Hainan trials consumption for development

On April 20, Hainan in South China launched a duty free policy for travelers who leave the island for inland. The island also has an existing exit duty free policy, launched in April 2008, which benefits non-mainland residents who shop in Hainan's downtown duty free shops and leave China via Hainan, and an exit VAT refund policy, introduced on January 1st this year.

The three policies can be conceived as a goods-for-services or consumption for development experiment. They are aimed at stimulating consumption in return for development of the local tourism industry and other related services.

The central government formulated the economic restructuring strategy and selected Hainan as a pilot area due to its unique geographical location and industrial structure.

If the exit duty free policy and the exit VAT refund policies are nothing new, the April 20th duty free policy is among only a few examples worldwide that recognize duty free benefits for domestic travelers.

As an increasing number of Chinese mainland residents with strong purchasing power travel abroad, the new preferential policy for both domestic and foreign travelers who shop and leave the island for inland aims to help contain some of this consumption at home.

However, deficiencies within the three Hainan policies exist and predict reduced performance initially. For instance, the exit VAT refund policy is less preferential than the exit duty free policy as it only refunds part of the VAT already paid, while the exit duty free policy exempts the import tariff, VAT and consumption tax on imports. It's logical that for the same categories of products covered by the two policies, eligible consumers will opt for the exit duty free shops.

Likewise, the merits and limitations of the new island-to-inland duty free policy compared with the relevant inland policies mean its effect is uncertain. For example, the island-to-inland policy offers a new duty free shopping option in addition to buying duty free products abroad. The mainland customs administer a duty exemption ceiling requirement of 5000 yuan for personal articles bought abroad, and the same amount is used in the island-to-inland policy but connotes far more than 5000 yuan if calculated into a normal market value at a markup rate of 10 to 35 percent. The more than nominal maximum duty free value may attract the attention of consumers who travel for shopping, and yet it's also noticeable that the island-to-inland duty free option only comes with restrictions on product coverage and number of products purchasable at one time. Other limiting factors worldwide include the customs entry regulations of other countries, the pricing strategies of big-brand manufacturers and fluctuations in the Chinese currency. But putting all these aside, Hainan will need to make efforts to build market competition. Even though the WTO does not rule out the possibility of a monopoly service provider, the China Duty Free Group, the exclusive duty free operator in Hainan, needs to introduce into Hainan competition of different brands of duty free products, and at the same time build up its own competitive edge compared with other countries' duty free operators.

The author is director of the policy review division of Beijing WTO Affairs Center, a trade policy think tank affiliated to Beijing Municipal Commission of Commerce.