Hainan special customs operations: China's next era of opening-up

Editor's note: Zhao Jinping is the vice president of the China Association of Trade in Services, and former director and researcher of the Department of Foreign Economic Relations at the State Council Development Research Center. The article reflects the author's opinions and not necessarily those of CGTN.

"I hope that one day we can source coffee beans from around the world and sell our coffee to the world."

For Huang Haiwen, this was once just an ambition quietly repeated during her years of shifts on the factory floor. Today, it is steadily becoming a reality.

Huang joined Xinglong Coffee in 1992 as a junior product quality inspector. Her earliest memories of the factory are filled with the smell of smoke from firewood-fueled roasters and the rhythmic clatter of hand-operated tools. She watched the plant transform, first replacing wood fires with natural gas and semi-automated lines, and later embracing fully automated production. With each upgrade, she learned how essential innovation was to keeping the industry alive and competitive.

That belief shaped her next chapter. In 2022, the company established the Huang Haiwen Model Worker Innovation Studio, a recognition of both her expertise and her commitment to pushing boundaries. Under her guidance, the studio began developing specialty coffee products in-house, experimenting with new flavors and blends to match evolving consumer tastes.

Her responsibilities expanded again when she became a deputy to the National People's Congress. From that vantage point, she saw more clearly the advantages Hainan holds as a natural hub for coffee transshipment – its climate, its location, and the momentum of the Hainan Free Trade Port (FTP). In early 2024, during a meeting with officials from the Ministry of Finance, Huang proposed adding green coffee beans to the Hainan FTP's positive list for foreign trade.

Those proposals, combined with broad institutional support, eventually bore fruit. On January 26, 2025, the Ministry of Finance and other departments announced that unroasted coffee would be added to Hainan FTP's zero-tariff raw and auxiliary materials list. For coffee producers, this meant greater global sourcing options and lower production costs, a small policy shift with far-reaching impact.

Now, the tiny coffee beans Huang holds between her fingers carry a larger story. They are traveling farther, entering new markets, and giving shape to a dream she first voiced more than 30 years ago.

As Huang Haiwen's dream begins to take shape in the coffee workshop she helped build, it is also unfolding against a much larger transformation taking place across the island. Her story, rooted in decades of persistence, experimentation, and opening to the world, mirrors Hainan's own trajectory. What began with a single factory upgrading its production lines is now reflected at the provincial level, where entire systems of trade, regulation, and logistics are being redesigned to support global integration.

The momentum behind the rise of the Hainan coffee industry, including breakthroughs such as the zero-tariff policy she helped advance, is just one example of how Hainan is preparing for a more ambitious stage of opening. The same forces that allowed a local coffee bean to reach overseas markets are now being scaled up to reshape how goods, services, and capital move across the island. In many ways, the success of countless small stories like Huang's forms the foundation for the structural changes that are about to unfold.

Against this backdrop, on December 18, 2025, the global trading landscape will witness a quiet but structurally significant shift in the South China Sea. On this date, the island province of Hainan, an area roughly the size of Belgium or the U.S. state of Maryland, will officially launch special customs operations. To the casual observer, this may sound like a technical bureaucratic adjustment. In reality, it marks one of the most aggressive and ambitious experiments in Chinese economic statecraft since the accession to the World Trade Organization (WTO) in 2001.

For China, this moment represents more than a milestone in regional development. It reflects a deliberate decision to push forward with institutional opening at a time when global conditions appear unfriendly to openness. As major economies tighten export controls, apply investment screening, securitize supply chains, and resurrect industrial policy, China is opting for a model that attempts to combine large-scale liberalization with sophisticated regulatory discipline. Hainan, a province geographically separated yet administratively integrated, is now the testing ground for this ambitious balancing act.

At the Fourth Plenary Session of the 20th Central Committee of the Communist Party of China (CPC), policymakers adopted the Recommendations of CPC Central Committee for Formulating the 15th Five-Year Plan for National Economic and Social Development, underscoring the imperative of developing Hainan FTP to "high standards." Over the course of the 15th Five-Year Plan, Hainan's institutional framework is expected to progress from basic formation to deeper consolidation. The result will be greater freedom and predictability in the movement of goods, capital, people, and transport across the island, alongside more secure and regulated data flows.

As protectionism rises in advanced economies and global supply chains fracture, Beijing's decision to launch special customs operations is paradoxical but deliberate: a move toward wider opening-up that pairs freer flows with delicate orchestrated institutional design. This duality, expansion of freedom combined with precise regulation, may become a defining feature of China's next era of economic modernization.

