level shape the
establishment of Shanghai Free Trade Zone?”. As the problem entails a detailed examination
of interaction between political and economic factors both on domestic and international level,
the author decides to adopt International Political Economy as the theoretical framework.
More specifically, state-centric realist approach of IPE is applied to the 2x2 framework,
seeking to offer a comprehensive explanation of the underlying forces behind Shanghai FTZ.
The thesis author believes that in order to better understand China’s new round of reform and
opening up, it is necessary to bring in the broad picture of China in transition. After a careful
examination of China’s domestic and international situations, it is found out that Chia is
facing pressing challenges. On one hand, China’s current development model is no longer
sustainable; on the other hand, the country is facing external trade problem brought about by
America-led international institutions. Under this background, the establishment of Shanghai
FTZ marks a response from the Chinese central government to address its domestic and
international problem.
By examining the four quadrants in the 2x2 framework, it is found out that domestic
institutional force as represented by the Chinese government, and international institutional
force as represented by the two mega-FTAs led by the United States held the most
explanatory power in accounting for the driven forces behind the establishment of Shanghai
FTZ. Domestic interests as represented by various Chinese enterprises and international
interests as represented by the global market forces, though also involved in the picture, are
not so important in shaping the decision-making process.
37
In sum, the establishment of Shanghai Free Trade Zone is the combined result of internal
incentives for structural reforms in order to promote sustainable growth, as well as external
push factor of the on-going process of international free trade arrangement. Given the
experimental nature of Shanghai FTZ, it is expected that if the new policies are successful,
more liberalizing economic policies will expand to the rest of the country, leading to new
forms of economic growth.
38
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