I. Background and Process of the Establishment of China (Shanghai) Free Trade Zone

The establishment of free trade zones (FTZ) in China has been a long process of continuing exploration. As early as 1990, the State Council granted the establishment of Shanghai Waigaoqiao Bonded Zone as one of the first gateways to the outside world. When carrying out opening-up measures there, the government found that a coordinating mechanism needed to be formulated between the zone and relevant port to lower costs and accelerate cargo distribution. Then in 2004, the Waigaoqiao Bonded Logistics Zone passed final acceptance, signifying the first step toward zone-port coordination and the establishment of a FTZ. In 2005, the State Council granted the establishment of the first bonded port in China, Yangshan Bonded Port, marking a stride toward the formation of a FTZ and the true zone-port integration both in infrastructure and soft environment including polices and functional orientation. In 2009, Shanghai Pudong Airport Free Trade Zone was established under the approval of the State Council, which mainly aims to support the role of Pudong airport as a hub. In the same year, Shanghai Free Trade Zone was inaugurated promoting the coordination among “three ports and three zones”. After years of development, the model featuring zone-port integration and coordination among “three ports and three zones” has been playing a key role in establishing an international shipping center. In 2012, Shanghai port handled 736 million tons of cargo throughput and 32.53 million TEUs of container throughput, taking first place in the world for a third straight year. The share of “waterway-to-waterway” transited containers increased significantly to 42.8 percent, 6.8 points higher than that of 2007.

At the end of 2013 when Premier Li Keqiang was inspecting the Waigaoqiao Bonded Zone during his research visit to Shanghai, he proposed that apart from Shanghai Free Trade Zone, the government could conduct official studies on the possibility of establishing a pilot FTZ in Shanghai for further opening up to the outside world and promoting the system and mechanisms of an open economy. On July 3, Premier Li presided over a State Council executive meeting which basically approved the Framework Plan for the China (Shanghai) Pilot Free Trade Zone (hereinafter referred to as the Framework Plan). And on Aug 22 the State Council officially approved the project of China (Shanghai) Pilot FTZ. Later on Aug 30, the 12th National People’s Congress Standing Committee in its fourth session granted the State Council temporary authorization to adjust laws and regulations binding on the China (Shanghai) Pilot FTZ. On Sep 27, the General Office of the State Council issued the Notice of the State Council on Publishing the Framework Plan for the China (Shanghai) Pilot Free Trade Zone. And on Sep 29, the China (Shanghai) Pilot FTZ and its Administrative Committee were inaugurated, marking the official commencement of their running.

II. Main tasks of FTZ development and requirements on port and shipping industries

The development of China (Shanghai) Pilot FTZ as a national strategy, is one of the major efforts by the Central Committee of the Communist Party of China and the State Council to pilot developmental plans, deepen reform, further opening-up and innovate systemic designs, assuming considerable realistic and strategic significance. To establish and develop a FTZ will create new advantages for China in the face of global competition, build a new platform for countries in pursuit of cooperative development, expand space for economic growth and help to build an “updated version” of China’s economy, which thus will definitely play a profound role in facilitating the economic and social development of China.

1. Main tasks and Innovation

According to the Framework Plan, the Pilot FTZ is comprised of four special customs supervision zones including Shanghai Waigaoqiao Bonded Zone, Waigaoqiao Bonded Logistics Zone, Yangshan Bonded Port and Shanghai Pudong Airport Free Trade Zone, which means that it will be built with major support from sea ports and Pudong airport. It is also specified in the paper that the pilot FTZ is expandable and can be replicated.

Main tasks for building the pilot FTZ include accelerating the transformation of government functions, widening the opening of the investment sector, strengthening the safeguarding role of laws and regulations and deepening efforts in reform and opening-up in the financial sector. Their highlights, then, are concluded as follows.

