ACI’s latest research finds that the development of the Hainan Free Trade Port (FTP) is hindered by its weak economic fundamentals, competition from established Pilot Free Trade Zones (PFTZs) and limited institutional capacity. Building clear strategic positioning, executing policies robustly, facilitating collaboration with key trade partners and coordinating with other free trade zones, will benefit its development.

Hainan FTP provides a litmus test of China’s willingness and actual commitment to explore liberalisation and regional economic integration. The central government has granted it more policy flexibility than the other PFTZs in trade, investment, and taxation.

The “zero-tariff” policy is a notable example of policy flexibility. The customs of Hainan FTP operates independently from the rest of China through a “first-line” and “second-line” special customs supervision system. As shown in Figure 1, the “first line” refers to the customs control when goods enter Hainan from overseas. All goods, unless specified on the prohibitive or restrictive lists, will be exempted from tariffs and be able to move freely between the overseas and Hainan FTP. The “second line” controls goods entering mainland China from Hainan FTP, which are subject to mainland customs procedures and duties. However, to incentivise manufacturing for enterprises in the encouraged industries in Hainan, goods are relieved of import tariffs, if the imported materials undergo processing in the FTP that increases their value by more than 30%.

There have also been efforts to align the FTP’s zero tariff policies with regional trade arrangement. For example, to guide businesses in utilising both the FTP policies and benefits from the Regional Comprehensive Economic Partnership (RCEP), Hainan identified 695 export and 241 import product categories benefiting from RCEP tariff concessions, along with 1,674 product categories covered under the FTP’s zero-tariff policy. These would facilitate cost optimisation, enhance industrial linkages between Hainan and its key trading partners, and enable businesses to fully capitalise on the combined advantage

Despite these policy initiatives, the development of Hainan FTP faces tough reality checks. For one, Hainan’s economic scale remains limited, which hinders the development of the free trade port. For example, it contributed only 2% of China’s total utilised FDI and ranked at the bottom in GDP among pilot zones in 2023. In terms of trade, though services trade increased sharply from 2020 to 2023, much of the increase falls outside the high-value-added sectors, such as the use of intellectual property and information and communication.

The FTP development also faces significant institutional challenges. The first challenge is the dilution of policy advantages. For example, other PFTZs’ Foreign Investment Negative List has evolved to match the standards of the FTP version, which erodes Hainan’s previously distinctive market access liberalisation strategy. Likewise, tariff exemptions for imported goods processed with at least 30% value-added, previously limited to Hainan, were extended to the Guangdong-Hong Kong-Macao Greater Bay Area. If Hainan cannot deliver comparable results with other special economic zones, it risks losing the central government’s unique policy support.

Further, Hainan’s strategic positioning within China’s network of PFTZs remains ambiguous. Policy directives in Hainan predominantly emphasise its pilot function, with insufficient attention to local developmental imperatives. This has led Hainan to prioritise testing and developing advanced institutional architectures to stand out in the pilot regions without adequately addressing its fundamental economic constraints and also jeopardises Hainan’s effectiveness as a reform pilot in the long run.

In conclusion, Hainan FTP’s growth is hindered by its weak economic fundamentals, including limited FDI inflow, international trade and GDP, and institutional capacity. The dilution of its policy advantage and ambiguity of strategic positioning adds further challenges to its development. We argue that Hainan must enhance its cooperation with its major trading partners – such as ASEAN economies through the blue economy projects – as well as strengthen its positioning within China’s PFTZ network to fully unlock its potential.

By HUANG, Yijia

Researchers: XU, Ni, LIU, Jingting