Core significance of special customs operations

According to the Master Plan for the Construction of the Hainan Free Trade Port, Hainan aims to establish a system marked by "liberalization and facilitation in five areas (trade, investment, cross-border capital flows, personal entry and exit, and transportation) plus safe and orderly flow of data" with genuine international reach. At the center is trade liberalization and facilitation, which carries both foundational and symbolic weight for the port's broader institutional architecture. The plan calls for a comprehensive special customs supervision zone across the entire island, anchored by a zero-tariff policy for goods trade.

The core purpose of these special customs operations is to construct a customs governance system defined by "freer access at the first line, regulated access at the second line, free flow within the island." Leveraging Hainan's geographic separation from the mainland, this framework provides the institutional conditions for zero-tariff imports inside the island while maintaining high-level opening-up at the first line and ensuring smooth circulation within. Effective management of the second line is essential to prevent large volumes of zero-tariff goods from flowing unchecked into the mainland market.

"Freer access at the first line," however, is not absolute. Under the list of taxable import goods and the List of Prohibited and Restricted Goods and Articles for Import and Export, Hainan will retain tariffs or restrictions on a limited set of sensitive goods. It will also apply stringent controls to high-risk goods and services touching areas like biosecurity, ecological security and product quality. Expanding zero-tariff treatment to the vast majority of goods, alongside other liberalization measures, is expected to lower production and consumption costs, attract domestic and foreign investment, and boost demand for higher-quality imports, thereby supporting Hainan's broader economic upgrading.

"Regulated access at the second line" is likewise not an attempt to impede Hainan-mainland flows. After special customs operations take effect, zero-tariff goods entering the customs territory of the People's Republic of China (hereinafter referred to as "the mainland") will be taxed according to national rules. But goods produced in Hainan, or processed there with at least 30 percent added value, may enter the mainland tariff-free. This enterprise-friendly arrangement was first piloted in the Yangpu Bonded Port Area – the early "showcase" of Hainan FTP. The initial transaction, completed by Hainan Ausca International Oils and Grains Co., Ltd. in 2021, set the precedent. The pilot subsequently expanded to the Yangpu Development Zone, the Haikou National High-tech Industrial Development Zone, and other approved enterprises across the province, generating a substantial base of cases and operational experience. Participating firms have reported significant cost reductions when moving processed goods to the mainland, delivering tangible benefits to both producers and consumers.

A major innovation in the theory and practice of multilateral free trade

Free trade zones (FTZs) and FTPs are core components of the global free trade architecture. In the World Customs Organization's International Convention on the Simplification and Harmonization of Customs Procedures, also known as the Kyoto Convention, an FTZ is defined as "a part of the territory of a Contracting Party where any goods introduced are generally regarded, insofar as import duties and taxes are concerned, as being outside the Customs territory." "Outside the Customs territory" refers specifically to the application of tariff arrangements that differ from the unified regime governing the domestic customs area.

The Hainan FTP adopts this international model through island-wide special customs operations. Its physical separation from the mainland allows the creation of a special customs supervision zone that operates outside the domestic tariff system. In tariff policy, Hainan broadly aligns with global FTZ and free port practices, placing it within the framework of multilateral rules. Its institutional design draws heavily from established models – Hong Kong, Singapore and Dubai among them.

Yet Hainan is not a "separate customs territory," and this constitutes the most consequential point of departure from places such as Hong Kong and Singapore, which are built on fully independent tariff regimes. The requirement to maintain a "second line" between the island and the mainland is the clearest manifestation of this distinction.

In comparing Hainan with existing Chinese special customs supervision zones, such as comprehensive bonded zones, there are shared features: adherence to international FTZ norms and the construction of a platform with Chinese characteristics for global commerce. But the core innovation of the Hainan FTP lies in its ambition to build an open economic system that encompasses not only industrial and commercial activity but also cities, rural areas, permanent residents, and cross-border flows of trade, investment, finance, transport, people, and data. Regulating the second line under these conditions introduces a degree of complexity unmatched by prior FTZ models.

Hainan's geography, natural physical isolation on a large scale, affords it a unique advantage in constructing a free trade port with such breadth. As the world's largest free trade port by area, its ability to maintain high-level opening-up at the first line while effectively regulating the second line will stand as a significant contribution to global FTZ theory, rulemaking, and operational practice.

Supporting requirements for tax system reform

Tax reform is a critical pillar of the institutional architecture underpinning Hainan FTP. With the launch of special customs operations, the reform agenda will deepen further, building on progress made during the preparatory phase. Under the Master Plan, Hainan is expected to develop a tax regime compatible with high-level free trade port practices, guided by the principles of "zero tariffs, low tax rates, streamlined tax structure, strengthened law foundations, and phased implementation."

Zero tariffs entail the exemption of import duties, import value-added tax, and consumption tax on goods entering through the first line, excluding items covered by the catalogue of taxable imported goods and the List of Prohibited and Restricted Goods and Articles for Import and Export. Low tax rates include the dual 15 percent tax incentives, meaning a 15 percent corporate income tax applied to "encouraged" industrial enterprises that are registered and operate substantively within the free trade port, and that for high-end and in-demand talent working in Hainan, any portion of personal income tax above 15 percent will be waived.

