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Issue 09, 2000 (15 September)
 Export Processing Zone Special

Customs Implement New Processing Trade Control Measures

The State Council has approved the establishment of 15 pilot export processing zones in Dalian, Tianjin, Beijing, Yantai, Weihai, Kunshan, Suzhou, Shanghai, Hangzhou, Xiamen, Shenzhen, Guangzhou, Wuhan, Chengdu and Hunchun. The move is intended to reform and strengthen the supervision of export processing trade and stamp out related smuggling activities. In view of Hong Kong companies' extensive involvement in processing trade in the mainland, it is important that they keep abreast of the new development.

The pilot processing zones are special closed areas established with central government approval and supervised by the Customs. The zones are equipped with segregation facilities and a supervisory body is set up by the Customs in each zone to monitor all incoming and outgoing goods as well as relevant facilities on a 24-hour basis.

Enterprises operating in the zones fall mainly into the following three categories:

  1. Enterprises engaged in export processing;

  2. Warehousing enterprises dedicated to serving export processing enterprises;

  3. Transport companies approved by the Customs to deliver goods in and out of the zones.

Customs Management

The Customs are revamping the traditional management of processing trade by simplifying existing procedures and implementing the new requirement for goods to undergo customs declaration, document checking and inspection all in one go. The new management method is marked by the following characteristics:

  1. Increased utilisation of modem communications and computer networking technologies linking up different customs offices electronically;

  2. Strengthened overall management by the Customs of processing zones and simplified administration of individual enterprises;

  3. Enhanced overall management of processing activities and simplified administration of processing trade contracts;

  4. Strengthened physical control of imported/exported goods going through the check points at the processing zones, thereby simplifying customs clearance procedures and meeting the needs of modern multinational corporations for zero inventory.

In practice, the new method operates as follows:

  1. Customs supervision is implemented round the clock in a closed environment, with separate passages at check points for goods and personnel;

  2. The Customs exercise control over enterprises in the zone through computer link-up for transmitting electronic data and handling customs procedures. The Customs in the zone are linked online to their counterparts at different ports;

  3. Enterprises engaged in processing trade in the zone are not subject to the customs duty deposit system nor the "registration handbook" requirement. The Customs will use the electronic account management system instead, with verification and cancellation performed every six months based on the total value of trade flows;

  4. Goods moving between a processing zone and an offshore location are managed by a "filing" system under which the processing enterprise has to complete a "PRC Customs Declaration Form for Import/Export Goods";

  5. Imported/exported goods moving between a processing zone and a port as well as between different processing zones are managed by the "through train" or "inter-customs territory" method whereby declaration is to be made at the Customs in the processing zone and the goods are to be inspected and released at the check point in the zone.

Supervision of Incoming and Outgoing Goods

In the export processing zones, the Customs will adopt the following specific measures for supervising incoming and outgoing goods:

  1. Imported/exported goods moving between a processing zone and localities outside China are managed by a "filing" system under which shippers or their agents are required to declare to the Customs a checklist of incoming and outgoing goods in accordance with the approval documents issued by the Supervisory Committee. Such goods are not subject to export quotas or licensing control, except for those subject to involuntary export quotas.

  2. For goods to be delivered out of a processing zone, the enterprise on the receiving end is required to go through declaration procedures in accordance with the relevant Customs regulations concerning imported goods, and pay the necessary taxes. For goods subject to import licencing control, the receiving enterprise is also required to submit the valid import licence to the Customs. The enterprise on the supplying end has to submit a checklist of the goods moving in and out of the processing zone to the Customs for verification and cancellation.

  3. Shipment of goods between processing zones is subject to a joint application filed by the consignor and consignee with the Customs in the zone out of which the goods are delivered. Upon Customs approval, the goods are handled in accordance with the relevant provisions concerning "inter-customs territory".

  4. Transport vehicles and personnel entering and leaving the processing zone must go through special passages and are subject to Customs inspection. Upon inspection and approval for release, processed goods destined for offshore localities or goods delivered out of the processing zone must be carried by Customs-approved warehousing and transport service operators in the zone.

Taxation Policy

Import duty and taxes on import on goods that enter the processing zones from outside China will be handled in accordance with the following provisions, unless laws or administrative regulations stipulate otherwise:

  1. Exemption is granted to the machinery, equipment and moulds for production as well as parts and components for maintenance imported by enterprises in the zone; machinery and equipment imported for use in infrastructure projects and infrastructure materials for construction of production plants and warehousing facilities in the zone; and office supplies imported for use by enterprises and administrative organs in the zone.

  2. Full bonding is granted to raw materials, parts and components, packaging materials and consumables imported by enterprises in the zone for export processing.

  3. Export duty is exempted for the shipment abroad of the finished products and offcuts, substandard or waste products generated in the course of processing, unless laws or administrative regulations provide otherwise.

  4. Tax is levied on vehicles and daily consumables imported for use by enterprises and administrative organs in the zone.

Purpose of Establishing Export Processing Zones

To China, processing trade is one of the best ways of utilising foreign capital following its reform and open policy. In the past 20 years, the total import and export value of processing trade has surged 70 times, accounting for half of China's foreign trade. However, the rapid growth of processing trade has brought with it rampant smuggling activities. Last year, the Customs cracked 447 major smuggling cases relating to processing trade, involving Rmb2.9 billion. In the first five months of this year, 137 major processing trade-related smuggling cases involving Rmb840 million were cracked.

In order to curb smuggling activities related to processing trade, China has in recent years stepped up its efforts to manage processing trade by introducing the customs duty deposit system. However, this system has not proven to be effective. With the recent launch of massive efforts to combat smuggling, China has also hammered out plans to reform the management of export processing. The latest decision by the State Council to establish export processing zones in existing economic and technological development zones marks a major move by Beijing in this direction.

Limitations of Export Processing Zones

Rampant smuggling related to processing trade is a result of the significant difference in taxes between importing commodities for processing trade and importing commodities for other types of trade. Decentralised operations and open management have also made it difficult for the authorities to crack down on smuggling activities. While the recent State Council decision to establish export processing zones is regarded as a key reform initiative aimed at creating an improved environment for the healthy development of processing trade, the following deficiencies should not be overlooked.

  1. There are currently tens of thousands of processing trade enterprises in China, chalking up annual imports and exports of US$200 billion. It can be expected that it is beyond the capacity of the new export processing zones to accommodate all these enterprises and handle the cargo flows generated. Moreover, while new enterprises can choose to establish in the processing zones subject to cost and efficiency considerations, existing enterprises moving into the zones have to face problems such as increased costs, staff deployment and support facilities.

  2. In most countries, export processing zones are often established to overcome constraints such as insufficient infrastructure facilities, weak support industries and ineffective customs control, and with the single aim of generating foreign exchange earnings. In the case of China, it would have been more appropriate to establish export processing zones in the initial stage of its opening up and reform. However, as China's processing trade has now grown into a considerable scale and is closely linked with various support industries, with the Customs authorities exercising the appropriate supervisory powers, the implementation of centralised, closed management may not necessarily be the lowest-cost option.