Free Trade Zones on China’s Belt & Road Initiative: The Eurasian Land Bridge

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Tax Incentives and Faster Delivery Times Are Making The Belt & Road Eurasian Routes Increasingly Viable

Op/Ed by Chris Devonshire-Ellis

A major route for China’s Belt & Road Initiative is the ”Road” section, which stretches along its main corridor from Xinjiang Province in Western China, through Kazakhstan, across to Azerbaijan, Georgia and onto Turkey and the European Union. Known as the Eurasian Land Bridge, the route is the fastest way from China to Europe. Over 6,300 trains made the journey from China overland to Europe last year, while the journey time from Shanghai in Eastern China to Istanbul in Turkey via Kazakhstan, Azerbaijan, and Georgia, including two sea transit segments, for arrival in Istanbul takes just 14 days.

In this article I examine the various Free Trade Zones that exist on the borders of these countries and which may therefore be useful when planning manufacturing ventures and available logistics and tax incentives along these routes, and taking advantage of the train network that is already becoming a standard Eurasian transportation mode.

Free Trade Zones (sometimes called slightly different names in other countries) are highly useful tools for foreign manufacturers as they generally allow the duty free importation of goods, and exemption from VAT. They also permit the claim-back of any VAT originally paid on purchasing goods in the respective host country. Consequently they are valuable sites within which added value production, such as assembly, or working on component parts from different origins can be conducted on a tax free basis. This is a significant factor in reducing manufacturing cash flow operational costs, and also allows for the addition of lower cost labor, depending upon the location, to be factored into the overall production cost rather than being exposed to one salary band in just one country such as China.

This last point is important along the Belt & Road Eurasian Land Bridge as salary levels vary considerably. Below I feature the basic monthly salary costs of a skilled factory worker, engaged in the manufacturing industry in each of the countries concerned. Bear in mind additional costs such as various mandatory welfare, which can reach up to 50% of salary, may also need to be factored in.

Skilled Manufacturing Worker Basic Salary Costs – Eurasian Land Bridge
Country Monthly Salary (USD)
China 2788
Kazakhstan 320
Azerbaijan 319
Georgia 338
Turkey 499
(Source: Trading Economics)

These figures show a marked difference between wage levels in China and across Eurasia, which goes some way to explain the attraction for Eurasian investments and the establishing of manufacturing businesses along the Belt & Road Initiative by Chinese companies. Those wages have gone hand in hand with the development of Free Trade Zones as attractive business locations along the route, offering the tax and duty incentives I described. I identify some of these – in a Westbound direction – as follows:

China-Kazakhstan Border
Huoergousi Export Processing Zone (China)
This EPZ was established back in 2010 and is based in Yili City, near the border with Kazakhstan at Khorgos, which itself is a Kazakh EPZ and one of the largest inland ports in the world. Huoergousi handles processing and export trade in Electronics/ IT, Chemical Processing, Engineering, Integrated Circuitry, and Agricultural Technology. The EPZ sits on 20 sqkm and offers investors the ability to offset VAT and Import Duties on products received into the Zone for processing and subsequent export. The zone is close to the major city of Yining, which provides most of the labor. There are air connections from Yining linking it to several major Chinese and Kazakh cities, and train services through to Khorgos in Kazakhstan, and Urumqi, Xinjiang Provinces’ provincial capital city. See also: New Special Economic Zone In Yili Near Kazakhstan Border
Website: http://www.xjhegs.gov.cn/

Khorgos Eastern Gate Special Economic Zone (Kazakhstan)
The Khorgos Eastern Gate SEZ was established in 2011 and sits just 15 km from the Chinese border. It covers 46 square km, including a 1.3 sq km waterless port, a 2.25 sq km logistics park, a 2.24 sq km industrial area and the Atenkeri railway changing station, which converts container bogeys onto the Kazakh rail gauge, which operates a different width to China rail. The SEZ was designed for the development of warehouse logistics and to manage other areas such as food product production, textile manufacturing, chemicals, mechanical equipment, and related businesses. It is on the main China-Europe rail link, coming in from Yining, and also has rail connections onto the Capital, Nur-Sultan. Businesses operating in the Eastern Gate SEZ are exempt from import tariffs, land tax, property tax and value-added tax. Kazakhstan is also a member of the Eurasian Economic Union, providing manufacturers based there with Free Trade access to markets in Russia in addition to Armenia, Belarus and Kyrgyzstan.
Website: http://www.sezkhorgos.kz/lang/eng

