China launches free-trade experiment at port Hainan

Chinese officials are promoting the launch of a free-trade port on the tropical island of Hainan as a major step in opening the economy to foreign investors, even as global trade tensions rise and protectionism increases elsewhere.

Officials describe the transition to what they call the world's largest free-trade port as a "substantial leap" in China's efforts to open its markets to foreigners. The move, which took effect in December, allows most goods to enter the island without tariffs and offers lower taxes for companies and high earners, says the Economist.

The free-trade port (FTP) covers an area nearly the size of Taiwan and is about 30 times larger than Hong Kong. Some analysts initially speculated that Beijing aimed to create a new Hong Kong-style hub after President Xi Jinping announced the plan in 2018, though officials say Hainan's ambitions are more limited.

Under the new rules, 74% of goods can enter Hainan tariff-free. Products can be shipped to the mainland without levies if they undergo processing on the island that adds at least 30% of their value. Taxes on firms in strategic sectors and on high earners are capped at 15%, compared with rates of up to 35% and 45% on the mainland. Citizens from 86 countries, including the United States, are eligible for visa-free entry.

Despite policy support, Hainan faces challenges in shedding a long-standing reputation as an economic backwater. Designated China's only province-wide special economic zone in 1988, it has struggled to deliver sustained growth beyond tourism.

In 2024, Hainan's GDP per capita was about 76,000 yuan ($10,900), below the national average and behind most other special economic zones. The province's total GDP, about $114 billion, was among the lowest in China, hindered in part by limited infrastructure links to the mainland.

Supporters argue the island's geographic isolation could be an advantage, allowing Beijing to test reforms without disrupting other parts of the country. One closely watched pilot allows firms to apply for less restricted internet access, enabling users to visit sites such as Google and X that are blocked on the mainland.

President Xi has described the creation of the FTP as a "landmark" move to promote "an open world economy." Li Daokui, a Tsinghua University professor and government adviser, said the experiment would be closely monitored.

"This youngest and bravest student in a cohort is given permission to swim in the deep water," Li said. "Then the whole class would watch what Hainan would do."

Medical tourism is one area the province hopes will benefit. In Boao Hope City, private hospitals are allowed to use foreign-approved drugs and devices not yet authorised in China. Some facilities have struggled to attract patients, while others cater to wealthy Chinese clients.

Manufacturing firms have also shown interest. Mixue, a Chinese beverage chain, has opened a factory to import coffee beans tariff-free and sell processed products on the mainland without additional duties. Swire Pacific is building a Coca-Cola bottling plant for the China market.

However, some executives remain sceptical. "The business case is just not there," said an auto industry executive, citing a lack of talent and well-integrated supply chains.

Local authorities have sponsored visits for potential investors. Lei Jun moved his video-game design firm from Fujian province to Hainan after such a trip, saying he was "won over by the climate and subsidies."

Service industries may offer more immediate opportunities. Chi Fulin, president of the China Institute for Reform and Development, said "Hainan will lead the opening up of the country's service sector."

But he cautioned that change would take time. "You might say that Hainan, where people wear down jackets on top and flip-flops below, has a lot of inertia," Chi said. "Changing these habits is a long-term process. But if the overall environment changes drastically, if it snows heavily, can you still wear flip-flops?"