On December 18, 2025, the Hainan Free Trade Port (FTP) officially commenced island-wide customs closure operations. This initiative is far more than a simple policy adjustment; it represents a comprehensive, systematic, and institutional upgrade, designed to transform Hainan into a new gateway of “the highest level of openness” that connects China with the world, particularly Southeast Asian markets.
Its impact will extend well beyond the island, affecting global manufacturing layouts, port competitiveness, and regional economic integration.
I. Definition and Core Policy Framework of Island-wide Customs Closure
“Island-wide customs closure” does not signify isolation but a greater degree of openness. Its core is the implementation of a special customs supervision system defined as “eased access at the first line, controlled access at the second line, and free flow within the island.”
- “Eased access at the first line” refers to the boundary between Hainan and overseas. Except for goods explicitly prohibited or restricted by law, other commodities can move in and out freely with minimal customs procedures.
- “Controlled access at the second line” refers to the boundary between Hainan and the Chinese mainland. Goods entering the mainland from Hainan are subject to standard import regulations, primarily for taxation and compliance, ensuring national tax revenue security and market order.
- “Free flow within the island” means goods, capital, personnel, and other factors of production can circulate freely within Hainan.
The supporting policy framework delivers breakthroughs in key areas:
- Expanded “Zero-Tariff” Coverage: Post-closure, “zero-tariff” eligible goods expand from about 1,900 to approximately 6,600 tariff lines, increasing coverage from 21% to 74% of total import/export items, encompassing most production equipment and raw materials. This exemption applies to import tariffs, import VAT, and consumption tax, potentially saving enterprises about 20% in tax costs on imported equipment.
- Optimized “Tariff Exemption for Value-added Processing” Policy: One of the most transformative measures, this policy sees significantly relaxed restrictions (e.g., on core business income ratios) and now allows cumulative value-added calculation across upstream and downstream enterprises. This makes it easier for businesses to meet the “over 30% value-added” threshold for tariff exemption when selling finished products into the mainland market. Companies can ship primary products or components to Hainan for substantial processing; if the value-added meets the standard, the final products can enter the mainland market tariff-free.
- “Dual 15%” Tax Incentives as a Long-term Advantage: Encouraged industries registered and substantively operating in the Hainan FTP enjoy a reduced 15% corporate income tax rate. Eligible high-end and in-demand talents benefit from an individual income tax exemption for the portion exceeding 15%, providing long-term, stable fiscal predictability.
- Enhanced Trade and Investment Liberalization/Facilitation: Measures include implementing a negative list for cross-border trade in services, relaxing foreign investment access, adopting a “commitment-based registration system” for business setup, and streamlining procedures. A visa-free policy for nationals of 59 countries is in effect, with further eased entry-exit restrictions for business personnel.
II. Strategic Opportunities for Global Supply Chains and Manufacturing
Hainan’s customs closure provides global supply chains with a cost- and efficiency-advantaged “super interface” into the Chinese market.
- Reshaping “China-ASEAN” Supply Chain Geography: Situated at the nexus between China and Southeast Asia, Hainan is the nearest maritime gateway for China’s southwestern and central-western regions, saving an average of about 10 days compared to eastern coastal ports. Post-closure, Hainan evolves from a geographical “corridor” to an institutional “hub,” poised to become a preferred transit and processing base for ASEAN raw materials/agricultural products entering China and for Chinese manufactured goods bound for ASEAN.
- Dual Solution for Global Manufacturing: “Cost Restructuring” & “Market Access”: For multinationals in sectors like high-end manufacturing, biopharmaceuticals, and green tech, Hainan offers a unique proposition:
- Cost Restructuring: Leveraging zero-tariff imports of high-end equipment and raw materials, combined with the “dual 15%” tax incentives and competitive operational costs, enables the establishment of highly cost-competitive production bases.
- Market Access: The “value-added processing” policy facilitates meeting rules of origin requirements for mainland market entry, effectively navigating traditional trade barriers.
- Catalyzing Emerging Industrial Chains and Innovation Clusters: Policy incentives favor high-tech sectors. Hainan, prioritizing future-focused industries like the planting industry, deep-sea technology, and aerospace, has attracted multinational R&D centers. This is driven not only by cost advantages from duty-free hardware imports but also by Hainan’s institutional alignment with high-standard international trade rules. Through over 110 pilot initiatives, Hainan is proactively integrating with frameworks like the CPTPP and DEPA, ensuring better alignment for cross-border R&D flows and intellectual property protection.
III. Implications for Hong Kong and Singapore
Hainan’s rise poses structural implications for traditional Asia-Pacific hubs—Hong Kong and Singapore—driving a regional functional shift towards “competition-complementarity.”
- For Hong Kong: Towards Functional Complementarity and Upgrading: Short-term competition exists in goods trade, duty-free consumption, and some professional services. However, core strengths differ fundamentally:
- Hong Kong excels in its common law system, internationalized financial markets, free capital flow, and status as a global offshore RMB hub—deep-rooted institutional “soft power.”
- Hainan offers emerging institutional dividends backed by the vast domestic market, competitive trade/manufacturing costs, and strategic geography.
A rational trend is cross-border synergy: “Hong Kong services + Hainan manufacturing/market access.” A “Hainan-Hong Kong Cooperation Memorandum” is signed. From January-July 2025, Hong Kong’s utilized investment in Hainan grew 99.3% year-on-year. Future supply chains could follow a “Hong Kong ordering – Hainan production – global sales” model, with Hong Kong focusing on international finance, legal, arbitration, and high-end business services, while Hainan handles manufacturing, processing, and mainland market access.
- For Singapore: Challenging the “Transshipment Hub” Model, Driving Service Upgrades: Hainan directly challenges Singapore’s traditional transshipment model.
- Direct Competition: Cases exist of Indonesian cargo ships routing directly to Hainan’s Yangpu Port instead of Singapore, saving up to 32% in costs. Yangpu’s customs clearance efficiency (e.g., e-declarations processed within an hour) is competitive. The “value-added processing” policy attracts cargo previously only transshipped or warehoused in Singapore for substantive processing in Hainan.
- Structural Impact: With entrepôt trade constituting about 90% of Singapore’s total trade, the model is challenged when sufficient China-ASEAN trade volume enables direct shipping to policy-advantaged hubs like Hainan that offer added value. This pressures Singapore to evolve from a “global transshipment station” to a “global high-tech shipping and supply chain management center,” focusing on high-end services like green shipping, digital trade, and maritime law.
Notably, competition fosters cooperation. For example, PSA International has signed agreements with Hainan, operating stable direct shipping routes. The future Asia-Pacific shipping network may thus evolve from a Singapore-centric “hub-and-spoke” model to a “multi-nodal network” including Hainan and other Chinese coastal ports.
IV. Conclusion: Towards a More Diverse and Resilient Era for Global Supply Chains
The island-wide customs closure of the Hainan FTP represents a proactive offer of “certainty” and “openness dividends” by China amidst rising anti-globalization trends.
- For China, it creates a strategic junction for domestic and international economic circulation, using high-level openness to spur domestic reform and providing a pivotal platform for China’s deeper participation in Asia-Pacific economic integration.
- For Global Supply Chains, it adds a vital “China option,” offering multinationals a new solution for optimizing Asia-Pacific and global production footprints, thereby enhancing supply chain diversity and resilience.
- For Regional Economies, it is altering the industrial and trade geography of East and Southeast Asia, fostering closer value-creating regional production networks, while prompting mature centers like Hong Kong and Singapore to reposition and upgrade their service offerings.