Aktau Special Economic Zone (Kazakhstan)
The Aktau SEZ lies on Kazakhstan’s Western coast on the Caspian Sea. Formed in 2002, it comprises significant port facilities to accommodate ever larger quantities and more diverse types of cargo. The intent is for cargo to transit by ship over the Caspian Sea and then by rail through Azerbaijan and Georgia for delivery in Turkey and beyond. This new route was made possible by the opening of a railway connecting Georgia and Turkey in 2014. The SEZ provides processing facilities, warehousing, customs, a bonded zone, and exempts businesses operating in it from import duties, land and property tax and VAT. It is a major hub for Chinese goods transiting overland to the Caucasus, Turkey and EU. See also: Aqtau Port, Kazakhstan’s Caspian Sea Belt & Road Window To Europe.
Website: https://www.sez.kz/en/

Alat Free Trade Zone (Azerbaijan)
The Alat FTZ is based near Azerbaijan’s Capital City and major Caspian Sea Port of Baku, and comprises Baku International Sea Port as well as soon to be opened Free Trade facilities. The FTZ was instigated by Presidential decree in 2016. To date, the UAE has invested US$500 million into the project, which is expected to become the largest logistics zone in the Caspian region. It will offer comprehensive logistics services to international businesses, serv­ing as a major regional intermodal distribution hub. Taking into account that many manufacturers now prefer to put the final touches onto their products at distribution centres such as FTZ’s nearby consumer markets, the provision of value added logistics services at the Alat FTZ becomes significant. This will generate non-oil trade for Baku Port at Alat and Azerbaijan, and also position it as a regional logistics leader with all three main services of import/export, transit shipment and logistics. Tax incentives are still be be finalized but can be expected to include duty free imports, VAT exemptions and the standard EPZ/SEX tax incentives. The Alat FTZ will link directly to the Baku-Tbilisi-Kars railway, providing direct transit for goods arriving from China and Kazakhstan en route to Turkey and Europe. See also: Azerbaijan Developing As A Regional Hub For The Belt & Road, Eurasian Economic Union and European Union.
Website: https://portofbaku.com/en/Alyat-Logistics-and-Trade-Zone-ALTZ/

Poti Free Industrial Zone (Georgia)
The Poti FIZ was established in 2011, and includes 3 sqkm of land providing facilities in industrial, logistics, chemical and metallic processing. Sited in Eastern Georgia close to Baku, it is connected via road and rail to the Baku-Tblisi-Kars network and therefore to Azerbaijan and Turkey. It also offers routes south through to Armenia, which Azerbaijan and Turkey do not provide due to on-going border disputes. International businesses operating in the zone are exempt from Import-Export duties, Corporate Income Tax, Dividends Tax, and VAT. Instead it levies a 4% import-export duty for goods entering the Georgia market. It is connected to the Georgian capital, Tbilisi, (which also has a FTZ). See also: The Baku-Tbilisi-Kars Railroad
Website: http://www.potifreezone.ge/

Hualing-Kutaisi Free Industrial Zone (Georgia)
Managed by the Chinese SOE Hualing, the HKFIZ is based near to Kutaisi city in Western Georgia, one of the more important cities in the country. It is near the Port of Batumi from which goods can be shipped to the European Union. The FIZ deals mainly with wood and stone processing, furniture manufacturing, automotive, and metalworks. Kutaisi is sited on the main Georgian rail line and has an international airport. Batumi is on one of the routes of China’s proposed Eurasian Land Bridge which provides an eastern freight link to China via Azerbaijan and the Caspian Sea, and a western link by ferry to Ukraine and on to Europe and EU member states such as Bulgaria and Romania.
Website: https://hualingfiz.ge/

