In the past nearly half a century of reform and opening up, with over 20 free trade zones established, the Hainan Free Trade Port is neither an experiment nor a model. It’s like feeling one’s way across a river, indicating that the reform has not entered deep waters but rather a dead end.
On December 18th, the mainland China’s Hainan Free Trade Port officially began its closed-loop operation. The Communist Party has defined the Hainan Free Trade Port as a “special customs regulation area,” or in simpler terms, “open at one end, control at the other.” The sealing off refers to setting up a tariff barrier for other regions within mainland China, essentially internal closing. In other words, extending import regulation measures to the mainland from Hainan Province.
Does China need to establish more free trade zones? Since the establishment of the first free trade zone with Shanghai’s Waigaoqiao Bonded Zone at its core in 2013, China has already set up 22 free trade zones. The so-called free trade zones, as the CCP claims, are based on institutional innovation and high-level openness, taking the lead in trade facilitation, investment liberalization, financial openness, and more.
So, what sets the Hainan Free Trade Port apart this time? Essentially, it’s not focusing on a certain region of a province or city as before. This time, it’s the entire Hainan province. The CCP emphasizes the size, stating it’s as large as 40 Hong Kongs.
However, apart from size, the Hainan Free Trade Port lacks any distinct advantages compared to previous experimental areas in the reform and opening up process. Shanghai was once a pioneer in introducing technology and production lines. During that time, why did Deng Xiaoping choose Shanghai (Baosteel) for the first introduced project, a Japanese steel mill? It’s because Shanghai had the most sophisticated industrial base and supply chain in the early stages of reform and opening up. Additionally, importing coal and iron ore from Australia was convenient, and the supply chains for Japanese personnel and materials were the most accessible. These advantages are not present in Hainan.
The true comprehensive reform pilot was selected in Shenzhen. The only reason being its proximity to Hong Kong, where thoughts are more open. In the 1962 Guangdong Hong Kong refugees crisis, Shenzhen alone saw 60,000 people fleeing to Hong Kong. In three other exoduses in 1957, 1972, and 1979, a total of 560,000 people fled through Shenzhen, although some were from other regions.
Now that Hong Kong no longer serves as the key link between mainland China and Western countries for the reform and opening up, the “one country, two systems” has turned into “one country, one system,” losing its independent judiciary. After implementing the national security law, the U.S. revoked Hong Kong’s independent tariff status. The former international financial center is now considered a financial center ruin. So why does the Hainan Free Trade Port need to surpass Hong Kong, and on what grounds?
After the handover of Hong Kong’s sovereignty in 1997, the only true free trade zone within the CCP’s jurisdiction is Hong Kong, possessing and surpassing all the advantages of the free trade zones designed by the CCP.
If the CCP needs free trade zones, simply maintaining Hong Kong’s then status quo is the simplest and most effective solution. If the CCP does not require free trade zones, which was one of the reasons for suppressing Hong Kong back then due to mainland China’s direct foreign trade, then building numerous free trade zones, especially at the provincial level, is unnecessary.
Why suppress the genuine free trade zone like Hong Kong while establishing pseudo free trade zones like Hainan?
The problem lies in the so-called pseudo free trade zone, where there is nominal free trade, but the political and economic regulations still follow the CCP’s style.
For example, regarding information freedom, no free trade zone has an unmonitored internet. Regarding the legal system, no free trade zone has an independent judiciary. As for freedom, no free trade zone has freedom of news and speech. In these aspects, the former advantages of Hong Kong cannot be replaced or overtaken.
It was precisely because of Hong Kong’s independent legal system and freedoms separate from the CCP that led to its destruction with the imposition of the national security law. Meaning, the Hainan Free Trade Port will never have institutional reform, hence not a pilot for political system reform.
