It started when Richard Nixon made his famous trip to China in 1972. That journey was meant to open Chinese markets to American exports, but over the course of several decades, it has resulted in China becoming an economic powerhouse in its own right. During an era when globalization was the talisman for the world’s economy, China soon began exporting far more goods to the US than it received from America.
When the current occupant of the Oval Office came to town, he declared that China’s economic policies were not fair and vowed to do something about them. Most rational people would have engaged in trade negotiations to try to level the playing field, but Trump, in his usual bombastic style, took to Twitter to announce a host of new tariffs on Chinese-made goods.
“Tariff wars are easy to win,” he boasted. Yet more than a year later, the trade war with China has metastasized into a loud, ugly pissing contest in which both sides have dug in their heels. If any negotiations are going on, they are sporadic and perfunctory at best.
There is no doubt the tariffs on Chinese goods have had a negative effect on the Chinese economy. Accustomed to double digit growth for the past 20 years, it now finds growth has slowed to a crawl. The Chinese new car market, which had seen sales expand every year, is actually contracting for the first time ever. Rather than knuckle under to the blusterer in chief, China has elected to refocus its attention on expanding its business relationship with other countries in hopes of replacing some of the diminished exports to the United States.
One strategy that emerged this week is to dramatically increase the size of the Free Trade Zone on the outskirts of Shanghai. For over a century, Hong Kong has been the primary point of contact between mainland China and the world. Shanghai would like to expand its economic influence to become a mini-Hong Kong.
Shanghai vice-mayor Chen Yin tells the South China Morning Post, “Goods from abroad entering the fenced customs areas of the new area will be under bonded or tax exemptions.” Special tax policies will apply for foreign goods as well as goods and service transactions between companies within the area.
Tesla Gigafactory 3 Included
The expanded FTZ would included Lingang, an industrial area south of the city of Shanghai built on reclaimed land. That’s where the new Tesla Gigafactory 3 is under construction. The new free trade zone will cater to certain industries, including integrated circuits, artificial intelligence, biomedicine, and civil aviation.
“The new area of the FTZ will put industrial development in a more prominent position,” says vice commerce chairman Wang Shouwen, who has been deeply involved in China/US trade negotiations over the past 13 months. He says Trump’s trade war has convinced China to show more openness to the world on trade. In the expanded FTZ, customs duties would be deferred or waived on certain products.
Lingang “is a vast area that can accommodate mega manufacturing projects, commercial complexes and entertainment facilities,” says Cao Hua, a partner in Unity Asset Management, a private equity firm. “The announcement is not a surprise but it boils down to whether land resources and financial capital will be used effectively to turn Lingang into a boomtown.”
The war of words between Beijing and Washington was not that hard to imagine last year, given the erratic tendencies of the unstable lunatic in the White House. Tesla seems to have played its hand masterfully, leading the way into this enhanced economic freedom in China. Whether or not other American companies will be permitted to take advantage of the expanded free trade zones is unclear at the moment, however, according to Reuters.
Final Decision Expected This Month
China has about a dozen other free trade zones at present. If the Shanghai experiment is successful, its policies could be expanded to include those other zones as well. It should be noted that China currently imposes and collects duties on all foreign goods traveling through those zones. Whether to reduce or eliminate those duties will be decided at a conference of government leaders later this month.
Getting the details right is not an easy task. Huang Yejing, a research professor at the Institute of World Economy at the Shanghai Academy of Social Sciences, tells SCMP, “Customs authorities are supposed to ensure all the goods inside the zone are duty free to boost commercial activities in the area. But they also need to make sure that those duty-free goods do not flow out of the zone and sold on the domestic market. It is still an unanswered question facing regulators.”
Whatever the result of Trump’s trade war, Tesla seems to have positioned itself nicely to succeed with its business venture in China. There’s a reason why the first Tesla factory outside the US is there and not in Europe, South America, or Africa. Will other American companies follow Tesla’s lead? “We’ll see,” said the Zen master.