East Anatolia Free Trade Zone (Turkey)
The East Anatolian FTZ is based in Eastern Turkey. The East Anatolian region is the largest in Turkey and borders Georgia, Armenia, Iran and Iraq, making it an ideal base for export processing and onto markets in the Caucasus and Persia, in addition to transiting Turkey and heading West towards Europe. It is near the major city of Erzurum, itself a terminal and processing centre for LNG piped in from the Caspian Sea and bound for Europe. It has a major airport, is linked to the national rail network, and has significant road connectivity across the country. It should be noted that Turkey has a trade agreement with the EU that permits goods in free circulation can be sent to Turkey or to the EU countries from the free zones without any customs duty payment. Moreover, no customs duty is applied on the goods of third country origin at the entrance into the free zones and exit to the third countries. This provides additional tax and trade advantages as follows:

  • Companies are %100 exempt from Corporate Tax (%20) and Income Tax (%15-%35).
  • Free Zones are considered to be outside of the customs border, no Customs Duty, Value Added Tax (VAT) or KKDF (%6 over the credit payments) is applied on the goods that enter the zone.
  • Companies that sell at least %85 of their products abroad are %100 exempt from the income tax payable over salaries of employees.
  • Due to the Custom Union Agreement between Turkey & EU, Turkish origin goods are in free circulation in EU Market (No Tax between TR & EU)
  • Companies can freely transfer their profits and earnings to Turkey or any other country.
  • As Free Zones are outside of the customs border, companies can purchase good from Turkey for export prices. (No VAT)
  • Infrastructure services are provided exempt from VAT (Electricity, water, Gas, telecommunication)
  • Companies are free to bring second hand (used) machinery to the Free Zones and there is no age limitations for the importation of second hand (used) machinery

The European Free Trade Zone (Turkey)
The Avrupa Serbest Bölgesi (ASB) is a Free Trade Zone that includes a multi-sectoral industrial site, established in 1999, it is located in the Çorlu district of Tekirdağ in European Turkey, with an area of 2 sq. km. More than 150 companies from all over the world – such as 3M, Foxconn, Polyplex Resisns, Indorama, Bekaert Textile, Flamaerotec and MTU Motor have invested into the European Free Zone, where 4,000 people are currently employed.
Website: http://www.asb.com.tr/ENG/about-us

As can be seen, the trade and tax infrastructure to allow goods to be shipped in, processed, and then exported duty free is largely in place right along the Belt & Road’s most direct Eurasian land route. Some zones, such as those in Georgia and Turkey, even go as far as exempting companies from paying any taxes whatsoever. Listed above I have included just the zones on each specific border. In fact, these countries have several of these zones, and they can also offer alternatives for businesses not needing to be based on borders and for those operating in other cities. A basic breakdown of the numbers of such zones is as follows:

Operational Free Trade Zones Along The China-Turkey Eurasian Land Bridge
Country Number of Zones
China 20*
Kazakhstan 12
Azerbaijan 1
Georgia 3
Turkey 21

*including six newly announced FTZ to be sited along national borders. See: China Announces Free Trade Zones In Six Border Provinces

The development of these Free Trade Zones across the Eurasian Land Bridge illustrate exactly what is happening along the route and the new, low cost manufacturing locations and faster supply chain opportunities that this delivers. It is certainly true that Chinese companies are well aware of this and are already piling in along the Belt & Road Initiative to take advantage of lower operational costs than those attainable in China, and shift production along the Belt & Road routes. The advantages of this are slowly starting to be understood by local businesses in Kazakhstan, Azerbaijan, Georgia and Turkey. The question is when European manufacturers will catch on and start to engage with the Belt & Road routes and Free Trade Zones to both service China – and Europe.

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About Us

Silk Road Briefing is produced by Dezan Shira & Associates. The firm has been operational throughout China, ASEAN, India and Russia since 1992 and assists foreign investors throughout the Eurasian region. Chris Devonshire-Ellis is the Practice Chairman, and provides Management and Corporate advisory and strategic analysis to MNC’s and Governments interested in China’s Belt & Road Initiative. For assistance please email silkroad@dezshira.com or visit us at www.dezshira.com

 

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