Beyond Zero Tariffs – What Hainan’s New Customs Zone Means for Industry, Investors, and the Island

December 18, 2025 Posted by China Briefing Written by Arendse Huld Reading Time: 12 minutes

Hainan customs zone launches on December 18, introducing a two-line tariff system that exempts most imports from duties within the island. This policy aims to position Hainan as a processing and trade hub, attracting industries reliant on imported inputs. For investors, the zone offers strategic access to regional supply chains and the Chinese mainland.

On December 18, Hainan will launch an island-wide special customs zone in an ambitious effort to transform the island into a key processing and trade hub.

The customs zone will implement a new “two-line” tariff system in which 74 percent of goods entering Hainan from abroad (through the “first line”) will be exempt from import tariffs, VAT, and consumption tax. While these goods can be circulated and used freely within the province itself, if they are shipped to other parts of China (through the “second line”), they will be subject to the same import duties and taxes as if they were coming from outside of China – unless substantially transformed on the island.

Expanding zero-tariff coverage to around 74 percent in the Hainan Free Trade Port is not just about lowering import costs. More importantly, it reshapes firms’ location choices and value-chain positioning within China’s dual-circulation framework. – Linjia Zhang, Associate Professor of Economics, International Business School Suzhou (IBSS), Xi’an Jiaotong-Liverpool University.

Beyond building a reputation as a duty-free and low-tax destination, Hainan is positioning itself as a key processing hub within Southeast Asia’s trade networks. The two-tiered tariff structure seeks to attract investment in value-added processing and specialized activities by lowering the cost of foreign materials and technologies, rather than simply transforming the island into a transshipment hub. For industries that require significant imported inputs, such as pharmaceuticals, food processing, and light manufacturing, Hainan now provides both seamless connectivity with regional supply chains and access to both the Chinese mainland and emerging markets in Southeast Asia.

As a free trade port operating “within the territory but outside customs,” Hainan’s policies are more forceful, broader in scope, and more coordinated [than other FTZs]. […] Hainan’s successes are likely to be first promoted to other FTZs in China, and then spread across the country. – Haili Wu, Associate Professor of Practice, International Business School Suzhou (IBSS), Xi’an Jiaotong-Liverpool University

For this article, we spoke to Linjia Zhang, Associate Professor of Economics, and Haili Wu, Associate Professor of Practice, at the International Business School Suzhou (IBSS), Xi’an Jiaotong-Liverpool University.

What will the customs zone do for Hainan?

Hainan has historically been a backwater, lagging far behind the southern manufacturing powerhouse of Guangdong that lies just 20 kilometers to its north across the Qiongzhou Strait. Today, it still has one of the country’s smallest provincial populations and economies. GDP per capita in 2024 reached RMB 76,085 (US$10,796), just over a third that of Beijing, while annual disposable income per capita reached RMB 34,829 (US$4,942) – well under half Beijing’s level.

Wages in Hainan are also relatively low, falling below national averages. Average urban public sector wages reached RMB 117,443 (US$16,665) in 2024, below China’s average of RMB 124,110 (US$17,611), while the private sector, which nationwide employs over 80 percent of the urban workforce, paid an average of RMB 65,299 (US$9,266), compared to the national average of RMB 69,476 (US$9,859).

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The government hopes that the expansion of duty-free trade and preferential tax policies for businesses will spur the island’s economic development by attracting investment and boosting consumption, in particular in industries such as pharmaceuticals, food processing, and tourism.

The island already offers a range of preferential measures for businesses and talent. These include a 15 percent corporate income tax (CIT) rate for companies in encouraged industries – below China’s standard rate of 25 percent – as well as a lowered individual income tax (IIT) rate for high-skilled talent.

Since December 2020, the island has allowed zero-tariff imports of certain raw and auxiliary materials included on a positive list (known as the Hainan Free Trade Port “Zero-Tariff” Raw Material List), provided the materials are for the use, processing, or services carried out by Hainan-registered entities. In September 2024, the Boao Lecheng Pilot Zone – itself an experimental area for pharmaceutical production and healthcare services – implemented interim exemptions on import duties and VAT for eligible medical institutions, educational institutes, and research entities importing approved drugs and devices for use or sale within the pilot zone.

These policies have already had a profound impact on the island’s economy and industrial landscape. In 2024, Hainan saw the establishment of 2,072 new foreign-invested enterprises (FIEs), an increase of 19.8 percent from 2023. The number of foreign trade companies has also increased significantly, exceeding 74,000 by the end of 2024, a 19.8-fold increase from 2018.

