VCI Legal – January 2, 2026

I. Background and Policy Context

On 18 December 2025, China officially launched island-wide closed-loop customs operations at the Hainan Free Trade Port (Hainan FTP), marking a critical milestone in the development of what is widely regarded as the world’s largest free trade port. Unlike conventional free trade zones or bonded areas, Hainan FTP is designed as a unified institutional space covering the entire island, with a distinct customs boundary separating Hainan from the rest of mainland China.

Early implementation data indicate a strong and immediate policy impact. By 31 December 2025, the value of zero-tariff imports had reached RMB 420 million, while value added generated from duty-free processing and subsequent domestic sales exceeded RMB 47.23 million. In parallel, 3,265 new foreign trade enterprises were registered, more than doubling the number recorded during the same period in 2024. These figures suggest that the reform has rapidly translated into tangible commercial activity.

The launch of Hainan FTP reflects a broader strategic shift in China’s opening-up policy. Rather than relying primarily on cost advantages or fragmented tax incentives, China is increasingly pursuing an “institution-based opening”, emphasising transparent rules, high standards, and regulatory certainty. Hainan is intended to function as a testing ground for this new model, with successful mechanisms potentially replicated nationwide.

II. Comparison

1. Domestic value creation and internal market integration

A fundamental distinction between Hainan FTP and Vietnam’s free trade zones lies in the approach to domestic value creation and integration with the internal market. At Hainan FTP, the core incentive mechanism is the exemption of import duties based on local value added. Enterprises may import goods and inputs duty-free for processing within Hainan, and where the locally generated value added exceeds 30 per cent, the finished products may enter the Chinese domestic market without incurring import duties. This policy effectively embeds Hainan into China’s internal market and encourages substantive production activities rather than mere transit or low-value processing.

By contrast, Vietnam’s free trade zones and export processing zones remain largely export-oriented. Goods transferred from these zones into the domestic market are generally treated as imports and are subject to full customs procedures and import duties. Vietnam has not yet adopted a value-added-based duty exemption mechanism comparable to Hainan’s. As a result, incentives for deep domestic value creation within free trade zones are weaker, and integration with the domestic market remains limited.

2. The principle of taxing only goods on a restricted list

Another defining feature of Hainan FTP is its reversal of the traditional tariff logic. Instead of granting zero tariffs only to specifically approved goods, Hainan applies a “negative list” approach under which import duties are imposed solely on goods explicitly listed as taxable. Following the introduction of closed-loop customs operations, the number of tariff lines subject to a zero per cent rate expanded from approximately 1,900 to nearly 6,600, increasing coverage from 21 per cent to 74 per cent of all tariff lines.

From a legal perspective, this approach significantly enhances regulatory certainty. Enterprises can determine their tariff obligations by reference to a clearly defined restricted list, rather than relying on administrative approvals or discretionary interpretations. This predictability is particularly valuable for long-term investment planning and complex supply chain arrangements.

In Vietnam, free trade zone incentives continue to operate under a “positive list” logic. Tariff exemptions are granted only where goods meet prescribed conditions and are expressly eligible under applicable regulations. Enterprises must often undergo administrative review processes to qualify for incentives, which may increase compliance costs and introduce delays. While this model allows for tighter regulatory control, it reduces flexibility and predictability from an investor’s perspective.

3. Logistics, finance, and data as an integrated institutional space

Hainan FTP is also distinguished by its design as an integrated logistics, financial, and data hub at the regional level. Customs reform is applied across the entire island rather than being confined to specific port areas. A substantial proportion of goods benefit from expedited or immediate customs clearance, significantly reducing transaction time and logistics costs. This effectively positions Hainan as an alternative gateway to southern China, complementing or competing with traditional logistics corridors.

In the financial sphere, Hainan is piloting deeper liberalisation measures, including cross-border trade financing, enhanced foreign exchange flexibility, and blockchain-based payment systems. These mechanisms facilitate near-real-time settlement, reducing counterparty and currency risks that commonly affect international trade. Against the backdrop of growing geopolitical pressures on the US dollar–based and SWIFT-centred global payment system, such arrangements may serve as an important supplementary framework for Asia–Pacific trade.

Vietnam’s free trade zones, by comparison, remain subject to the country’s unified regulatory framework on customs, foreign exchange, financial services, and data governance. While this ensures systemic stability, it limits the scope for institutional experimentation. As a result, Vietnamese free trade zones have yet to evolve into fully integrated logistics–finance–data hubs with regional influence.

About VCI Legal:

VCI Legal is an award-winning business law firm in Vietnam with a wide range of legal and corporate services, among other things, corporate, banking & finance, tax, labor & HR, real estate and dispute resolution with special focus on international investment disputes, We also offer our specialized type of service called “In-House Counsel Service” with the aim of assisting our clients in dealing with all types of internal and external issues arising from their day-to-day operations and business activities. With our offices in both Hanoi and Ho Chi Minh City, we have a tremendous depth of experience in providing well-reasoned and comprehensive legal advice to not only multinationals and Fortune 500 companies, but also small and medium enterprises.

Our professional team comprises one of the leading law firms in Vietnam with service quality highly recommended and acknowledged by international legal service reviewers such as: The Legal 500, AsiaLaw Profiles, IFLR, KPMG’s Tax Directors’ Handbook, Acquisition International, ACQ Global, Global Law Experts, Finance Monthly, and Chambers & Partners.

For many years, VCI Legal has been ranked among the top law firms in Vietnam for corporate, finance, insurance, taxation, employment, intellectual property and investment. With a “Can Do Attitude” combined with a “Know How” capacity, our firm is big enough to provide comprehensive legal support for any in-house legal matters, yet small enough to care about each of our clients. We undertake each engagement with the mindset of a long-term relationship, with the will to give whatever it takes to understand and fulfill your needs.

Ho Chi Minh City

Suite P7-42.18, Vinhomes Central Park, 720A Dien Bien Phu, Thanh My Tay Ward, Ho Chi Minh City, Vietnam

Tel.: (+84) 028 3827 2029 Fax: (+84) 028 3823 4436

Hanoi

Suite 1903, Floor 19, W1 Tower, Vinhomes Westpoint, Pham Hung, Tu Liem Ward, Hanoi City, Vietnam

Tel.: (+84) 024 3936 4985 – (+84) 024 3936 4987

Affiliated Offices: Beijing – Shanghai – Hanoi – Ho Chi Minh City – Singapore – New Delhi – Dubai – Doha – Zurich Paris – Rome – Brescia – Washington D.C. – Los Angeles