China sealing Hainan customs borders to make full free trade port

Beijing has moved to seal Hainan’s customs borders and turn the island into a full-fledged free trade port (FTP), a move that has sharply divided Chinese and overseas analysts over its economic and geopolitical implications.

Under the new framework, the Hainan FTP will implement arrangements for zero tariffs as part of island-wide special customs operations. Manufacturers operating in Hainan will be able to import raw materials tariff-free. At the same time, products that meet a 30% local value-added threshold will be allowed to enter the Chinese mainland without tariffs.

The scheme, which kicked off on December 18, also expands Hainan’s role as a duty-free shopping hub. Luxury goods will be sold tax-free to any Hainan or foreign consumer who can show a record of overseas travel within the previous 12 months, subject to an annual spending cap of 100,000 yuan (about US$14,000) per person. That will extend policies that in the past applied mainly to travelers leaving Hainan for the Chinese mainland.

At the heart of the scheme is a three-part model officials describe as “opening the front line, controlling the second line, and allowing free flow within the island.”

• The front line refers to Hainan’s boundary with the outside world, where zero tariffs apply.
• The second line marks the customs boundary with the Chinese mainland, where goods flows are closely monitored to prevent disruption to mainland markets.
• Free flow within the island refers mainly to the movement of people.

Officials say the construction of the Hainan FTP follows a clear, phased roadmap:

• By 2025: establish a basic policy and institutional framework centered on trade liberalization and investment facilitation.
• By 2035: further mature the free trade port’s institutional system and operational model.
• By mid-century: fully develop Hainan into a high-standard free trade port with strong international influence.

Chinese analysts said the package could help the country attract foreign direct investment, stimulate external trade and position Hainan as a gateway to more closely link China with global markets, especially ASEAN countries.

“Opening up the front line allows goods, capital and people to move freely across borders,” says Yu Fenghui, an adjunct professor at Huazhong University of Science and Technology. “About 74% of imported goods are now on the zero-tariff list, covering almost all production equipment and raw materials. The policy is effectively turning Hainan into a world-class low-cost production hub.”

“The model is not a simple replication of Singapore or Dubai. The main difference is the second-line control,” Yu says. “By setting up 10 regulatory ports and using smart inspections that allow clearance in about two minutes, authorities are building a firewall against arbitrage while keeping the island open.”

He says Hainan’s opening-up would mainly benefit high-end manufacturing, modern services and the digital economy, with aircraft maintenance, new-energy vehicles, healthcare, education and data-driven sectors as early gainers.

“For many companies, scrapping import tariffs, value-added tax and consumption tax has a significant impact,” says a Chinese commentator with China Central Television (CCTV). “After the customs seal, the number of zero-tariff items in Hainan has surged from about 1,900 to more than 6,600, with its proportion to all items rising from 21% to 74%, significantly lowering raw material and production costs.”

“If you import a large batch of chestnuts to Hainan, as long as their added value exceeds 30% your chestnut products can be sold into the mainland market tariff-free,” he says.

“Hainan has clear advantages in helping digital content go global, especially in game exports and cross-border data processing,” he says. “With direct overseas cloud services and dedicated international data links in place, hundreds of games developed or processed in Hainan are now reaching players in overseas markets, strengthening the island’s role as a hub for digital content exports.” 

However, some overseas commentators said the scheme is doomed to fail amid the worsening diplomatic relationships between China and the West. 

“Beijing’s wolf-warrior diplomacy has led to a broad deterioration in China’s external ties,” Ngan Shun-kau, a Canada-based Hong Kong commentator, writes on a social media post. “Capital from the United States and other advanced economies is disengaging, foreign companies are leaving and China’s external trade is drying up.” 

He says a free trade zone is meant to attract foreign investment and trade, but many foreign investors now want to keep their distance from China. 

“Besides, the mainland economy is in a prolonged downturn, with weak consumption and little prospect of an import recovery, severely limiting the market for foreign goods,” Ngan says. “Tighter border controls between Hainan and the mainland will push up prices on the island and inevitably lead to more smuggling activities.”

Geopolitical goal

Beijing’s plan to build Hainan into a high-standard FTP has been years in the making. Since the idea was first raised in 2018, the project has been framed as a key platform for testing deeper opening-up policies on China’s own terms.

From the central government’s perspective, the urgency of advancing Hainan has grown since US President Donald Trump first launched a trade war against China in 2018 and intensified it this year. The current 55% US tariffs imposed on Chinese goods have forced many manufacturers to shift production to Vietnam and other ASEAN countries.

Some observers said Hainan’s opening up may not attract many manufacturers, as those serving the US market are likely to move to Southeast Asia while others will stay in established hubs in the Pearl River Delta and the Yangtze River Delta. They added that savings from cheaper imported raw materials in Hainan can’t offset the costs of relocating factories.

Zhang Jianping, deputy director of the Academic Committee at the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce, said the longer-term objective of the Hainan FTP is to help China meet the requirements of high-standard international trade agreements, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Digital Economy Partnership Agreement (DEPA). 

“In 2021, China put forward applications to join both the CPTPP and DEPA,” Zhang said. “Hainan will serve as a testing ground, gradually stepping up exploration in these areas through pilot programs.”

“The global trading system is under unprecedented strain, as some developed economies turn toward de-globalization, protectionism and unilateralism,” he said. “This creates serious challenges for developing economies, including China. China and many countries in the Global South will continue to support economic globalization and regional cooperation.”

Zhang added that Hainan’s hardware and infrastructure are already advanced, but its service sectors remain weak. He said Hainan should learn from Shenzhen’s experience in managing an open economy efficiently.

The CPTPP emerged from the original Trans-Pacific Partnership (TPP) following the US withdrawal in January 2017. The remaining 11 economies, including Japan, Australia and Canada, went on to form the CPTPP, which aims to promote high-standard rules on trade, investment and digital issues. In December 2024, the United Kingdom became the latest country to join it.

The more pressing concern for Beijing is that Taiwan also applied to join the CPTPP in 2021. In recent years, Taiwan has accelerated domestic reforms to align itself with CPTPP standards. It is widely believed that if Taiwan becomes a CPTPP member, China will probably be excluded.

Zheng Yongnian, director of the Institute for International Affairs at Qianhai, said Hainan needs to further align with global rules, such as the CPTPP, while strengthening its links with ASEAN and the Chinese mainland, particularly the Guangdong-Hong Kong-Macao Greater Bay Area. He said Hainan should learn from Hong Kong’s regulatory and institutional practices to develop its services sector.

Read: China’s big layoff wave now buffeting its tech sector

Follow Jeff Pao on Twitter at @jeffpao3