Accordingly, nowhere has the change been more notable than in foreign trade, which has boomed in the five years since the launch of the free trade port. Between 2020 and 2024, total two-way trade almost tripled in nominal terms from US$12.6 billion to US$39 billion and exhibited a CAGR of around 18.81 percent in real terms.

In 2024, Hainan, one of the few regions of China that runs a trade deficit, imported a record US$24.13 billion in goods, reflecting the impact of the zero-duty policies. Exports have also surged, almost tripling from US$5.1 billion in 2021 to US$14.9 billion in 2024.

While processing trade still accounts for a relatively small share of overall foreign trade – just under 8 percent in 2024 – the segment has grown rapidly in recent years, increasing 26.5 percent year-on-year in 2024 in US dollar terms.

According to the Deputy Director and Spokesperson of Haikou Customs, Zhao Junlun, Hainan has imported RMB 21.5 billion (US$3.1 billion) worth of goods under the zero-tariff list since its implementation, with RMB 4.1 billion (US$581.8 million) fully exempted, benefitting 525 companies.

A testbed for liberalization policies

All of China’s 22 free trade zones act as testing grounds for the country’s wider market opening and trade liberalization policies, with pilot programs adapted to each FTZ’s local conditions and industrial makeup.

However, Hainan is uniquely positioned to pilot policies that are “more forceful, broader in scope, and more coordinated” than elsewhere, according to Wu. Located near the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) – one of China’s key economic engines – Hainan is ideally located to absorb technological, managerial, and service-sector spillovers from Hong Kong. As an island – and the largest FTZ by area — Hainan offers clear functional positioning and risk-isolation capacity for localized trade policies. All of this makes it an ideal location for the “closed-loop” customs operations, as well as more radical reforms to the financial system and the internationalization of the RMB.

Both Wu and Zhang emphasize that this also means that many of Hainan’s bolder policies cannot be replicated wholesale in other parts of China. Instead, its role in this regard is to evaluate which institutional tools can be implemented effectively and without causing adverse effects on the local economy and society, with implementation being “differentiated, phased, and risk-controlled”.

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Located near the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) – one of China’s key economic engines – Hainan is uniquely positioned to absorb technological, managerial, and service-sector spillovers from Hong Kong. As an island, Hainan also offers clear functional positioning and risk-isolation capacity for localized trade policies. All of this makes it an ideal location for controlled zero-tariff and low-tax regimes, which are therefore also less likely to be replicated outright in other regions.

The Hainan pilots and policies that are most likely implemented elsewhere are targeted governance instruments, such as negative lists for market access, streamlined customs supervision, digitalized clearance, and pilot programs for facilitating cross-border flows of data, capital, and talent. “These tools reduce institutional friction while posing manageable fiscal and regulatory risks, making them suitable for gradual replication”, says Zhang.

A clear example of this is the negative list for cross-border trade in services. First implemented in Hainan starting in mid-2021, the list outlines the services overseas providers are prohibited from offering through cross-border supply, consumption abroad, or the movement of natural persons. Unlisted activities are presumed open, and unlike the negative list for foreign investment, this framework regulates service provision without requiring a commercial presence in China.

In April 2024, following the success of Hainan, China’s Ministry of Commerce (MOFCOM) released the country’s first-ever nationwide negative list for China’s cross-border services trade, as well as a second list applicable specifically in FTZs.

According to Zhang, “The negative-list mechanism is particularly significant because it helps Hainan align with high-standard international economic rules, including those reflected in CPTPP-equivalent frameworks.”

Hainan will therefore act as “a reference point for differentiated regional opening paths”, allowing policymakers to identify the conditions under which different liberalization measures are viable, and thereby to adapt Hainan’s successful policies and measures to the local advantages and industrial strengths of each area.

Which industries will benefit from zero-tariff imports?

The industries most likely to benefit from the new customs zones are those that rely heavily on imports and can add significant local value through processing, services, or consumption. Sectors that previously faced high tariffs on imported goods, but have low logistics costs may find new opportunities as input material costs decrease.

Hainan has already been cultivating many of these industries through its low-tax regime and targeted zero-duty policies, with several sectors seeing a major boost since the launch of the free trade port in 2020.

