Free Trade Agreements China
Expanding business operations globally has never been easier than with the opportunities afforded through technology in today’s times. For businesses looking to expand globally, it is vitally important to understand which countries have Free Trade Agreements (FTAs) and how they work. For many businesses, China has become an essential part of their global operation. As such, understanding which countries have free trade agreements with China and the nature of the relationship is essential to the running of their business. Here we explore what you need to know about China’s free trade agreements.
In this article, we will highlight everything you need to know about FTAs in China, including the major agreements and benefits of leveraging FTAs.
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The Importance of Free Trade Agreements
Free trade agreements hold importance for several reasons and benefit economies, companies, and consumers. When countries want to achieve economic growth and promote trade between a country or group of countries and regions, a free trade agreement provides the necessary framework.
Such agreements between countries promote economic growth, foreign direct investment and impact local consumers. When choosing a location to operate in, FTA’s have to be considered, especially in cross-border business operations. Choosing a place with favorable policies and FTAs can influence a business’s overall strategy and significantly impact a company’s profit and loss statement.
Overview of China’s Network of Free Trade Agreements (FTAs)
China is one of the leading countries in FTAs, making it an advantageous place to branch out into new countries. Currently, China has 23 FTAs in place with 26 countries and regional blocs, including ASEAN. ASEAN is comprised of 10 Southeast Asian countries, such as Thailand, the Philippines, and Vietnam.
In addition, China has another 10 FTAs, currently in the negotiation process and 8 more under consideration. Furthermore, China is in the process of updating some of the existing FTAs, particularly with Singapore and ASEAN.
A noteworthy point is that China’s FTAs mainly cover the surrounding regions, with no FTAs in North America and few agreements in South America. This is because, traditionally, FTAs were in place with bordering countries where cross-border trade was more common.
Today, it is not uncommon for a business in China to sell to a consumer in South America or for an investor from China to acquire a business in Hong Kong. The barriers associated with global business have been greatly reduced and, in some cases, almost completely eliminated.
This is why China’s trade agreements are constantly evolving in order to match market demands. The proximity requirements that many FTAs have are bound to expand as international business becomes more prevalent with ecommerce on the rise.
The Chinese Government oversees the FTA network. However, it takes clear communication between Chinese leaders and other countries to develop transparency and clarity in the application of FTAs.
China’s Major Free Trade Agreements
China has numerous Free Trade Agreements in place with countries around the world. The more notable FTAs include:
Regional Comprehensive Economic Partnership (RCEP)
This is the world’s largest FTA, with 15 Asia-Pacific countries and the ASEAN states being members. This agreement lowers trade barriers, improves market access, and can streamline processes with uniform standards. This is a relatively new FTA, being passed in November 2020 and ratification announced in early 2021.
This FTA allows China and the ASEAN states to eliminate tariffs on most products passing through the borders. It’s estimated that almost 90% of goods flowing through the border of China and ASEAN member states qualify for this FTA.
Closer Economic and Partnership Agreement (CEPA)
This FTA primarily addresses tariffs and duties between China, Hong Kong and Macao. Additionally, there are different investment incentives within mainland China. Promoted investments include industry sectors restricted to foreign investors and large service industry concessions.
CEPA enforces a minimal tax contribution requirement for both Hong Kong and Macao. An example of using CEPA would be a mainland China business acquiring a company based in Hong Kong.
This agreement goes beyond the China-ASEAN FTA to lessen trade restrictions on services between China and Singapore. Fewer restrictions mean more opportunities to capitalize on an expanded market base.
China-South Korea FTA
The China-South Korea FTA (the China-Korea Free Trade Agreement) aims to increase trade and 2way investments between China and South Korea. The free flow of goods and personnel are supported under this FTA. This FTA has been in force since December, 2015 and includes multiple areas across service trade, goods, investment policies and more.
Double Tax Avoidance Agreements (DTAs)
Double tax avoidance agreements are other FTAs that benefit both business owners in China and those looking to do business with China. Global investors often pay taxes in their home state and in China on domestic income.
Double tax avoidance agreements eliminate instances of double taxation, lowering your tax burden. China currently has DTAs with more than 110 countries and regions.
Bilateral Investment Agreements (BITs)
China also has 107 Bilateral Investment Agreements (BITs) that outline terms and regulations for private investors. These agreements prohibit unfair treatment by the host country and make investing in companies domiciled in China favourable.
China’s BITs include countries they do not have FTAs with, such as Austria, France, Canada, Germany, Italy, and the United Kingdom.
An Analysis of China’s Major FTAs
China’s advanced network of FTAs has a significant impact on multiple areas of the economy. First, FTAs incentivize cross-border trade, increasing the development potential of smaller countries. This leads to access to a wider variety of consumer market offerings and the ability to expand business operations.
Additionally, global supply chains are promoted when there is more transparency in trade. Industries must cut down operational costs to improve supply chain management and compete with other exporters.
Regional and global integration are other byproducts of China’s trade agreements. Countries that were once isolated from international trade and consumption can now participate in the market, at the business and consumer levels.
As technology continues to gain importance and come to the center stage in the Chinese economy, FTAs have never been more critical. Both consumers and business owners are engaging in global business in countries that provide favorable agreements, making it easier to carry out business operations.
Businesses would rather avoid operating in a country where they will be double taxed and look for alternatives with favorable policies and regulations. China understands its role in trade and aims to solidify its importance in the global economy, so it has aimed to deepen its ties with stronger trade agreements.
What are the Benefits of an FTA with China
Utilizing China’s FTAs has numerous benefits for businesses operating in the country. Here are some of the most notable benefits of a free trade agreement with China.
- Market Access – FTAs provide improved market access to countries within China’s network through reduced trade barriers and import restrictions. This gives companies operating in China a distinct advantage when entering a new market.
- Increase in Trade and Investment – FTAs promote and facilitate increased trade and investment with China and the countries with which they have agreements.
- Access to Key Resources – For businesses that have supply chains across different countries, China’s FTA’s allows for easy access to components that are not available domestically.
- Enhanced Global Competitiveness – By actively aiming to strengthen ties and engage in FTAs, China illustrates that they are open and committed to trade liberalization. Through this, China aims to attract investment and develop international partnerships continually.
China’s FTAs create an opportunity for more investment and economic growth. Through the current agreements in place, companies have greater access to more markets with reduced entry barriers. For companies with supply chains spanning across different countries, these agreements make it easier to operate, which illustrates the importance of the Chinese market, and the trade relationships China has. As stndard trade resumes and China aims to strengthen trade relationships, companies will have greater market access, strengthening China’s importance in the global economy.
If you are considering doing business in China, check out our Complete Guide to Doing Business in China, or get in touch with us for any questions you may have!
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