Streamlined tax structure is another major objective. After full island-wide special customs operations are in place, taxes and fees, such as value-added tax, consumption tax, vehicle purchase tax, the urban maintenance and construction tax, and educational surcharges will be simplified and consolidated at an appropriate time. Also, a single retail sales tax will be established to be levied only at the final consumption stage. This restructuring is designed to reduce both administrative complexity and the tax burden on firms and individuals.

The distinct regional status created through special customs operations provides the institutional space necessary to implement a tax system that differs from that of the mainland. Together, these reforms are intended to support a freer, more predictable, and internationally aligned fiscal environment for Hainan.

Hainan FTP's opening outcomes

During the preparatory phase for the special customs operations, early initiatives, such as the zero-tariff lists, the dual 15 percent tax incentives, and tariff exemptions for processed goods with value added above 30 percent, began to take hold. These measures have strengthened the momentum of Hainan's export-oriented economy and made the initial advantages of the Port increasingly visible.

The data underscore this trajectory. Over the past five years, actual foreign investment in Hainan has grown at an average annual rate of 14.6 percent. The province registered 8,098 new foreign-invested firms, with an average annual growth rate of 43.7 percent. Outbound direct investment, goods trade, and services trade expanded at annual average rates of 97 percent, 31.3 percent, and 32.3 percent, respectively, placing Hainan among the top performers nationwide. The region's economic outward orientation has reached 35 percent, nearly double its 2019 level. Enterprises and individuals have also benefited directly: Under the dual 15 percent tax incentives, the number of beneficiaries has continued to rise, with cumulative tax reductions exceeding 31 billion yuan (around $4.24 billion) for firms and 17 billion yuan for individuals.

With the rollout of special customs operations and the gradual consolidation of Hainan's institutional framework, trade and investment flows are expected to become even more liberalized and predictable. Complementary tax reforms will further reinforce this process. Together, these developments are poised to unlock additional market dynamism, attract more production factors to Hainan, foster innovation and entrepreneurship, and support the high-quality economic development of Hainan FTP, delivering more tangible open-door dividends to both enterprises and residents.

Why the launch of special customs operations is only the beginning

As December 18, on which Hainan's special customs operations will officially launch, is around the corner, preparatory work has been fully completed. Yet the launch marks only the starting point. The broader agenda of institutional innovation for Hainan will require sustained effort over the coming decades.

First, deepen institutional opening-up in modern services. Expanding modern services opening-up is essential for strengthening the global competitiveness of Hainan's pillar industries and for cultivating new comparative advantages in services trade. To support Hainan's alignment with high-standard global economic rules, the central government has introduced a negative list for cross-border trade in services and a negative list for foreign investment access, the shortest one in the country. After special customs operations begin, further refining these negative lists will signal the transition of Hainan FTP from institutional formation to institutional maturity. Benchmarking against high-standard arrangements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the negative lists for investment access and services trade should be progressively shortened so that by 2030 they converge with CPTPP-level commitments. Before 2035, China should work toward integrating the three negative lists, for investment access, services trade and market access, into a unified framework aligned with the CPTPP's liberalization level.

At the same time, Hainan should accelerate post-border regulatory reforms in intellectual property, government procurement, competition policy, environmental standards, and labor rules. Full implementation of the WTO's Joint Initiative on Services Domestic Regulation should serve as a guiding benchmark. This process will require a systematic review of market access requirements to eliminate "granting access but disallowing operation" issues, improve transparency in licensing and qualification procedures, and reduce registration and compliance costs.

Second, raise the liberalization level of the first line. Implementing the list of taxable import goods and the List of Prohibited, and Restricted Goods and Articles for Import and Export is central to balancing high-level liberalization with market stability. The whole process is progressive and requires scientific study of core policies underpinning "freer access at the first line." According to policy disclosures at the July 23, 2025, State Council Information Office briefing, the range of zero-tariff goods will expand from 1,900 to 6,600 tariff lines, roughly 74 percent of all taxable goods, once special customs operations begin. This sharply reduces the share of goods subject to the two lists and marks a major elevation in the level of goods-trade liberalization.

To build on this momentum, a phased optimization strategy is recommended. In the first phase, drawing on the 11th-year implementation status of Regional Comprehensive Economic Partnership (RCEP) tariff schedules, the share of taxable goods should be reduced to 5 percent within two to three years after the launch of the special customs operations, while retaining the roughly 4 percent category of special management goods under the framework of RECP. In the second phase, by 2035, on the basis of the annual reduction of both taxed and non-tariff-controlled goods within the Hainan FTP, the combined proportion of taxable and specially administered goods should fall below 3 percent, approaching CPTPP tariff-commitment levels. Given the global scope of Hainan's zero-tariff policy, the resulting openness would exceed that of most CPTPP members, reinforcing China's capacity to shape new models of high-standard free trade ports.