These include sectors such as pharmaceuticals and healthcare, aerospace, the marine economy, food processing, renewable energy equipment, and new energy vehicles, and digital economy hardware such as datacenters and computing equipment. These sectors stand to benefit from lower import costs for input materials and components, allowing them to enhance their competitive edge in both domestic and international markets. In addition to processing, services sectors, such as tourism and cultural services, will also see positive impacts, as the zero-tariff policy can lower costs for companies operating in Hainan and stimulate demand for high-quality services.

Pharmaceuticals and healthcare

The pharmaceutical and healthcare industries are clear beneficiaries of the new customs regime, as zero-duty imports will reduce the cost of inputs such as innovative drugs, advanced medical equipment, and R&D resources.

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Hainan has already been positioning itself as a hub for pharmaceuticals production and healthcare, releasing various preferential policies for the industry’s development. In September 2024, the Boao Lecheng Pilot Zone implemented interim tariff and VAT exemptions for eligible medical institutions and education and research entities importing approved drugs and devices for use or sale within the pilot zone.

The same year, the 2024 Catalogue of Encouraged Industries, which replaced the 2020 version, was expanded to include additional medical fields such as pharmaceuticals and biopharmaceuticals equipment manufacturing. The 2020 version already included several healthcare-related fields, mostly related to healthcare services such as high-end medical, rehabilitation, and nursing services, the research, diagnosis, and prevention of tropical diseases, third-party medical testing and other intermediary services and institutions, and management of medical institutions. The catalog enables companies to avail of the reduced 15 percent CIT rate if they meet certain other eligibility requirements.

The Boao Lecheng Pilot Zone also enjoys a range of other preferential policies, including a “special access policy” for urgently needed imported drugs and medical devices. This enables the import and use of internationally innovative drugs and medical devices within the zone that have already come onto the market overseas but are not yet available domestically. The policy forms part of the zone’s ambitions to provide high-quality geriatric healthcare services, as well as expand medical tourism, as the policy significantly shortens the waiting period for elderly patients in China to access potentially life-saving treatment, giving them access without having to travel overseas.

The Pilot Zone is also seeking to expand the medical tourism industry, leveraging the island’s tropical climate and reputation as a premium travel destination. The industry has already begun to take root, with the Boao Lecheng Pilot Zone attracting 413,700 medical tourists in 2024, an increase of 36.8 percent from 2023.

This policy shift is having a noticeable impact on trade in the pharmaceutical and healthcare sectors. In 2024, Hainan imported a total of US$208 million of pharmaceutical materials and medicines, an increase of 47 percent year-on-year, and US$32 million worth of medical instruments and equipment, surging 283 percent year-on-year, according to Customs data.

Meanwhile, exports of pharmaceutical materials and medicines grew 35 percent year-on-year to US$141.8 million, while exports of medical instruments and equipment surged 826 percent to US$18.6 million from 2023 levels.

Food processing and tropical agriculture

Two other strategically positioned industries are food processing and tropical agricultural deep processing, both of which are dependent on imported inputs and have strict requirements for logistics, quality control, and cold-chain systems.

Hainan has a relatively large and steadily growing agricultural industry. The output value of its plantations reached RMB 142 billion (US$20.1 billion) in 2024, an increase of 2.1 percent from the previous year, producing 6.2 million metric tons of fruit, up 4.2 percent year-on-year. This included 1.1 million tons of bananas, 942,300 tons of mangos, and 711,600 tons of pineapples. The island also produced 6.5 million metric tons of vegetables in 2024, up 2.3 percent from the prior year, and 296 million coconuts.

The agricultural and sideline food processing industry – one of the island’s “eight pillar industries” which covers the processing of a variety of agricultural products, including fruits, vegetables, grains, oils, sugars, meat, and seafood – has expanded rapidly in recent years. The industry’s added value output increased 22.5 percent year-on-year in 2024 and accelerated by 53.5 percent in the first six months of 2025 from the same period in 2024. Hainan produced almost 3 million metric tons of soft drinks in 2024, an increase of 7.8 percent from 2023, as well as 11.9 billion cigarettes.

The combination of zero-tariff imports and mature domestic processing capacity – as well as locally-produced materials and resources – is expected to be a major boon for this sector in the coming years. The industry perfectly illustrates the intent of the customs regime – turning Hainan into an important node in the food processing value chain, where high-value processes can be completed before re-export to end consumer markets or further offshore processing.

Tourism and modern services

High-end consumption and modern services, a pillar of Hainan’s economy, are similarly expected to see a boost from the special customs zone.

