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Updated: 2007-06-14 16:56

Today China has three bonded port areas that are test runs for creating free trade ports modeled along the lines of the trading gateways such as Hong Kong and Singapore.

Dayaowan in Dalian, approved in August 2006, is the third of three bonded port areas being constructed in the country at the express instruction of the State Council. The other two are Dongjiang in Tianjin and Yangshan in Shanghai, which were approved in August 2006 and June 2005 respectively

These bonded ports will integrate all the preferential policies granted by the central government to bonded areas, export processing areas and bonded logistics parks.

The so-called Zone-Port Interaction Policy builds on a gradual liberalization of trading practices in select port cities.

The new idea is to offer logistics services in international warehousing and distribution, procurement, trade and combining bonded zone policy with international seaport service.

Historically, the free trade zones (FTZs) or bonded zones were created during the 1990s as the second wave of foreign investment incentives after the first Special Economic Zones of the 1980s.

The third wave that began in 2000 has been the geographical entity called export-processing zones (EPZs) of which there are now some two dozen spread not only along the coastline in parallel with FTZs but also in the western and inland provinces.

The fourth wave of trade liberalization is of course the country-wide implementation of World Trade Organization (WTO) agreements, which will broadly grant trading rights and also drop import duties dramatically.

The changes under WTO and competition from the EPZs mean that the FTZs must add incentives to attract and maintain business.

The FTZs have historically been a popular place to handle either high-end imports or as a distribution centers for manufacturing exports.

Their younger cousins, the EPZs have had the tax advantage of bringing in goods from Chinese sources without duties because the company outside the EPZ is eligible for export refunds, and the buying company inside the EPZ is exempt from paying value-added tax (VAT) for purchases. Also, EPZs have a much wider manufacturing function than the FTZs, which are geared more toward logistics and simple processing.

Imports entering the FTZ from outside China proper are exempt from customs duties and VAT; customs duties and VAT are assessed only when the goods leave the FTZ to enter China proper.

The FTZ is then kind of a safety zone where China does not require quotas or import licenses to be produced until the goods are ready to enter China proper.

In the old days, bonded zones were the only locations where wholly owned foreign companies could engage in trading activities, a restriction that eventually should be swept completely away in the WTO era.

The key difference between the traditional Hong Kong and Singapore free port model versus new free port model in Chinese mainland is the potential to have a blend of local production and local consumption mixed with foreign production and consumption

That vision of truly free trade activities within China is still far from reality. In China, all bonded zones are named as "free trade zones," but there remains a big difference in customs regulations with the international practice in real free trade zones or free ports.

The Dalian Dayaowan Bonded Port Area will one day be turned into a free multi-sector trade zone once several logistics projects are completed for oil, ore, grain and autos. There will also be enlargement of the Dayaowan Container Terminals, the existing bonded area and export processing area.

Dongjiang Port in Tianjin, like Dayaowan, required approval by eight ministries, including the National Development and Reform Commission. Up to 10 billion yuan will be spent on the construction of infrastructure at Dongjiang.

In conclusion, the attractions of the bonded port areas are powerful. The comparative freedoms of the bonded port areas will be the ability to re-export imported goods free of customs duties or supervision before re-export, trans-shipment and reloading containers, as well to conduct export processing and facilitate export rebates for external enterprises in addition to all the basics such as good infrastructure and customs efficiency.