Small Island Economic Development: The Hainan Island

Posted: November 7th, 2023

Small Island Economic Development: The Hainan Island

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February 10, 2022

Small Island Economic Development: The Hainan Island

Small remote islands often face development challenges despite holding significant financial potential for national economies. Islands are strategically located to open inland markets to global trade and investment via maritime routes. Therefore, without these small remote hubs, countries cannot maximize the net benefits of globalization. The connection between islands and domestic economies outlines why China is investing in the Hainan Free Trade Port Policy (HFTP). Free trade ports represent China’s latest approach to business reform and approach to international markets. HFTP is anticipated to develop into a regional and global economic engine, increasing market liberalization for the Macao region. China can expect to draw foreign investments with the trade port policy containing zero tariffs, low tax rates and an efficient legal system. However, there are concerns that the Hainan island economy might fail because China already has many free trade zones and protectionism over Hong Kong’s economic welfare. Even though the HFTP represents a small economic risk for Hong Kong, the Chinese government should follow through with its development because it introduces a new level of economic liberalization, making the island an important driver of China’s future economic growth.

China is focusing on developing the Hainan island because it provides the country with a base for building upon free trade. The Hainan port policy entails a two-phase zero-tariff regime that will enable particular imports to enter China more easily (Hu et al. 2019). Over the years, China has struggled with sourcing raw materials for its industries. The zero-tariff treatment simplifies the procurement process for certain goods, supporting the development of inland industries. Hu et al. (2019) conducted a comparative analysis of Hong Kong and Singapore to highlight that both ports increased the volume of imports after implementing a zero-tariff policy. Subsequently, both economies recorded an increase in value-added processing in their domestic markets. Hainan, with its strategic location and a zero-tariff policy will promote vigorous import and export exchanges, which will allow rapid regional economic growth.

The HFTP promises to continue growing international tourism revenue for the Hainan province and China. The Hainan policy included a plan for increasing air rights to open up the island’s economy to more global markets (Zhou & Liang, 2020). HFTP has already opened the province to Haikou, Sanya, Vietnam, Cambodia and other maritime trade routes. As of 2020, there were over 61 direct flights to destinations spread across Europe and West Asia (Zhou & Liang, 2020). Hainan benefits from a sustainable structure for attracting tourists thanks to the port policy connecting regional and foreign trade routes. Hainan had been recording a decline in inland tourism before the port megaproject. Since then, the island economy has ushered in 771 million dollars from tourism, which is an increase of thirteen percent (Zhou & Liang, 2020). HFTP is helping China to grow into a more diversified economy, facilitating the transformation from an industry-oriented economy to a service-oriented economy.

The free trade port will act as a global hub for exchanging logistical knowledge and optimizing global supply chains. The purpose of the free trade port policies is to improve the ability to incorporate ports into the national economy by enhancing the transport infrastructure and service coverage between ports and cities (Zhou & Liang, 2020). The free trade zone facilitates the development of South China, promoting its use along the Southeast Asian trading system. At the same time, the port strengthens logistical knowledge through information sharing. The inter-professional exchanges also have political implications, as they strengthen human and business relations between Hainan and the greater Macao region. Improving cooperation between Hainan and Guangdong will be pivotal to Hainan exploring emerging markets in the South China sea. The integration of Hainan into global supply chains is a strategic way for China to ensure sustainable growth and access to Chinese markets.

The HFTP is anticipated to attract highly skilled individuals and foreign investors to the Chinese economy. Wu et al. (2021) conducted an income tax comparative analysis between HFTP and existing free trade zones to find the former has more competitive rates. The Hainan tax policies are innovative because they are more attractive than other free zones in China and South East Asia. Hainan’s economy is relatively undeveloped as it relies on traditional service industries. The implementation of the HFTP will facilitate an expansion of the island economy by drawing in people with an eye for modern service sectors. Hainan has a simplified tax system comprising only seven taxes compared to China’s eighteen (Wu et al. 2021). Therefore, it is easier to invest and own property in Hainan province. The simplified tax system reflects the general tax reforms taking place in China. Apart from financial capital, human capital is the second most important input in sustainable business success.

The HFTP makes it easier for Chinese and international firms to expand to broader markets. The port policy contains a minimum approval investment scheme with a registry of special markets with relaxed access to the Hainan port (Hu et al. 2019). Businesses from such markets have simpler and reliable access to Chinese markets, improving the capacity for revenue generation via exports. Foreign investors can expect an efficient and effective legal system in Hainan for rapid dispute resolution. The Chinese government also introduced a comprehensive filing system and licensing and approval procedure for easier market entry. With the port promising growth in capital accumulation, multinational firms in the Chinese economy can expand to other markets. The increase in foreign direct investment will positively impact China’s traditional industries while presenting opportunities for new ones. The port policy is an incentive for companies to advance in their respective industries through trade.

            When it comes to Hong Kong, the HFTP can be a blessing or curse depending on implemented public policies. The Hainan master plan includes an attractive off-shore duty policy that can exert competitive pressure on Hong Kong’s consumer market (Dandan, 2020). Considering Hong Kong’s high rental prices, Hainan can be a suitable alternative for many residents. However, land is limited on the small island. Hainan Party Secretary, Liu Cigui, reiterated that the province would engage in controlled real estate development to limit the number of residential houses (Dandan, 2020). Controlled planning will benefit Hong Kong and Hainan by reducing the land pressure. Unlike Hong Kong, Hainan’s development is not heavily reliant on the property market. The influx in tourists and industries in Hainan will benefit Hong Kong in the long run by providing a market for its products and services. Overall, the new port policy does not threaten Hong Kong’s economy if Hainan officials commit to controlled real estate development.

            The Hainan special economic zone is a prime example of why China continues to grow as one of the best markets to invest in. The free trade policy will be the driver of this trend for many years to come. Literature informs that China’s economic health relies heavily on foreign direct investment. To this end, the HFTP introduces measures, such as the zero-tariff regime and low-income tax, that make it easier to secure foreign capital. Moreover, the approach makes the Hainan small economy equally attractive for highly-skilled personnel. With the increase in imports and exports, China profits from improved logistical knowledge and network for supply chain optimization. All in all, China needs to take advantage of all the exclusive benefits provided by the new port policy to develop its mainland market. The HFTP policy highlights how small islands can influence national economic growth despite their limited capacity and vulnerability to the effects of global warming.

References

Dandan, M. (2020, June 9). Hainan free trade port: Replacing Hong Kong? Think China, https://www.thinkchina.sg/hainan-free-trade-port-replacing-hong-kong

Hu, H., Wang, S. & He, J. (2019). Comparative advantages of free trade port construction in Shanghai under the belt and road initiative. International Journal of Financial Studies, 8(6), 1-15. doi:10.3390/ijfs8010006

Wu, Y., Qi, F., Wang, J., & Wang, Q. (2021). China’s Hainan Free Trade Port: Medical laws and policy reform. Frontiers in Public Health, 9, 764977. https://doi.org/10.3389/fpubh.2021.764977

Zhou, J. & Liang, Z. (2020). Current status and prospects of China’s Hainan free trade zone. Advances in Economics, Business and Management Research, 150, 262-271. 

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