On the Adjustment of Industrial Subsidy Policies in Pilot Free Trade Zones of China

Abstract

From the perspective of the background and purpose of pilot free trade zones （FTZs） of China, the construction of FTZs should be embodied as the high-level liberalization of investment, trade and finance, as well as the creation of the environment with a fair competition, which also means that the opening level and fair competition level in FTZs should at least be not lower, but rather higher, than those in current international obligations applied in the whole country. However, some industrial subsidy policies in current FTZs are inconsistent with the WTO obligations, or have such potential risks. Specifically, there are some prohibited subsidies in some parts of some FTZs, which directly violate the Agreement on Subsidy and Countervailing Measures （ SCM Agreement”） of WTO. Meanwhile, the national or other local subsidies applicable in FTZs always have the nature of specificity, and some special subsidies for some parts of FTZs have regional specificity or industrial specificity. Not all subsidies with specificity violate the obligations in SCM Agreement, but such kind of subsidies have the risk of violating the obligations. The central government tries to clear the various tax and non-tax subsidies which exist all over the state （of course including those in FTZs）, but hasn’t achieved good effects. Subsidization is one of the important means for the Chinese government to promote economic development, but this kind of the economic management mode of the government has great limitations, which especially leads to an unfair competition. The above problems are related to the understanding of the government itself, the inertia of the government’s economic management, and the close systematic relationship between state-owned-enterprises and the government. Additionally, in pursuit of the achievements in their official career, some local governments may use subsidies without considering the cost or economic rationality. The background and purpose of FTZs as well as the current states of international trade rule of law have decided the necessity and urgency for FTZs to adjust industrial subsidy policies. The external motivation of the establishment of FTZs was to deal with the challenges brought by TPP. China tried to construct FTZs in order to open the gaps, deepen the reform, and raise the level of trade liberalization, so as to dock with the high-level free trade rules in the future and avoid being in a passive position. The United States quitted TPP later, but Sino-U.S. trade frictions were so increasingly intensified that the trade war broke out. Industrial subsidy policies belong to one of the core problems in the trade war. High-level opening-up and business environment with a fair competition are vital to FTZs. The adjustment of industrial subsidy policies is the demand of both performing international obligations and the rule of law of domestic governance. Based on the protection of the reliance interests of recipients, among the subsidies with the violating risks, the existing subsidy contracts with a stipulated time limit should be permitted to perform till their expiration. Transition periods should be set to the contracts originally without a time limit, and these contracts should be permitted to perform till the expiration of the transition periods. New subsidies with violating risks should be prohibited to create. New subsidy measures should be characterized by non-specificity to the greatest extent to avoid the risk of violating the WTO obligations to the maximum extent. The above adjustment originally belongs to a nationwide issue, but FTZs, being the front of the reform and opening up, and taking the mission of exploring replicable and propagable experiences”, should take actions at first in this aspect.