A woman irons fabric at a garments factory at the Sihanoukville Special Economic Zone. Photo: Chhor Sokunthea / World Bank
Since China’s “Go-global Initiative” called upon Chinese enterprises in 2002, these enterprises have been ever-more active in expanding their businesses overseas, in which establishing overseas economic zones has been one of the most noticeable phenomena among all types of economic cooperation. This trend was bolstered by the Belt and Road Initiative launched in 2013, as overseas economic zones are perceived as a good platform to deliver tangible benefits to countries within the Silk Road Economic Belt and along the 21st Century Maritime Silk Road, and to realise the ultimate goal, a community of shared future for mankind.
China’s Fast Expanding Overseas Economic Zones
China’s Ministry of Commerce (MOFCOM) revealed that by September 2018, Chinese enterprises have set up over 110 overseas economic zones with an accumulated investment of USD 36.63 billion. The zones, mostly dedicated to manufacturing, energy and agriculture industries, have accommodated around 4,500 business entities with economic output exceeding USD 111.71 billion and tax revenue of USD 3.08 billion to host countries.
The ASEAN region, an important nexus of the 21st Century Maritime Silk Road, remains a priority for the economic zone cooperation. Among the twenty successful overseas zones rated highly by China’s MOFCOM, seven are in Southeast Asian countries including Thailand, Cambodia, Vietnam, Laos and Indonesia, accounting for one-third of the total number. In particular, the Sihanoukville Special Economic Zone, under the cooperation of Cambodia and China’s Jiangsu province, is recognised as a model project for all zones across the world.
However, apart from the model projects, the increasing overseas expansion leaves most overseas economic zones finding themselves struggling to integrate into local economies and making profits to self-sustain, long before the ongoing US-China trade war. With disruptions brought about by current US-China trade disputes, the overseas economic zone cooperation faces volatility, uncertainty, complexity and ambiguity, and risks are also worryingly amplified.
Challenges faced in fast-expanding Overseas Economic Zones
Prompted by the Belt and Road Initiative, Chinese enterprises, both state-owned and private, accelerated their pre-existing overseas expansion plans, leaving a series of problems to be addressed.
On the macro level, the geographical distribution of the zones is uneven, with inconsistent standards of development. Among all 47 Asian countries excluding China, 19 are currently hosting almost half of the total number of China’s overseas economic zones, - for example, Indonesia alone has as many as six. By contrast, only 5 out of 53 European countries accommodate Chinese zones, with 3 located in West Europe and 7 in East Europe.
The development standard is also far below ideal. China’s MOFCOM noted that only 20 out of over 100 MOFCOM’s approved zones are meeting the instructed standards. Causing this situation is an issue found in most of the cases that the zone management did not make pre-investment plan with due diligence in inspecting the zone site and host country’s socio-economic conditions. For this reason, some zones have even changed location several times after the initial settlement; while some others found in-site functional facilities were not in place for long even after factories having moved in.
Financing and sustainable development are two primary technical challenges faced. According to MOFCOM’s survey, only 39% of all zones secured financing from banks, leaving the remaining 61% in financial difficulties. As sustainable development has been enshrined into United Nations’ documents and upgraded to global consensus, Chinese enterprises operating overseas should attach great importance to the environment and society pillars of the United Nations Sustainable Development Goals (UNSDGs). The negligence of these core principles, as we have seen, has caused continuous repercussions from local society targeting at Chinese enterprises. Since Chinese projects normally involve construction of large-scale infrastructure, any disruption of the project would inevitably cost a huge amount of money.
Another issue is that of security threats. As rated by China Export and Credit Insurance Corporation, countries along the Belt and Road route are mostly of high-risk nature, accounting for as high as 84% of countries. In some cases, companies lacking proper security evaluation and preparation rushed to settle down in overseas zones and suffered from a series of local harassment, ranging from robbery to kidnapping.
Risks in the Era of the US-China Trade War
Since March 2018, when US President Donald Trump signed a memorandum of US’ trade with China, the trade friction between the world’s two largest traders has continuously escalated. A dozen rounds of high-level bilateral negotiations have taken place, but there is limited progress in solving the dispute. Some even estimate that the trade war has clearly been directed into a holistic confrontation between two politico-economic systems, suggesting a new “Cold War” but in an economic sense.
In order to sustain domestic stability amidst the trade war, the Chinese government has issued a number of policies, including positive monetary policies and encouraging industrial policies, which would enhance the government’s efforts in cultivating overseas economic zones and involved enterprises. The central bank has also cut the reserve requirement, to inject liquidity into the market, which would mitigate the financing pressure faced by related zones.
Apart from favourable policies from China, the US is clearly putting Chinese enterprises, particularly those operating overseas, under worrying risks. One issue is Article 301 of the Trade Act of 1974 and the US’s Long-arm Jurisdiction. The former allows US Trade Representatives to launch negotiations with trade partners that US rated as the most closed and least fairness. If negotiations failed, the Trade Representative could impose sanctions of up to 100% tariff on those trade partners. The latter allows US courts to deal with cases following the minimal relation principle, by which US courts could claim jurisdiction even over totally foreign entities that do not operate in US as long as the entities are using any services – for example, email box - provided by US-based companies.
US’s punitive tariffs on China-based companies’ products exporting to the US has resulted in many companies relocating their production capacity from China to regions like Southeast Asia. This move is costing these companies strong risks, stemming from inadequate pre-relocation assessments and unmatched logistical systems. In addition, in today’s globalised world, it is difficult for companies to avoid being linked with Chinese market and US services. As such, the US’s Long-arm Jurisdiction remains a long-time sword constantly hovering around the heads of related companies.
Another threat is the seemingly technological decoupling backed by US’s Entity List and US-related scientific associations. Once a foreign entity is on the Entity List managed by US’s Department of Commerce, the company or individual cannot purchase any American technologies unless it has special permit from the US Department of Commerce. Chinese technological giant Huawei is one that has been constantly under such coercion from US to be listed. Imaginably, the coercion is also relevant to other Chinese technological companies that have been fighting hard to squeeze in foreign markets, as most advanced and core technological patents they have been using are still possessed by US-based companies and institutes.
China’s Coping Strategies
The US-China trade war will not likely be resolved in any time soon. Facing a consequential economic slowdown, China has clearly tried to tap the potentials of economic cooperation with developing regions. UN’s International Trade Centre revealed that the trade potentials of South and Southeast Asia can make up for China’s lost trade volume exported to the US. So far, as Southeast Asia remains a priority for China’s overseas economic zones, the zones indeed perform relatively better in terms of management and facilities. Companies and zone operators should pay even more attention to compliance, legal consulting and security assessment, so to avoid as much as they can the threats and risks from the US.
In addition, the technological decoupling between US and China would ultimately give birth of two separated standards, services and systems, raising high sunk costs for those businesses operating in both countries and beyond. Companies, particularly those operating in overseas zones, would naturally have to be prepared to deal with these two lines of standards, services and systems.