China's Hainan Free Trade Port (FTP) is poised to reshape regional trade dynamics, according to a recent economic survey. As of late 2025, Beijing has fully operationalized island-wide customs arrangements, effectively transforming Hainan into a low-tariff, services-led economic zone with its own distinct customs system, separate from mainland China. This development has significant implications for regional and global trade, warranting a closer examination of its potential impacts and challenges.
The Hainan FTP's unique "two-line" tariff system is a key feature of its design. This system allows most imports into the island to be excused from duties, while goods produced locally with sufficient value addition can be sold across China without additional tariffs. This policy is intended to transform Hainan into a key processing and trade hub. According to Dr. Haili Wu at XJTLU's International Business School Suzhou (IBSS), the Hainan FTP is designed as a testing ground for China's transition to greater openness, providing businesses with a strategic pathway to navigate international trade tensions.
Early data suggests the Hainan FTP is already having a positive impact. In the first month of the special customs operations, newly established foreign-funded enterprises increased by 13 percent, the value of imports rose by 38.9 percent and visa-free tourist arrivals jumped by 64 percent. More than 10,000 new entities have benefited from zero-tariff policies. Moreover, Hainan's tourism industry has significantly raised its international profile, contributing 33.4 percent to the province's GDP. In 2025, the province received over 100 million tourist visits, including 1.5 million inbound visitors, a 35.2 percent year-on-year increase. Visa-free arrivals rose 64 percent, the number of international navigation ships entering and leaving ports increased 19.6 percent, and offshore duty-free sales climbed 46.8 percent.
However, some reports indicate challenges. One month after the customs closure, some residents and visitors reported soaring prices, declining business activity, and a withdrawal of domestic and foreign investment. Despite these concerns, the province's government work report outlined that Hainan now offers the highest level of market access openness for foreign investors in the country, marking a "substantial leap" in opening-up. Hainan's actual use of foreign capital grew at an average annual rate of 16.7 percent between 2020 and 2025, attracting investment from 180 countries and regions.
The economic survey cautions against viewing the Hainan FTP as an isolated disruptive event. Instead, it should be seen as a gradual structural shift that could reshape trade routes, logistics networks, and investment decisions across Asia, especially in the northern Indian Ocean and South China Sea region. The impact may be less about immediate competition and more about subtly altering the region's economic geography. The survey also emphasizes that the global economic environment is increasingly shaped by strategic considerations rather than efficiency and reciprocity.
Despite the potential benefits, the Hainan FTP faces several challenges. Hainan's economic scale remains limited, contributing only 2% of China's total utilized FDI and ranking low in GDP among pilot zones in 2023. While services trade increased from 2020 to 2023, much of the growth was outside high-value-added sectors. Furthermore, the dilution of policy advantages and competition from established Pilot Free Trade Zones (PFTZs) pose institutional challenges.
To fully realize the Hainan FTP's potential, clear strategic positioning, robust policy execution, collaboration with key trade partners, and coordination with other free trade zones will be crucial. As Hainan Governor Liu Xiaoming stated, the province is stepping up efforts to attract foreign investors and global talent as it accelerates the development of its free trade port.