(1) Emphasis on system innovations

Subject to the requirements of daring to try, managing risks, working step by step and improving constantly, efforts will be made in formulating a basic framework of systems in line with international rules on investment and trade. A set of laws and regulations, management systems and operation mechanisms will need to be prepared for the zone and more emphasis will be put on system innovations than preferential policies. Also, transformation of governmental functions will be accelerated and some governmental power will be relinquished in an effort to reform the economic restructuring model with the government playing a major role, abolishing the practice of depending solely on the government for economic support and transferring more of the power of dominating market behavior to major market players. Although relaxing control and pushing reforms toward a market-oriented system, supervisions on human and institutional resources will be conducted during the process of or after market behavior, helping to solve the issue of “more emphasis on examination and approval but less on supervision” effectively and giving the needed “system bonus” to society to get over the sluggish economy.

(2) Innovations on portal supervision

The pilot FTZ is going to adopt a creative supervision model featuring “opening the frontier, effective and efficient control of second-tier and free flowing within the zone”. Also, customs procedures and the process of inspection and quarantine will be made more convenient.

(3) Opening of more service sectors

Detailed plans are made to foster the opening-up of six service sectors including financial services, shipping services, trade services, professional services, cultural services and social services. Significantly greater freedom will also be given to them.

(4) Emphasis on pre-establishment national treatment and management model featuring negative list

The zone will follow international practices to give foreign investors pre-establishment national treatment, try to make a negative list of foreign investment projects not eligible for national treatment and reform the model of foreign investment management. Fully conforming to international norms, the plan to allow all foreign investment excluded on the negative list will bring more freedom to the investment sector, enlarge the investment scope and lower the investment threshold. Pre-investment examination and approval procedures will be simplified or abolished.

2. Requirements on port and shipping industries

The following content in the Framework Plan concerns port and shipping industries.

(1) Limitations on foreign ownership ratio in international shipping enterprises that are Chinese-foreign equity joint ventures or Chinese-foreign contractual joint ventures will be relaxed. And foreign-owned international ship management enterprises will be allowed.

(2) Efforts will be made to capitalize on good coordination among Waigaoqiao port, Yangshan deep-water port and Pudong hub airport, exploring the building of a shipping development system and operational model with international competitiveness.

(3) Transit and “less=than-container-load” (LCL) business will be further promoted. Ships not flying the PRC flag owned or controlled by Chinese-invested companies will be allowed to use their containers engaged in foreign trade to run coastal shipping services between Shanghai port and other coastal ports in China.

(4) Procedures for international shipping permit applications will be simplified and a highly efficient ship registration system will be established.

(5) Pilot tax refund policies at ports of departure will be improved. And studies on the expansion of pilot scope concerning ports of departure, carriers and means of transport will be made when appropriate.

(6) Shipping related industries including shipping financing, international ship transportation, international ship management and international shipping brokerage will be proactively encouraged. And the development of trade of Shipping Price Index-deviated products will be expedited.

These measures are most directly related to the development of port and shipping business. Apart from these, the specific plans for implementing the supervision role featuring “opening the frontier and effective and efficient control of second-tier” are also one of their biggest concerns.

3. Relevant rules and regulations issued

After the introduction of the Framework Plan, competent State departments and commissions and the Shanghai government issued a series of rules and regulations in relation to advice on its implementation and operation, including Special Administrative Measures for Foreign Investment Access in the China (Shanghai) Pilot Free Trade Zone (Negative List), Registration Administration of Foreign-Funded Projects in the China (Shanghai) Pilot Free Trade Zone, Registration Administration of Foreign-invested Enterprises in the China (Shanghai) Pilot Free Trade Zone, Registration Administration of Overseas Investment Projects in the China (Shanghai) Pilot Free Trade Zone, Registration Administration of Investment to Run Enterprises Abroad in the China (Shanghai) Pilot Free Trade Zone, Administrative Measures for the China (Shanghai) Pilot Free Trade Zone and Opinions of the Ministry of Transport and the Shanghai Municipal People’s Government on Implementing the Framework Plan for China (Shanghai) Pilot Free Trade Zone and Accelerating the Construction of Shanghai International Shipping Center.

