Recently, China has signed and applied for membership in several trade agreements, including RCEP, CPTPP, and DEPA, which are expected to promote the reform and opening up of China’s trade sector. Specifically in the area of services trade, China needs to prepare itself for transitioning from the current positive list approach to the negative list method within three years after the implementation of RCEP in 2022, while also adopting an internationally recognized methodology. Several policies are being implemented. This study analyzed the Hainan Free Trade Port policy, which prioritizes the introduction of regulatory reform and trade liberalization measures in China’s services sector. It aimed to explore ways for Korea and China to cooperate in the service industry while also assessing the potential for decentralizing the functions of the Hong Kong Free Trade Port.

The conclusions and implications of this study are as follows. First, China is initially promoting the reform and opening up of Hainan’s service industry through the implementation of market access relaxation measures and negative lists, which constitutes a fundamental aspect of the Hainan’s Free Trade Port policy. China is anticipated to elevate trade standards by conducting openness assessments, amending domestic laws and regulations, and simultaneously applying a negative list and market access relaxation measures for the Hainan Free Trade Port, renowned for its highest level of openness.

Second, although the product trade liberalization and the operation of the tax system at the Hainan Free Trade Port are expected to be partially aligned with those of Hong Kong, there still remains a need for further progress in promoting capital movement liberalization. Consequently, in the medium to long term, Hainan is expected to offer foreign investors entry conditions comparable to Hong Kong’s tax system. However, unless significant progess is made in opening up the services sector and liberalizing capital movements, Hainan’s potential role as a free trade port may be limited.

Third, changes in Hainan’s trade, investment, and duty-free shopping need to be interpreted in light of the impact of the COVID-19 pandemic. Notably, there has been a noticeable increase in imports affected by Hainan’s duty-free allowance adjustments and duty-free import measures. Additionally, the services trade has recently shifted from a deficit to a surplus, primarily due to the escalation of transit trade. In terms of investment, domestic investment by Chinese companies has notably surged, particularly in industries with preferential corporate income tax rates and those with corporate income tax exemptions on offshore earnings. At present, the investment surge is primarily driven by domestic companies, but the foreign investment is poised to rise, depending on the outcomes of Hainan’s policy implementations The impact of these policies on duty-free shopping is expected to be felt after 2023. If Chinese citizens’ overseas duty-free shopping decreases in the future, it is expected to have a significant impact on our country.

From our country’s perspective, the first step is to carefully analyze Hainan’s upcoming irregular announcements regarding reforms and opening up in the service sector, and use them as a reference to prepare a negotiation plan that is advantageous for our country in the future Korea-China FTA service and investment negotiations. By leveraging insights from Hainan’s policies, we can assess China’s reform and opening strategies in terms of priority areas, direction, and pace. Additionally, we can explore methods to streamline market access and implement national treatment at the regional level.

Second, given Hainan’s burgeoning growth prospects, there is an urgent need to expand cooperation, with particular emphasis on the cosmetics and medical sectors. While Hainan has risen to become the second-largest region for cosmetics imports in China, Korea’s response pales in comparison to rival nations. Simultaneously, China is utilizing Hainan as a testing ground for institutional reforms within the medical sector, thereby bolstering Hainan’s role as a gateway for foreign companies seeking to penetrate the Chinese medical market.

Third, it is necessary to prepare for enhancing the long-term competitiveness of Hainan’s service industry. Hainan aims to enhance its competitiveness by adopting international service standards similar to those in Hong Kong. This will be achieved by implementing mutual recognition of professional qualifications and providing preferential treatment. If the overseas consumption of services by Chinese citizens shifts to domestic demand, this could potentially impact Korea’s service exports to China. This shift might directly affect duty-free shopping for tourists and medical tourism. Therefore, it is imperative for us to explore ways to enhance the competitiveness of our country’s service industry while providing products and services in Hainan.