Third, strengthen innovative policy design for second-line regulation. The central challenge is maintaining robust management of zero-tariff goods crossing the second line, which, if failed, may disrupt China's domestic market, while keeping goods and personnel flows between Hainan and the mainland efficient, thus fostering closer and more convenient economic links. Public policy information shows that customs authorities have already formulated highly efficient custom governance schemes, including stratified regulation based on goods classification and the credit rating of market entities, along with intelligent supervision utilizing big data and blockchain technologies, in readiness for complex situations.

As trade and personnel flows between Hainan and the mainland intensify, further improvements are needed. Two areas merit priority attention: original management and integrated customs clearances.

Start with original management. Drawing on RCEP rules, implement an enterprise self-declaration system for Hainan-origin goods entering the mainland. This would reduce custom declaration time and costs associated with the 30 percent value-added exemption from tariffs.

As for integrated customs clearance, incorporate Hainan into the mainland's integrated customs clearance reform and grant it bonded-transit functions equivalent to comprehensive bonded zones. This would facilitate extending the second-line customs ports function for goods leaving Hainan to the mainland's customs supervision areas, thereby alleviating the pressure from centralized declaration of outward-bound goods at Hainan's second-line customs ports. Furthermore, this would strengthen the construction of cross-island bonded channels between Hainan and port-adjacent areas like Zhanjiang in Guangdong Province, offering a convenient pathway for nearly 70 percent of all goods entering and exiting the island.

In addition, as tax system reforms advance, integrated networking of customs clearance could also help manage rising volumes of tax refunds and supplementary declarations, improving two-way efficiency and boosting enterprise satisfaction.

Fourth, advance supporting tax system reforms. Zero tariffs, low tax rates, and a streamlined tax structure are central to Hainan's institutional framework and central to investor expectations. Policymakers should accelerate the optimization of zero-tariff policy and progressively expand the scope of preferential income-tax policies until they reach a broad, inclusive level. On the basis of solid pilot work, authorities should also clarify the timetable for full tax structure consolidation and the introduction of a retail-sales tax, thereby guiding market expectations toward long-term policy stability.

Fifth, build a smart customs governance system. The pressure on second-line customs ports and maritime anti-smuggling operations will increase significantly under special customs operations. Hainan should therefore accelerate the deployment of a digital perimeter system using big data, artificial intelligence, blockchain, and the Internet of Things; upgrade the international trade "single window"; and achieve fully paperless, intelligent, and interoperable customs clearance across the entire chain.

Sixth, intensify pressure testing. Balancing opening-up and security requires constant calibration. Hainan should benchmark against high-standard global trade rules, accelerate the compression of negative lists across investment, goods, and services trade, and regularly conduct pressure-test exercises for its special customs operations. Continuous testing will help identify vulnerabilities early and accumulate practical experience for advancing higher-standard liberalization in a well-regulated, risk-aware manner.

As China prepares to activate this sweeping special customs operations, Hainan's transformation is no longer an abstract policy blueprint, but is already taking shape through the lived experiences of people like Huang Haiwen. Her journey, from tending wood-fired roasters to shaping national-level policy, captures the essence of what this new chapter of opening-up seeks to achieve: empowering individuals, industries, and regions to connect more deeply with the world.

The launch of special customs operations is expected to redraw the island's economic contours, allowing goods, capital, data, and talent to circulate with unprecedented freedom and predictability. But its long-term significance may be best understood not through macroeconomic indicators, but through the opportunities it creates for ordinary enterprises with global ambitions. For instance, for Hainan's coffee sector, the zero-tariff policy is only the beginning. As supply chains streamline and new partnerships emerge, the island's industries, once limited by geography, are now positioned to participate in global competition on their own terms.

And this is where Huang's story comes full circle. What might begin as a quiet hope whispered over steaming roasters is now part of a wider transformation reshaping an entire province's relationship with the world. The same bean she once inspected under dim factory lights is now crossing borders under new rules crafted, in part, from her own proposals.

Her early wish – to source raw materials globally and sell proudly crafted coffee globally – no longer sounds like a distant aspiration. It now reads like a preview of what the Hainan FTP is designed to make possible: an island where individual dreams and national strategy move in the same direction, each reinforcing the other.

As Hainan steps into its next era of opening-up, the story of a single coffee bean, lifted from a local workshop into the global marketplace, offers a simple, tangible reminder of what this grand experiment ultimately aims to deliver: the freedom for people like Huang Haiwen to see their lifelong visions carried across the world, and Hainan's special customs operations are all about higher-level opening-up.

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