China View: Hainan’s Customs Closure Redefine China’s Trade Strategy In East Asia.
Hainan Island is situated in the South China Sea, being the southernmost island in China. On December 18th, 2025, the Chinese government officially established Hainan Island as a special customs supervision area, implementing a dual-boundary governance model, allowing trade liberalization of foreign goods between Hainan Island and Mainland China, while controlling the regulatory oversight at its boundary with the domestic market. To ensure the effective customer closure of Hainan Island, the Chinese government increased the number of zero-tariff goods from 1,900 to 6,600, expanding the scope by 74%.
The operations required to close the port is by no means a simple accumulation of preferential policies; its deeper significance lies in providing an excellent opportunity for the industrial transformation and upgrading of Hainan. In 2020, a Chinese private oil enterprise quickly entered the Hainan port and began production in 2021. This Chinese private oil company currently processes imported raw materials, such as canola seeds from Canada and soybeans from Brazil, into higher-valued grain and oil products in Hainan, supplying both domestic and international markets.
The Hainan Provincial Government's "Three-Year Action Plan (2025-2027)" aims to develop and enhance three key future industries: the seed industry, deep-sea exploration, and aerospace technologies. The national strategies behind food security, maritime power, and aerospace power closely link these three future industries. In Yazhou Bay, the national top agricultural research is dedicated to creating a "Silicon Valley of Seed Industry" to ensure national food security. Hainan is advancing into the blue economy with deep-sea technology and marine pharmaceuticals, relying on the Institute of Deep-Sea Science and Engineering of the Chinese Academy of Sciences. The customs closure has not only facilitated international exchanges but has also significantly reduced the expenses associated with importing advanced equipment and technology. These factors have catalyzed rapid progress in research and the industrialization of cutting-edge fields. These measures will enrich the industrial connotation of Hainan and play an important role in expanding China's national industry strategy. After the closure, Hainan Free Trade Port will become the largest free trade port in China and even the world.
Hainan Port Is China's Solution To Circumvent Geopolitical Risks.
The closure of Hainan Port is a response to global geopolitics. As China faces sanctions and the cancellation of tariff preferences from some countries, China has not received the "Generalized System of Preferences" (GSP) treatment from the EU, the UK, Canada, Turkey, Ukraine, Liechtenstein, and 32 other countries since last year. In addition, several U.S. Congress members have proposed the China Trade Relations Act, demanding the revocation of China's permanent most-favored-nation status. The Chinese government is thus using the "zero tariff" policy at Hainan Province's ports to attract global supply chains and multinational companies to reorganize, attempting to reshape its international trade landscape.
Challenges
Hainan Island's closure last year first impacted Kaohsiung Port, which is geographically close and similarly relies on "transshipment" as its core competitiveness. In the past, Southeast Asian countries would use Kaohsiung Port in Taiwan as a transshipment point to enter the Chinese and North American markets. However, several factors threaten this practice. Firstly, the Hainan Free Trade Port's implementation allows for tax refunds and free trade policies on goods shipped from Hainan Port. Secondly, the Hainan provincial government's policies of duty-free access to the mainland Chinese market and zero-tariff measures will also directly lead to the relocation of Taiwan's processing industries, particularly the high-tech sector, to Hainan Port. Finally, if shipping companies set up regional headquarters or register ships in Hainan, the Hainan Provincial Government will implement a 15% preferential income tax for shipping enterprises. In Taiwan, the preferential income tax for enterprises is usually 20%. As a result, Kaohsiung Trade Port in Taiwan may face diverting cargo that might flow away to Hainan Trade Port due to cost considerations, particularly because the lower tax rate in Hainan can significantly reduce their overall operational expenses compared to the higher tax rate in Taiwan.
The Hainan Free Trade Port presents both opportunities and challenges. China is currently grappling with sanctions imposed by Western nations, and the integrity of the legal system is being scrutinized due to the prevalent smuggling risks between the Hainan Free Trade Port and mainland China. Chinese policy provides businesses with an exemption from tariffs on domestic sales of imported raw materials that have been processed and have added value exceeding 30%. Companies might exploit this policy by falsely reporting processing ratios or types of raw materials to fraudulently obtain tax-exempt status. Furthermore, smugglers often use ships without registered ports to bypass customs along the lengthy coastlines of places like Danzhou in Hainan. In 2024, the Hainan police, in collaboration with various units, successfully dismantled the "0509" smuggling case, which involved the illicit trafficking of endangered animals and prohibited goods for trade. Following the closure of Hainan's customs, a versatile Free Trade Account system (FT Account) was implemented to facilitate foreign currency exchanges and streamline cross-border capital flows. The FT Account supports the free exchange of foreign currencies and facilitates cross-border capital flows. However, this financial system may also be exploited by smuggling groups for rapid cross-border capital transfers, even as it aims to curb the flow of traditional smuggling funds through enhanced regulation. In summary, Hainan Port, as a trade port promoted by the Chinese government, still has unresolved smuggling trade issues and faces geopolitical risks.
The Hainan Free Trade Port has not only become a trade transit point in Southeast Asia but has also accelerated the progress of China's "Belt and Road Initiative" in Southeast Asia.Currently, there exists a mutually beneficial model where the Association of Southeast Asian Nations (ASEAN) exports primary products to China, and in return, imports machinery, capital-intensive equipment, and technology-intensive goods from China. As a result, the bilateral trade volume between Hainan and ASEAN has increased from 23.66 billion RMB in 2020 to 57.91 billion RMB in 2024, as cooperation between the two sides in agriculture, investment, shipping, tourism, and other fields continues to deepen. In 2024, the share of intermediate goods traded between China and ASEAN in total trade rose to 67%; after the implementation of the Regional Comprehensive Economic Partnership (RCEP) in 2022, China's investment stock in ASEAN grew at an annual rate of nearly 12%, and the growth rate of non-financial investment further increased to 12.6% in 2024. ASEAN's actual investment in China has maintained a scale of tens of billions of dollars from 2021 to 2023, with an average annual growth rate exceeding 10%.
The Hainan Free Trade Port is expected to play a neutral role in the Southeast Asian regional economy, changing the past trade routes of Southeast Asia and restructuring the regional supply chain, which may enhance trade efficiency and foster closer economic ties among member countries. In addition, after the closure of the Hainan Free Trade Port, Hainan's strategic position in the "Belt and Road" initiative will become more prominent. If cooperation between China and ASEAN goes smoothly, it is expected to become the core platform connecting China, ASEAN, and the Regional Comprehensive Economic Partnership (RCEP).
Conclusion
After its implementation in December 2025, as a new type of free trade port, Hainan Free Trade Port has become a competitor in port trade in Southeast Asia and East Asia. On a political level, the Hainan Free Trade Port has promoted the Chinese government's policy influence in Southeast Asia. However, despite the Chinese government's promotion of the Hainan Free Trade Port, which appears to offer numerous preferential policies, countries continue to adopt a cautious approach towards the Hainan Free Trade Port. Additionally, the establishment of the Hainan Free Trade Port also affects the port trade of other East Asian countries. All policies have two sides. While the Chinese government hopes for the Hainan Free Trade Port, it must also face the past smuggling trade risks of Hainan Island, which could undermine the legitimacy and security of the new trade policies being implemented.
