Waigaoqiao is Back!

At the time that the WFTZ was established as the first FTZ in China in 1990, foreign investment in the PRC was primarily limited to the manufacturing sector, with companies generally required to sell only those goods that they manufactured. While foreign investors made inroads in certain service sectors during the 1990's, foreign investment in trading and distribution remained subject to tight controls.

However, later in the 1990s, companies that had previously used the WFTZ primarily for export processing began to explore leveraging their operations to support other aspects of business, such as selling to and sourcing from mainland China. While WFTZ FIEs did not, technically speaking, have intra-China trading and distribution rights due to the very tight regulatory controls, many FIEs began to use agents and WFTZ-supported systems to effectively channel goods to and from China proper. The WFTZ's ability to offer FIEs a practical way to deal with the regulatory restrictions on trading and distribution was an important factor in its development and prosperity. Indeed, as the zone grew in popularity, the concentration of foreign companies grew dramatically.

HERE COMES THE WTO, WITHER NOW WFTZ?

In 1999, China opened the door ever so slightly to foreign investment in trading and distribution companies outside FTZs. Specifically, the Procedures for Pilot Projects for Commercial Enterprises with Foreign Investment (Pilot Projects for FICE's) allowed Sino-foreign joint ventures to export goods directly, import and export goods for the joint venture's use, and engage in wholesale and retail businesses in selected geographic areas. As a practical matter though, many foreign investors still preferred to distribute in China through FTZ companies or agents because the Pilot Projects for FICE's imposed burdensome thresholds and other onerous requirements. In this regard, the 1999 Pilot Projects for FICE's did little to detract from the WFTZ's growth.

But China's accession to the WTO in December 2001 paved the way to the long-awaited opening of trading and distribution for FIEs. Within on year of its accession to the WTO (i.e. December 2002), China committed to giving minority-held FIEs full trading rights, whilst majority-held FIEs were granted the same privileges a year beyond this. By December 2004, all FIEs were able to trade in almost all goods. China also committed to phase out many restrictions on distribution services within three years of accession. By December 2002, moreover, regulators had agreed to allow FIEs to distribute domestic and imported products (subject to specific carve outs for certain products). The Chinese government also agreed to phase-in foreign investment over three years from WTO accession in wholesale and commission agent services. By December 2004, investors have been able to establish wholly-foreign owned enterprises (WFOEs) in wholesale and commission agencies.

China's April 2004 amendment to the Foreign Trade Law (对外贸易法)ostensibly fulfilled many of the country's WTO trading rights commitments. Under the new trade law, WFOEs are able to register to trade substantially all domestically-produced goods. In the same month, MOFCOM issued the Procedures for the Administration of Foreign Investment in the Commercial Sector (2004 Procedures), which, among other sectors, liberalized foreign investment in wholesale businesses and commission agency services. The net effect of these new laws was that after December 11, 2004, WOFEs were authorized to engage in trading and distribution in China of all but some very specific goods without equity ratio requirements, geographic restrictions, or market share limitations.

With the enactment of the 2004 Procedures, WFTZ FIEs that wished to engage in trading and distribution were arguably at a disadvantage to FICE's elsewhere in the country. For one, the law allowed FIEs outside of the WFTZ to engage in distribution within China, while the legal basis for companies within the zone to do so remained unclear. Indeed, WFTZ companies had to continue using agents to carry out trading activities with China proper, whilst exposing themselves to rigorous customs supervision and complex value-added tax (VAT)-related administration. Finally, WFTZ FIEs were limited in their ability to establish branches in China outside of the FTZ. As a result, after December 2004, not only was the WFTZ potentially less attractive to certain new foreign investors, but companies established within the zone started to explore options to relocate their operations elsewhere.

RE-ENGINEERING THE WFTZ

Following enactment of the amended Foreign Trade Law (对外贸易法)and the 2004 Procedures, the WFTZ administration and many FIEs located within the zone began lobbying for the same rights as FICE's. In July 2005, these efforts culminated with MOFCOM's and the General Customs Office'sCircular on Issues Relevant to the Administration of Trade in Bonded Zones and Bonded Logistics Parks(关于保税区及保税物流园区贸易管理有关问题的通知) (Circular on Trade in Bonded Zones).

The Circular on Trade in Bonded Zones appears to give WFTZ administration and WFTZ FIEs most, if not all, of what they asked for. The circular clearly states that enterprises and individuals in bonded zones and bonded logistics parks may acquire trading and distribution rights in accordance with the 2004 Foreign Trade Law (对外贸易法) and the 2004 Procedures. Since July 2005, some companies have apparently received trading and distribution rights under the Circular on Trade in Bonded Zones with approval certificate scopes of business that include wholesale, import and export, and commission agency businesses.

The Circular on Trade in Bonded Zones has arguably leveled the playing field between WFTZ FIE trading companies and non-zone trading companies. Prior to the issue of the circular, WFTZ FIEs ostensibly only had "international trading rights" and, therefore, had to pay commissions (typically 2% to 5%) to foreign trade companies if they wanted to do business with China proper. Because the Circular on Trade in Bonded Zones simplifies trading procedures and allows WFTZ FIEs to trade directly with China, in most cases there is no regulatory advantage to establishing non-zone FICEs.

The Circular on Trade in Bonded Zones may have actually tilted the playing field in the WFTZ's favour again (depending upon one's perspective, of course). The WFTZ presents several important advantages over non-zone FICEs. For one, the zone has a highly developed and efficient logistics infrastructure. In addition, it is designed to facilitate international trade, thereby offering streamlined export processing, more flexible foreign exchange regulations, and preferential tax treatment. Also, the fact that it is administered locally can make it more user-friendly.

Some foreign investors also find the Waigaoqiao Bonded Logistics Park (WBLP) particularly attractive. Located within the WFTZ, the WBLP is an approximately one square kilometre area that allows for goods to be delivered from the port to the WBLP via a 'Green Channel'