III. Expected influences of Pilot FTZ on the development of Shanghai port and shipping industries

The pilot FTZ provides an opportunity for China to further integrate into the world, and an important way to participate in global competition, which will help strengthen China’s economic relations with foreign countries under international rules and enhance the influence of China’s economy in the global market. Port and shipping industries are crucial to the development of a FTZ which according to international experience, is mostly based on a free trade port. Therefore, the development of the pilot FTZ will have a positive and significant influence on port and shipping industries, which will bring them great opportunities and changes, especially creating bonuses for their mid- and long-term development. As for the specific potential influences, the forthcoming specific rules and an evaluation on the effects of their implementation will have to be consulted. The establishment of the pilot FTZ is expected to influence the development of Shanghai port and shipping industries in the following aspects.

1. Faster assembly of production factors of the shipping industry

Liberalized and convenient investment and trade will speed up the expansion of market access and open shipping policies will further accelerate the assembly of varied production factors of the shipping industry and expedite the settlement of international shipping enterprises, ship management companies and businesses related to modern shipping services into the pilot FTZ to help improve the resource allocation abilities of the Shanghai International Shipping Center. Since the launch of the pilot FTZ, Shanghai Capacity Exchange Co Ltd, branches of China Pacific Insurance (group) Co Ltd and Dazhong Co Ltd and branches of several banks have quickly settled in. In reality, there were 25 enterprises settling in the zone on the very day of its inauguration. With the introduction and implementation of various supporting policies, more shipping elements will enter the zone and correspondingly improve the volume of ship registration, shipping trade, shipping financing, shipping insurance and “free-on-board” (FOB) services in Shanghai’s market.

2. Continuing increase of port throughput and a different model of port logistics

Convenient trade, an innovative port supervision model and a more open market will definitely accelerate the assembly of cargoes, enhance the radiating role of Shanghai port in the international and domestic market and increase the production scale of ports. In addition, the port’s logistics model will be transformed and supervision procedures will be improved and simplified, which will help speed up the assembly, distribution and transit of cargo, bring satisfaction to customers, save costs incurred by storage and management of containers and greatly improve the port’s operational efficiency and profits. It’s reported that the first batch of goods experiencing the new supervision model adopted by Shanghai customs of “entry first and clearance later” entered the zone on Oct 9. Benefiting from simplified formalities, the working efficiency was greatly enhanced and the average passage time was reduced from the previous 6 minutes to 30 seconds.

3. Better port assembly and distribution system and much higher share of waterway-to-waterway transit

Recent years have seen a relatively big increase in the percentage of waterway-to-waterway transit in container throughput of Shanghai port. The share in the first three quarters was 45.6 percent, 3.3 points higher than the same period last year and higher than the planned target by 2015 of 45 percent. The share in relation to Yangshan port also reached 49.6 percent. Shanghai port registered a robust increase in its traffic volume of international transits that reached 1.753 million TEUs with a year-on-year increase of 32.2 percent, indicating the remarkable effects of its internationalization strategies.

The establishment of the pilot FTZ will improve the quality of Shanghai’s international logistics, trading, processing, exhibition and financial services and expand transit trade. With the development of transit and LCL business, the port’s international cargo transit service will become more attractive and its role in the global cargo transit market will be further enhanced. The combination of developing shipping services on main shipping lines and improving tax refund policies at ports of departure will help promote the port’s transit services, increase the potential growth of the port’s transit volume, greatly boost the transit volume along the Yangtze River — and in relation to inland trade — and reverse the downturn of the transit volume of coastal ports.

