Hainan, China’s island province located at the country’s southernmost point, appears to be a much-needed haven for companies struggling to survive the current tariff war.  In 2020, the Chinese leadership released a large-scale plan to turn the entire province into a free trade port.  Endowed with lower tax rates and other preferential treatments such as exemptions from certain legal restrictions, Hainan, which has a land area of only 33,920 square kilometers, may play a role commensurate with its special status to help China weather the tariff storm.

An Island Province Undertaking an Important Mission

According to the 2020 plan, Hainan is expected to become a “high-level free trade port with strong international influence” by 2050.  To accomplish this goal, phased developments are scheduled to take place, with 2025 being the year that sees the preliminary establishment of “a free trade port policy and system focusing on free and convenient trade and investment” in Hainan.  Specifically, by the end of 2025, the Hainan Free Trade Port will begin its independent customs operation.  This means that after 2025, the port will be allowed to enjoy the free flow of most goods with foreign countries, while goods entering and leaving the mainland through the port will be subject to routine customs controls.  China’s ultimate goal is to enable a largely unrestricted flow of goods, services, capital, and data between Hainan and foreign countries.

“[…] Chinese President XI Jinping explained his vision more clearly: Hainan is expected to become […].”

In December 2024, while attending a meeting with local leaders in Hainan, Chinese President XI Jinping explained his vision more clearly: Hainan is expected to become “a crucial gateway for leading China’s opening-up in the new era” and is positioned strategically to focus on “modern services and high-tech sectors”.

A Crucial Gateway for China

The current tariff war between the United States and China offers Hainan an opportunity to show how it can serve as “a crucial gateway for leading China’s opening-up” at a time when China is on the verge of losing an important trading partner.

In 2024, China’s exports to the United States accounted for 14.7 percent (i.e., USD 528.8 billion in value) of China’s total exports (approximately USD 3.58 trillion in value) for the year.  The challenge facing Hainan now is how to leverage its status as China’s free trade port to help the country forge stronger relations with other trading partners, in the hope of increasing exports to these partners to minimize the potential losses resulting from the U.S.-China tariff war.

China is a member country of the Regional Comprehensive Economic Partnership (“RCEP”), a free trade agreement whose 14 other parties are Australia, Brunei, Cambodia, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, South Korea, Thailand, and Vietnam.  Hainan’s geographic proximity to these 14 countries makes them desirable targets for the island to deepen its connections.  The near doubling of the total trade value between Hainan and these 14 countries in just three years (i.e., from USD 7.8 billion in 2021 to USD 14 billion in 2024) signals how much China and these nations value their trade relations.

As companies operating in Hainan can benefit from favorable trade policies adopted by the island and the RCEP, these companies are able to trade goods to and from RCEP countries at reduced costs.  This unrivalled benefit helps Hainan attract even more foreign companies, which may further explore and expand their presence in other parts of China.  As a result, these companies in Hainan have access to nearly 2.3 billion potential consumers residing in China and other RCEP countries.  In fact, since June 2020, more than 70,000 foreign trade companies have been registered in Hainan and the number is expected to grow, as more policies are to be introduced to upgrade the free trade port.

Modern Services and High-Tech Sectors

“However, Hainan is not just a free trade port.”

However, Hainan is not just a free trade port.  With support from the Chinese leadership, the province enjoys exemptions from certain legal restrictions to develop new services and has the authority to provide favorable treatments to incubate innovative companies.  All of these measures allow the small province to create new sources of revenue by focusing on more lucrative modern services and high-tech sectors.  The revenue generated can help China reduce its losses resulting from its declining exports to the United States.

The rapid development of medical tourism in Hainan is a good example.  Through Hainan’s Boao Lecheng International Medical Tourism Pilot Zone, the island has emerged as an international medical tourism destination.  Hainan received 302,500 medical tourists in 2023, generating a revenue of RMB 4.7 billion (approximately USD 640 million), an increase of 67.77% over the revenue generated in 2022.  As the global medical tourism market is estimated to grow to USD 101.98 billion in 2030, the potential of Hainan, which is known for its beach resorts and hiking trails, to become a competitive player in this service industry cannot be underestimated.

The impressive development of medical tourism in Hainan is partly due to the “zero-tariff” policy for imported drugs and medical devices used in the province.  This helps reduce patients’ medical expenses.  Another key reason for Hainan’s growing medical tourism is the Chinese leadership’s exceptional approval for the province to use internationally licensed drugs and medical devices that are not yet available elsewhere in China.  As a result, patients treated in Hainan can receive cutting-edge treatments.

As for high-tech sectors, Hainan’s preferential personal income tax rate of 15% has helped the province attract talented professionals to support innovative companies.  These companies also gain the benefit of having a preferential corporate income tax rate of 15%, which allows them to save more for R&D investment.  The fact that these tax rates will be reduced further should take Hainan’s high-tech sector to another level, resulting in more high-tech exports from the province.

All the purposeful measures discussed above seem likely to allow Hainan to leverage its special status to help China weather the tariff storm.  Later this year, when China hosts the World Free Zones Organization’s annual congress in Hainan to engage policymakers and other stakeholders around the world in finding solutions to address challenges shaping the global economy, we may see the role of Hainan evolve further and this island province of China become even more impactful.

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• The citation of this article is: The Editorial Board of SINOTALKS^®, China’s Free Trade and Innovation Haven, SINOTALKS.COM^®, SinoExpress™, Apr. 14, 2025, https://sinotalks.com/sinoexpress/tariff-china-english. ↩︎