An iPhone that costs about US$100 less might not sound like a geopolitical statement, but in China’s southern island province of Hainan, it is exactly that. As global trade faces rising tariffs and deepening protectionism, China is moving in the opposite direction by opening one of its doors wider. That door is Hainan, a tropical island now positioned as the country’s most ambitious experiment in free trade and economic openness.
On December 18, China officially launched island-wide special customs operations in Hainan, transforming the entire island into a high-standard free trade zone. Unlike traditional free trade zones that cover a port, industrial park or a limited urban area, Hainan’s reform encompasses the whole island, redefining how China experiments with opening up its economy.
Expanded zero-tariff policies and new value-added rules are already reshaping costs for international companies and delivering tangible savings to consumers. The price gap seen on imported goods such as smartphones reflects deeper structural changes taking place beneath the surface.
China already operates 22 free trade zones (FTZs), but Hainan represents a fundamentally different level of openness. Most FTZs are tightly bounded and designed to upgrade specific industries or test incremental reforms. Hainan, by contrast, functions as a unified free trade port with its own customs, tax and regulatory framework, operating as a special customs area separate from the Chinese mainland.
Under the new policy framework, Hainan enables deeper institutional reforms: broad zero-tariff coverage, freer cross-border capital flows and a value-added processing policy that allows qualifying products to enter the mainland duty-free. The scale is unprecedented. With a land area of more than 35,000 square kilometers, Hainan is over 70 times larger than the combined area of China’s 156 bonded zones. What is normally confined to fenced industrial parks can, in Hainan, take place almost anywhere on the island.
For international companies, this offers a level of flexibility and access unmatched elsewhere in China. While the rules may sound technical, the underlying logic is simple.
First is a massive expansion of zero-tariff coverage. The share of goods eligible for zero tariffs has jumped from 21 percent to roughly 74 percent of all tariff lines, covering nearly all production equipment and key raw materials. Companies importing machinery and inputs can reduce tax costs by around 20 percent, significantly lowering barriers to investment and manufacturing.
Second is the “30 percent value-added rule.” Products processed in Hainan with at least 30 percent of their value added locally can enter the Chinese mainland duty-free. The message is clear: Hainan is not meant to be a transit hub for pass-through trade, but a place where real economic activity happens. Assembly, processing, manufacturing and supply-chain development all qualify.
Third is the so-called “double 15 percent” tax advantage. For companies registered and genuinely operating in Hainan and belonging to encouraged industries, corporate income tax is capped at 15 percent, compared with 25 percent on the mainland and 16.5 percent in Hong Kong. The encouraged industry list is wide-ranging, covering areas from desalination equipment and commercial space launches to imported food processing, modern agriculture and even rural homestays.
Individuals benefit as well. For professionals included in Hainan’s official talent catalog, personal income tax is also capped at 15 percent, far below the mainland’s top marginal rate of 45 percent. In parallel, customs and import procedures have been streamlined, with licensing requirements removed for many categories of used mechanical and electrical products, reducing administrative friction in cross-border trade.
The impact of these reforms is already visible. Jingrun Pearl, founded in 1994, became the first company to benefit from Hainan’s new preferential policies. The company sells pearl accessories across the island, including at airports, ports and resort areas.
Under the new value-added rules, products with more than 30 percent local value addition can now be sold on the mainland with zero tariffs. Jingrun Pearl CEO Zhou Shuo recently purchased 40,000 pearls valued at about US$1.67 million, saving roughly US$248,000 in taxes. By passing on part of those savings, the company has reduced retail prices, with some products now up to 20 percent cheaper. For consumers, abstract policy reform translates directly into lower prices.
Globally successful hubs tend to specialize in mobilizing one core economic element. Hong Kong excels at activating capital as an international financial center. Singapore has optimized the movement of goods, handling roughly one-fifth of global merchandise trade. Dubai has turned the free movement of people into an engine of growth.
Hainan’s ambition is broader. It aims to activate goods, capital, people and data simultaneously. Citizens of 86 countries now enjoy visa-free entry to the island. Cross-border capital flows are easier to manage. Goods move with fewer tariffs and barriers. Administrative systems are being redesigned to reduce friction wherever possible, making the island feel less like a traditional special zone and more like an international economic crossroads.
Early indicators suggest rising international interest. In the first three quarters of this year, Hainan’s actual use of foreign investment rose by more than 40 percent, attracting companies from 176 countries and regions.
Beyond economics, Hainan plays a strategic role. As an island, it is both physically and institutionally separate. That separation allows China to test sensitive reforms — offshore finance, cross-border data flows and internationalized medical services — in a controlled environment. Potential risks such as speculative capital flows, smuggling or financial volatility can largely be contained within the island.
Hainan is not expected to become China’s next economic engine overnight. Its primary function is as a testing ground for internationalized rules within a manageable space. Still, the launch of island-wide special customs operations sends a clear international signal: even amid global uncertainty, China is pressing ahead with opening up — and Hainan is where that experiment is being written into reality.