4. Faster development toward a cruise terminal and quicker assembly of passengers

Currently, there are only 40-plus travel agents in Shanghai which have received a permit for running outbound tourism businesses. The number is quite small. And compared with foreign countries, the municipality has very limited channels of sales of cruise tickets, which to some degree hinders the sales performance of those tickets. According to the opening-up measures to be adopted by the pilot FTZ, eligible travel agencies as Chinese-foreign equity joint ventures registered in the zone will be allowed to run tours to outbound destinations other than Taiwan. This policy will help to attract foreign investors to establish travel agencies, run outbound tourism businesses and expand the sales network of cruise tickets. Also, the establishment of the pilot FTZ will help to explore innovations in policies and systems for China International Cruise Tourism Pilot Zone, accelerate the development of Shanghai’ port toward a cruise terminal and encourage the development of cruise tourism businesses.

5. Transformation and upgrading of port and shipping enterprises stimulated by new free trade rules; stronger domestic driving forces

Currently, the USA and developed economics in Europe have been accelerating the negotiations on the Trans-Atlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP), seeking to establish a new international economic order featuring a weakened role of World Trade Organization rules. The core of the new regulations will be new free trade rules which involve liberalized investment and service trade and powerful control of cargoes and capital. During the establishment of the pilot FTZ, precautions need to be made in response to the tendency. A new order in global and regional economy and trade will definitely bring about a new order in international logistics and a new pattern of competition for global ports and shipping enterprises, especially intensifying the competition among East Asian ports.

With the implementation of international norms in the pilot FTZ, widened openness and lowered thresholds for foreign investment, more and more players will participate in the industry and intensify competition, especially competition in the international market, forcing the restructuring and upgrading of domestic port and shipping industries, encouraging professional and intensive operations, improving the quality of services and creating new economic growth points.

IV. Advices

The pilot FTZ is now under construction, fostering new conditions, tasks and requirements in relation to the development of Shanghai port and shipping industries. The municipality is advised to capitalize on the establishment of the pilot FTZ to accelerate the development of its port and shipping industries in the following ways.

1. Improve ports’ assembly and distribution systems

(1) Keep accelerating the establishment of port infrastructure, satisfying new requirements in port capacity during the establishment of the pilot FTZ

Waigaoqiao port and Yangshan port have nearly reached saturation point now, greatly limiting their potential to improve handling capacity through technological innovations and proactive endeavors. As the process of establishing the pilot FTZ goes further, the demand for port services will keep increasing in the future, which requires immediate efforts to increase the handling capacity to strike a balance between supply and demand.

The Phase IV project of Yangshan port needs to be expedited to further improve the comprehensive handling capacity of the container terminal of Shanghai port. Handling capacity and layout of container terminal main lines and branch lines need to be improved to accelerate the anchoring of vessels in branch lines and the establishment of anchorages, easing the deficiency in berths in branch lines.

It’s advised to strengthen cooperation between Ningbo port and Zhoushan port, create new cooperative models and mechanisms and facilitate coordinated development and exploitation of Big Yangshan Island and Small Yangshan Island to produce intensive effects and expand the radiating scope of the pilot FTZ.

(2) Keep encouraging “waterway-to-waterway transit” businesses

Waigaoqiao port, Yangshao port, Zhanghuabang Terminal and Jungonglu Terminal need to be operated in coordination in order to improve the management of transportation, reduce the need for distribution and improve the scale and efficiency of waterway transportation.

The procedures for transferring empty containers need to be improved according to international transfer procedures and a regional center for transferring international empty containers needs to be built. Efforts need to be made to accelerate the establishment of a transit and LCL business center on Yangshan Islands, expand the scale of international transit and LCL business and attract more multinational companies to establish international distribution centers in the pilot FTZ.

Efforts also need to be made to increase the intensity of liners in relation to fixed ports, shipping lines, shipping schedules, voyage times and vessels along the Yangtze River, exploring the establishment of a transfer center in the middle reaches of the river and enhancing the transfer efficiency along the river. Also, studies will have to be conducted on the standard ship type, management rules and charges relating to direct shipping between rivers and seas in an effort to reduce shipping costs and encourage the promotion of ships suitable for river-sea direct shipping.

