How Companies Can Leverage the 30% Added Value Rule in Hainan

On December 18, 2025, Hainan officially launched its island-wide independent customs zone, expanding the scope of duty-free tariff lines to 74 percent of imports and streamlining customs procedures for inbound goods.

The new customs zone implements a two-tiered tariff system in which goods not included in a tariff negative list are exempt from import tariffs, VAT, and consumption tax when entering Hainan from abroad – the first line” – and goods that entered Hainan duty-free that are shipped to other parts of China – the “second line” – are taxed at the same rates as if they were entering from outside of the country.

However, goods that are imported to Hainan tariff-free can be exempted from import duties when being shipped to the mainland if they are substantially transformed within the province – specifically, if they achieve 30 percent added value through processing in Hainan. This opens new options for companies to restructure supply chains and reduce production costs, especially for industries that are reliant on imports and can offshore high-value segments of their production.

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Linjia Zhang, Associate Professor in Economics, and Haili Wu, Associate Professor of Practice at the International Business School Suzhou (IBSS), Xi’an Jiaotong-Liverpool University, who contributed to this article, both noted that effective use of this mechanism is centered on viewing the Hainan FTP as a compelling option for offshoring key value-added segments of the production process while retaining core manufacturing capacity on the Chinese mainland, thereby reducing costs and maintaining connectivity with the vast domestic market.

What is the 30 percent added value rule?

The 30 percent added value rule allows goods produced by encouraged industrial enterprises that contain duty-free imported materials and have 30 percent or more local added value generated in the Hainan FTP to be exempted from import tariffs when shipped to the Chinese mainland. Import VAT and consumption tax will still be levied, unless these taxes have already been paid during the goods’ circulation within Hainan.

From December 18, 2025, the Hainan FTP will cease levying import tariffs, VAT, and consumption tax on 6,600 tariff lines – up from 1,900 products exempted under previous programs – covering around 74 percent of imports. The remaining 26 percent are goods included on the List of Imported Dutiable Goods, which covers 2,323 tariff lines that are still subject to most-favored nation (MFN) tariffs. The list mostly covers goods that are produced in Hainan and other protected categories, including a wide range of agricultural goods and raw materials, textiles and articles of apparel, and vehicles and vehicle parts, among others.

“Encouraged industrial enterprises” refers to companies operating within industries included in the Catalogue of Industries Encouraged to Develop in Hainan Free Trade Port (2024 Edition, which lists 176 sectors across 14 categories, including agriculture, manufacturing, construction, tourism, and wholesale and retail.

To be eligible for duty-free treatment, the added value resulting from the manufacturing and processing of goods containing imported materials within the Hainan FTP by an eligible enterprise must reach or exceed 30 percent of the combined value of the imported and domestically procured materials.

The value-added content of goods is calculated using the following formula:

Value-added percentage = [(Domestic sales price – ∑ price of imported materials – ∑ price of domestically purchased materials) ÷ (∑ price of imported materials + ∑ price of domestically purchased materials)] × 100%

If the result is 30 percent or higher, the goods are eligible.

Definitions are as follows:

• Domestic sales price: The actual transaction price when the goods are sold to the Chinese mainland.
• Imported materials: The total cost of materials imported into China used in making the product, including transport and insurance costs up to the point of entry.
• Domestic materials: The cost of materials bought within China (excluding VAT). If the material was produced within Hainan, its value can be subtracted from the domestic material cost.

If several registered companies in Hainan are involved in processing the product at different stages (for example, one company does assembly, another does packaging), their value-added contributions can be combined. In that case, the same formula applies, but the material costs and prices from all involved companies are added together.

Which industries are best suited to this structure?

Industries that are inherently well-positioned to benefit from the two-tiered tariff structure are those that are dependent on key inputs and for which certain value-added processes can be relocated away from the main manufacturing base.

This includes sectors such as high-end technology and high-value-added manufacturing. These are industries with strong technological content and relatively high margins, meaning they are likely to meet the 30 percent value-added threshold. These sectors typically combine imported high-value inputs with local processing, integration, or testing activities that generate meaningful incremental value.

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The model also strongly favors industries that rely on imported key materials, components, or equipment, but complete core production stages in Hainan, rather than simple repackaging.

The 30 percent rule is intrinsically also best geared toward producers that are oriented toward the mainland Chinese market, in particular those whose end consumers or clients are in China, as the policy’s core advantage lies in tariff-free entry into the Chinese mainland market after completing processing in Hainan.

There is a broad range of industries that can benefit from this structure, from biopharmaceutical manufacturing to food processing to yacht and aircraft maintenance.

How to benefit from the 30 percent rule

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According to Wu, the combination of zero-tariff imports and the 30 percent value-added processing rule essentially provides foreign-invested enterprises (FIEs) with a special “offshore processing + domestic sales” channel, in which companies can transfer some processing links to Hainan and retain supply capacity in the Chinese market, all while avoiding traditional import tariff costs.

Zhang also notes that, given transportation and logistics constraints, many companies may opt for a dual-base or functional-division strategy. This would involve concentrating value-added and institution-sensitive activities in Hainan, while maintaining large-scale production in the mainland.

As such, the key to leveraging the 30 percent value-add rule is to view Hainan as a destination for relocating targeted parts of the value chain to Hainan, rather than full localization of production.

Sustainable use of this policy depends on treating Hainan as a value-chain node, not a substitute for mainland manufacturing. – Linjia Zhang

Wu recommends FIEs focus on three core aspects to efficiently benefit from this mechanism: value-added design, supply chain restructuring, and compliance management. This involves selecting highly adaptable processing activities based on their own business characteristics, with priority given to raw materials with higher import tariff rates (such as automobiles, luxury goods, high-end electronic components, and biopharmaceutical raw materials), and where at least 30 percent local value-added in Hainan is easily achievable. At the same time, companies should avoid sectors or production links with excessively high raw material costs, or those with relatively small value-added capacity. This includes processes such as simple sorting and basic packaging, where added value typically amounts to less than 10 percent.

Zhang emphasizes that the policy is not intended to facilitate the relocation of entire factories, but rather to test whether companies can place the most valuable segments of their value chains in Hainan. At the same time, firms must ensure that these activities reflect genuine economic substance, in line with international trade norms and WTO rules.

Companies also need to consider Hainan’s overall industrial strengths, Wu notes, as the island’s supporting infrastructure for certain sectors is less mature than in more developed parts of China. FIEs that are not prepared for this reality may be inadvertently faced with higher operating costs in certain areas.

For FIEs that are asset-light, high-value-added, and tariff-sensitive, Hainan remains an option with controllable costs and promising potential. For companies that are asset-heavy and heavily reliant on supporting facilities, it is recommended to wait until the supporting infrastructure significantly improves after the customs closure in 2025 before entering the market. – Haili Wu

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