The Hainan Free Trade Port as a Strategic Economic Experiment

This week, China formally declared the beginning of massive free trade pilot zone program in Hainan and its overall value is estimated around 113 billion US dollars. This announcement was also seen as a significant shift in devoting long-term planning into tangible policy implementation in the core idea of having Hainan a free trade port, despite the fact that the idea had been in existence some few years before this announcement. More to the point, it followed the period when the world trade is experiencing a radical change following the geopolitical tension, the reorganization of the supply chain, and the increased focus on the economic security. As a first-year university student who studies international economics and global affairs, the most interesting aspect of this development is not only its size, but also the time of the year when it took place. Over the last few years, most economies have been more reserved and self-serving with a sense of resilience, self-sufficiency, and strategic autonomy. It is against this context that China opting to proceed with the idea of having a comprehensive free trade port indicates that they are seeking to redefine openness in new global circumstances and not to do away with it altogether. The Hainan Free Trade Port thus warrants consideration not only as a domestic reform project, but a policy trial which could have very far reaching consequences in the Asia-Pacific region as well as in international trade regimes and the future development of the regional economic order. To see the point of this, it is useful to put Hainan in the context of two overlapping stories. The first one is the long-run reform story of China, in which piloting first and then expanding later has been a common approach to change the policy. The other is the story of the integration of the region, in which East Asia and the entire Pacific economy have been transformed into an intricate web of trade, investment, and production. Hainan is set to be placed at the base of these trends: it is domestic reform infrastructure that is not only outward-facing but also supposed to shape the way China relates to regional rulemaking, and the geography of supply chains.

Hainan has a special economic geographical location in China. The island is geographically isolated by the extreme south of the country, and has never been as industrialized as the major manufacturing centers of the coast, like Guangdong, Jiangsu or Zhejiang. Its economy has not been dependent on the heavy industry or mass production but on tourism, agriculture, and simple services.

These features render Hainan especially adequate in terms of the policy experimentation. The fact that the industrial interests are not as rooted in the island makes opening of sensitive sectors and new regulatory structures less expensive in terms of adjustment costs. Governance wise, its oceanic geography also offers it an opportunity to control custom control, logistics and capital flow in a more regulated setting.

China has always used pilot zones as a fundamental way of enhancing reform. Since the initial Special Economic Zones such as Shenzhen during the 1980s to subsequent Free Trade Zones in Shanghai and other coastal regions, local experimentation enabled policymakers to experiment, gauge results and progressively broaden their successful steps throughout the country. Hainan Free Trade Port is the boldest example of this strategy to date, in terms of geographic area but also in the initiatives of policy to be covered.

The external environment is what distinguishes the present time period than preceding episodes. At the time of growth of Shenzhen and other coastal areas, the international regulations were comparatively uniform, multinationals were establishing just in time production across boundaries. Supply chains are now being reconsidered in terms of redundancy, export controls are being deployed more by governments and geopolitics are being valued by firms as a variable in business. In that regard, Hainan is not the replica of a vintage strategy. It is a modernized experiment meant to suit a disintegrated globalization.

The Hainan Free Trade Port is aimed at being a complex economic platform, unlike traditional free trade zones which are more oriented at tariff reduction, as well as export-oriented manufacturing. Its policy framework unites the goods trade, services, investment, finance, logistics, tourism, and innovation. This is indicative of a wider change in the mode of development in China towards high value-add and service-based development as opposed to low-cost manufacturing.

Among the most prominent policies announced is the tariff exempt mechanism that is related to local value-added content. According to this system, Hainan produced goods that include at least 30 percent of local value-added content can be exported without any tariff. The importance of this rule is that to avoid the simple transshipment or minimum processing, it has been encouraged that firms should undertake more serious stages of production at the local place, which includes design, processing, branding, and after-sales services.

Besides the tariff policies, the initiative has a huge impact of opening up the market to foreign-invested enterprises. There would be less entry barrier in areas like finance, logistics, healthcare, education, cultural services and professional services. The changed nature of these changes is especially significant since services are taking a growing portion of the world value chain, but they are still more controlled than goods trade in most economies.

The Hainan initiative being linked to the Comprehensive and Progressive Agreement in the Trans-Pacific Partnership is the most strategically important one. China has stated its interest publicly in joining the CPTPP that has exceptionally high standards in areas concerning digital trade, competition policy, state-owned enterprise, labor standards, and environmental protection. Full accession is complicated and also highly political. Nonetheless, Hainan is a real-life location where China can test CPTPP-readable rules. Institutional gaps between China and the CPTPP member economies might gradually be narrowed by regulatory convergence in topics like the data flows, protection of intellectual property, government procurement, and competition policy.

The region of Asia-Pacific is marked with highly interconnected supply chains. Intermediate goods and services tend to move between borders severally before they reach final consumers. Hainan becoming a free trade port can enhance the position of China as a logistical, transshipment, and coordination centre in such networks.

Ports, digital customs systems, and infrastructure of trade facilitation are some of the investments that will enhance efficiency in the region. To economies of the Southeast Asia, this can present opportunities to co-operate in the areas of logistics, tourism, and services, in addition to increasing competition over foreign investment.

The Hainan initiative is not without problems although it can be beneficial. The world trade is still in an uncertain situation and geo-political tensions may not allow liberalization processes to be effective. Export restriction, sanction, and strategic rivalry can limit worldwide approaches of capital and technology.

Finally, the fact that China has decided to introduce a free trade pilot zone of 113 billion dollars of Hainan is much more than a local development project. It is a strategic trial, which connects the reforms of domestic policy, international trade regulations, and economic integration of Asia and the Pacific.

In the end, Hainan might not matter as much as to whether or not it will be the next Shenzhen but what it can teach those in charge of policy and watchers about the next stage of globalization. When this free-trade port is able to integrate openness with own plausible regulations, it can enhance integration within the region and set an example of partial liberalization. Even in case it can wrestle with uncertainty, geopolitical boundaries, or uneven growth, it will yet demonstrate valuable lessons about the limitations to which contemporary economies are exposed.

By James Lin