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Issue 12, 2001 (15 December)

Free Trade Zone to Boost Hong Kong's Competitiveness

MOFTEC vice minister Long Yongtu said recently that the central government is taking a very affirmative approach in considering a proposal for the establishment of a free trade zone between Hong Kong and the Chinese mainland. Long added that Macau could also join the proposed zone but Taiwan's participation might pose certain difficulties. While China's WTO accession is set to unleash a host of opportunities both in domestic sales and in the services sector, the free trade zone proposal represents yet another major development that Hong Kong companies should closely monitor.

HKSAR Chief Executive Tung Chee-Hwa recently made a proposal to the central government on the establishment of a free trade zone. Long's immediate reaction to the proposal was positive.

If Hong Kong enters into a free trade agreement with the Chinese mainland, it will mean Hong Kong products, services and companies can enjoy greater access to the mainland market. After China joins the WTO, although import tariffs will be slashed, the average tariff of most consumer goods will remain at about 10%. Therefore, if the free trade agreement provides for zero (or close to zero) tariffs, the competitiveness of Hong Kong's domestic exports will increase sharply in the mainland market.

As for the services sector, China will maintain different degrees of market access restriction over foreign companies after its WTO accession. The restrictions will be in the form of business scope, minimum asset requirement and phased-in liberalisation. A free trade agreement between Hong Kong and the Chinese mainland should help lower these restrictions for Hong Kong companies, giving them greater access to the mainland market.

Furthermore, a free trade agreement may also encompass the mutual recognition of professional qualifications and standards which will help boost commercial ties between the two places and offer more opportunities for Hong Kong professionals to provide their service in the mainland. This may also encourage more foreign companies to locate their regional headquarters in Hong Kong to facilitate their entry into the China market.

China officially became a WTO member in December 2001. According to the relevant provisions of the WTO (Article 24 of GATT and Article 5 of GATS), members may enter into free trade agreements among themselves to reduce trade barriers in products and services. However, these agreements must not create greater trade barriers for other WTO member countries.

As both the Chinese mainland and Hong Kong are WTO members, so long as the terms of their free trade agreement do not undermine the interests of any third party, it will not contravene the spirit or stipulation of the WTO. In fact, WTO has been informed of the conclusion of more than 200 free trade agreements worldwide. Among these, over 150 have been implemented. Notable examples include the North America Free Trade Agreement (NAFTA), Mercosur, European Union (EU) and ASEAN Free Trade Agreement (AFTA). In Asia-Pacific, bilateral free trade agreements have been signed between Australia and New Zealand, and Singapore and New Zealand respectively. Other bilateral agreements currently under negotiation include the ones between Singapore and Japan, and between Hong Kong and New Zealand. Even China has indicated earlier that it would form a free trade zone with ASEAN over the next decade.

At the WTO ministerial meeting held in November, a resolution was passed to launch a new round of global trade talks aimed at eliminating trade barriers and boosting trade. Hong Kong has always been a keen supporter of global trade liberalisation and will continue to participate actively in the next round of talks. It can be expected that while Hong Kong gets actively involved in the next round of WTO talks, it would also study the feasibility and scope of a free trade agreement with the Chinese mainland with a view to further boosting trade and commercial ties.