The Hainan Free Trade Port will make island tax-free shopping more convenient, with more products being tariff free (such as iPhones, Rolex watches, etc.), attracting mainland consumers for “Hainan shopping tours.” Hainan is not a wealthy province, nor a region with a developed manufacturing sector. It cannot consume the vast array of tax-free products available, and there still exist tariff barriers between Hainan and mainland provinces, meaning mainlanders shopping in Hainan are still subject to tariffs, benefiting only Hainan.
The tax-free island excludes leaving the island, intended for mainlanders shopping in Hainan and bringing goods back to the mainland. The personal tax-free limit is increased from 30,000 to 100,000, with goods exceeding this limit requiring customs declaration and tax payment. The primary benefit is to promote shopping tourism from the mainland to Hainan, having no impact on the national economy, lacking any demonstration effect. How is this an experiment or reform? Its sole purpose is to boost Hainan’s tourism industry. Is this worth extensive promotion?
Some suggest adding high-quality domestic products to the tax-free island. Since these are domestic products, they are already tax-free wherever purchased, there is no need to visit Hainan specifically for duty-free shopping. If tax exemptions can stimulate the economy, lowering tariffs nationwide, rather than just in Hainan, would undoubtedly be more effective at boosting the economy.
Additionally, there is a related policy where if imported raw materials processed in Hainan increase in value by 30% or more, they can be exported to the mainland without import tariffs. This policy also lacks a nationwide demonstration or experimental effect but aims to stimulate high-value processing industries in Hainan, which could be more beneficial for any province with a complete supply chain. This policy is simply boosting Hainan.
Some argue that establishing the Hainan Free Trade Port will pose a threat to Hong Kong and Singapore. In reality, Hong Kong has already fallen, and if the goal is to turn Hainan into an alternative financial center to replace Hong Kong, it could have picked Shanghai with a more developed financial sector or Guangdong with a more vibrant economy, although even Shanghai cannot replace Hong Kong. Hainan lacks the conditions to threaten or substitute Singapore. Those suggesting so are just stirring trouble for Singapore.
Many interpret Beijing’s goal with Hainan as an attempt to recreate another Shenzhen Special Economic Zone. Shenzhen was only meaningful in a specific era when the whole country operated under a planned economy, unsure about introducing a market economy and foreign investment, necessitating a small-scale trial before national expansion once experience was gained.
Therefore, Shenzhen played a pioneering role in economic system reforms. However, once the entire country transitioned to a partially market economy under the “socialist system,” the direction of reform was lost. Everything that could be reformed in the economic system had been, so-called deep waters of reform imply there’s nothing more to change, essentially leading to a dead end. Further reform would mean adjusting the political system, which is unacceptable for the CCP.
For Xi Jinping, maintaining the existing economic system poses immense risks as private economy has become a threat to the CCP’s socialist system. The state-owned economy should further shrink the space for private enterprises, leading to a situation where the state advances while private retreats.
This forms the backdrop for Xi Jinping launching the free trade zones after taking office. Free trade zones aim to clumsily imitate the Shenzhen Special Economic Zone without touching the political system. Nearly half a century after reform and opening up, engaging in provincial-level free trade zones when many policies are still being explored indicates that the twenty-plus free trade zones set up in the past decade have not accumulated any useful experience.
If free trade zones bring benefits to economic and technological development, they could be implemented nationwide. All the CCP needs is nominal free trade, but it must accept CCP’s regulation and control, which is why the Hainan Free Trade Port is destined to fail.
To the average person, all of Xi Jinping’s projects seem unfinished, including the Belt and Road Initiative and Xiong’an. Why continue to introduce new unfinished projects if existing ones are incomplete? Here, the factor is the dictatorship of the CCP’s autocrat decisions, coupled with these unfinished projects serving as cash cows for the CCP’s elite.
Given that the new elite close to Xi Jinping find it challenging to seize or share the already divided wealth from the old elite, they need to find new routes which entail continuously launching new projects. This is the practical purpose behind these unfinished projects.