The tropical island has relied heavily on tourism for its economic growth in recent decades. In 2024, it welcomed a record 97.2 million visitors, who collectively spent RMB 204 billion (US$28.9 billion). This is reflected in the island’s economic makeup, in which the services industry plays a much bigger role compared to other similarly developed parts of China, which are generally more reliant on industry and manufacturing. In 2024, the added value of the services industry accounted for over 60 percent of its GDP, while manufacturing and industry accounted for just 19 percent.

The potential boost to Hainan’s services industry comes against the backdrop of a wider national push to increase domestic consumption. The 15th Five-Year Plan, the economic development blueprint for the period from 2026 to 2030, has outlined expanding consumption and domestic demand as the country’s top economic priority. According to Zhang, within this policy context, zero-tariff arrangements are intended to support service upgrading rather than simple price reductions. By enabling access to higher-quality imported goods and inputs, the policy helps improve tourism products, destination management, and the overall consumption experience, encouraging higher per-capita spending.

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The intent of the zero-tariff and low-tax regimes for tourism and services consumption in Hainan is therefore to raise the value of services and move the sector further up the value chain. Zhang notes that island tourism is naturally positioned at the premium end of the market, creating significant potential for the expansion of high-end, value-added services such as marine tourism, medical tourism, and cultural experiences.

This premium positioning is already reflected in visitor spending patterns. In 2024, the per capita spending of inbound tourists was RMB 2,099 (US$298) – the highest of anywhere in the country. This underscores both the island’s strength in high-end consumption and the scope for further growth in modern services.

Hainan as a Southeast Asian processing trade hub

The launch of the special customs zone may advance Hainan’s position as a key trade hub within Southeast Asia’s trade and logistics networks. However, its potential goes beyond merely capitalizing on existing free trade agreements (FTAs) such as the China–ASEAN FTA and the Regional Comprehensive Economic Partnership (RCEP).

Hainan’s position at the southernmost tip of China, in relatively close proximity to Vietnam, the Philippines, Malaysia, and Indonesia, makes it a natural bridgehead connecting the Chinese mainland with markets in Southeast Asia.

The distance from the island to major Southeast Asian ports is significantly shorter compared to ports on China’s east coast, with a shipment from Sanya to Kuala Lumpur taking just three days, compared to five from Shenzhen.

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According to Wu, this improves logistics efficiency by 40 percent, and these trade routes are particularly suitable for goods that are shipped in high-frequency and smaller volumes, such as tropical fruits or electronic components. She further explains that this also makes Hainan ideal as a transit hub between China and Southeast Asia, forming a more efficient two-way trade channel via routes such as the Yangpu—Ho Chi Minh City—Guangzhou Nansha sea-rail intermodal transport channel. These routes enable more efficient shipping of industrial goods, such as electromechanical products and textiles, from the Chinese mainland to Southeast Asia, and the shipping of materials such as rubber, fruits, and minerals back to China.

However, as Zhang notes, Hainan’s emerging advantages lie not just in its port capacity or geographic location, but in its ability to coordinate and organize regional supply chains, setting it apart from traditional transshipment hubs.

Whereas traditional transshipment hubs focus primarily on the movement of goods from one location to another with minimal processing, Hainan is looking to establish itself as a node within global value chains. This means that it may not handle massive volumes of goods as other major ports in the region do. Instead, it will serve a specialized role for deeper processing, assembly, and servicing products for re-export. As regional trade agreements like the RCEP further integrate supply chains across East and Southeast Asia, Hainan’s logistical capabilities, bolstered by zero-tariff incentives, are creating new opportunities for firms to redesign their routing strategies for resilience and cost optimization.

The island’s strategic position in this context also enables firms to tap into markets in both ASEAN and the Chinese mainland, leveraging the advantages of China’s huge domestic market while serving emerging markets in Southeast Asia. This flexibility makes Hainan an attractive location for companies looking to optimize their supply chains for both regional and domestic markets, particularly as trade flows within the RCEP framework continue to grow.

In addition to its potential as a logistics hub, Hainan is also set to attract a variety of shipping-related producer services, including maritime finance, supply-chain management, maintenance, and insurance. According to Zhang, these services reinforce Hainan’s role as an operational and managerial center, rather than just a physical port. As its logistical capabilities expand, Hainan has the potential to become a comprehensive trade hub that supports the entire value chain, from the movement of goods to the financial and administrative services that facilitate global trade.

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Beyond Zero Tariffs – What Hainan’s New Customs Zone Means for Industry, Investors, and the Island