The municipality is also advised to speed up the cultivation of the inland river container transport market and build express waterways; to accelerate the establishment and commencement of the operation of Waigaoqiao inland river port and Ruchao inland river port, strengthen their links to sea ports and promote the integrated operation of inland ports and sea ports; to build a platform for common carriers engaged in the inland river container business, link each part of the logistics chain relating to inland river containers and keep pushing the pilot project of “two ports and one shipping line”; to expedite research and development and application of inland river container vessels with “large tonnages and the support of high technologies”, and learn from the advanced experience of the shipping business along the Rhine-Main-Danube waterways in Europe; to accelerate the building and trial run of vessels equipped with flexible connectors and increase the length of inland river container vessels to increase shipping efficiency and profits; strengthen connections between main ports and branch ports; improve supporting services and try to persuade the Maritime Safety Administration of the Ministry of Transport to issue permits to inland river container vessels on a periodic basis.

2. Strengthen cooperation among regional ports

Efforts need to be made to improve the cooperative mechanisms, proactively strengthen the linkage and cooperation among ports along the Yangtze River and at the Yangtze River Delta, carry out coordinated operations in various ways, favor the integration of main ports and branch ports and expand the radiating effects of the pilot FTZ.

3. Facilitate port supervision system reform and innovation, transfer the development model of port logistics

The municipality is advised to capitalize on the establishment of the pilot FTZ to keep encouraging innovation in relation to the management of and policies concerning clearance formalities, customs inspection, transit procedures and supervision, operational procedures and warehouse storage and reform the development model of port logistics in order to enhance the logistics efficiency and speed up the assembly and distribution of cargo. Also, the functions of the ports need to be expanded and value-added services need improvement to meet international standards and further improve the quality and comprehensive management and services of Shanghai’s ports.

4. Formulate and improve implementation rules as soon as possible to put polices concerning the pilot FTZ into practice

The Framework Plan and Opinions of the Ministry of Transport and the Shanghai Municipal People’s Government on Implementing the Framework Plan for China (Shanghai) Pilot Free Trade Zone and Accelerating the Construction of Shanghai International Shipping Center need to be fully carried out. Studies need to be made in order to make full use of the comparative advantages of the pilot FTZ and international entrepots including Waigaoqiao port and Yangshao port, stimulate the further integration of ports and zones, and gradually include the whole area of each port and zone into the coverage of the pilot FTZ policies. Implementation rules and operation measures for pilot projects of coastal shipping and tax refunds at ports of departures need to be formulated as soon as possible and the effects of these pilot projects need to be publicized. Also, efforts need to be made in developing polices and measures for encouraging the restricting, upgrading and healthy development of the shipping industry.

5. Foster the establishment of the cruise terminal

Efforts are required to facilitate the infrastructure establishment of the cruise terminal and improvement of supporting facilities to improve its handling capacity for large cruises; to encourage the establishment of a ship supply distribution center in the cruise terminal; to conduct studies on mechanisms for passenger-ship involved shipping dispute settlement and in response to emergencies; to cultivate a local cruise market and explore local cruise development projects and to make full use of the comprehensive advantages of the pilot FTZ and China International Cruise Tourism Pilot Zone and encourage policy and system innovations concerning cruise products, financing, ship age and charges.

6. Transform industrial management methods, improve the enterprise credit system

The municipality is advised to transform its administrative methods, strengthen supervision of international ship transportation, international ship management and other modern shipping-related service sectors, subsequent to their entry into the market with approval, and establish systems for after-entry supervision and the tracking of enterprise credit to regulate the market order and prevent risks. Also, the legal environment will also need to be improved to make enterprises voluntarily operate in accordance within the laws and withdraw from the pilot FTZ in the event of any illegal activity.