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Speech by SCIT on CEPA


Following is the speech by the Secretary for Commerce, Industry and Technology, Mr Henry Tang, at the Foreign Correspondents' Club luncheon today (July 10): (English only)

Ladies and Gentlemen,

It gives me great pleasure to be here today to talk about the Mainland/Hong Kong Closer Economic Partnership Arrangement (CEPA).

This is certainly not the first time I speak and offer elucidation on this landmark trade pact that Hong Kong entered into with the Mainland of China. Since the formal signing ceremony on June 29, witnessed by Premier Wen Jiabao, the Chief Executive and of course many of you here, I and my colleagues have taken every opportunity, including press conferences, seminars, briefings, and media programmes, to explain to the public, and in particular to the business community, the contents of CEPA and how it will become a new platform for further economic restructuring and greater prosperity for Hong Kong. In short, it will make all the difference if we are able to take advantage of CEPA.

I am sure you are by now reasonably familiar with the details of CEPA. As someone close to the process, I would like to share with you some of the basic principles and the thoughts which have guided us through the consultations in the past 18 months.

The first and foremost is Hong Kong's free trade policy. I would not dispute it if you were to describe our policy for free and open trade as a doctrinal stance. Hong Kong is a free port with zero tariff applied to all products irrespective of their origin. Our services are open to the world, and government regulations are consciously kept to the absolute minimum. Facilitation and support, rather than control and direction, are the basic tenet of our economic policy. CEPA must enshrine this fundamental policy.

And to answer the worry of some, Hong Kong's trade and economic autonomy will not be affected in any way by the conclusion of CEPA. Probably the contrary is the case. The conclusion of CEPA underlines our separate membership status in the World Trade Organisation (WTO) and our autonomy in external commercial relations.

Free Trade Agreements (FTAs) are concluded between separate customs territories. You do not find, for instance, New York signing an FTA with the rest of the United States. And for that matter, Shanghai and Guangdong cannot form an FTA with us.

Indeed, we had been very conscious of the fact that CEPA was to become the first ever Free Trade Agreement entered into by either Hong Kong or the Mainland of China under the WTO framework. Both the Central People's Government and the HKSAR Government were committed, right from the beginning of the consultations, that CEPA should fully comply with the relevant WTO rules and the liberalisation measures should exceed either party's existing WTO commitments.

The interrelation between FTAs and the WTO is becoming a very topical issue. Among other reasons, FTAs in existence now already outnumber WTO Members. Indeed, many WTO Members are parties to more than one FTA.

The WTO (and the former GATT - General Agreement on Tariffs and Trade) accepts that preferential trading arrangements are an acceptable derogation from the cardinal most-favoured-nation (MFN) principle, because FTAs can make a positive contribution to the expansion of world trade, and can serve as building blocks for global trade liberalisation. But to ensure that FTAs and the GATT/WTO are mutually supportive and mutually reinforcing, dedicated rules, namely GATT Article XXIV and GATS Article V are devised to govern the formation of FTAs among WTO Members. Like all FTAs, CEPA is subject to these rules.

After months of hard work from both sides, I am proud to tell you that the end result lives up to all the requirements of the WTO, and in some places achieves WTO-plus outcome.

On the question of defining Hong Kong companies, admittedly one of the most delicate and difficult issues throughout the consultation process, because of essentially the disparity in the respective level of economic openness of the two economies; we have achieved, I believe, a very credible outcome and have responded in the most positive way to the earlier concerns of some of the foreign business communities in Hong Kong.

Under CEPA, objective and transparent criteria are laid down on what constitutes a Hong Kong company. In brief, the criteria stipulate that to qualify for the benefits of CEPA, a Hong Kong company must be incorporated and must engage in substantive business operations here.

Ownership, shareholding structure, ethnicity or nationality considerations do not feature in the definition of a Hong Kong company. Thus there is no question of discriminating against foreign owned companies incorporated in Hong Kong under this nationality-neutral test. Hong Kong will continue to offer a level playing field for all. Hong Kong has thrived on this basic principle. We will continue to uphold this.

One should not forget, however, that where the WTO is concerned, China is still a "new kid on the block". It has only begun to gradually open up its services market following 16 years of painstaking negotiations for its WTO entry. It has therefore a natural and legitimate concern about the risk of circumvention and the floodgate effect that CEPA could potentially cause. Against these considerations, CEPA has struck a good balance and an extraordinary outcome.

Now, one might argue that requiring a company to have been locally incorporated for three years before it can enjoy the benefits of CEPA in effect nullifies any "first mover" advantage. But if one takes a closer look at China's WTO commitments, many of the liberalisation measures only kick in within three to five years after China's WTO accession.

And what is more, in a number of key services sectors, what we were able to secure in CEPA goes far beyond what China has committed and, I dare say, will ever commit to the WTO. To name a few, the entry asset threshold for banks incorporated in Hong Kong will be significantly lowered from US$20 billion to US$6 billion. A similar concession applies to the distribution services sector. Hong Kong films may now enter the Mainland market completely quota-free. Hong Kong law firms with representative office in the Mainland will be permitted to run business jointly with their Mainland counterparts.

Equally importantly is that for trade in goods, CEPA's rules of origin, now under active discussion by the two sides, will not carry any discrimination on the basis of the ownership and shareholding structure of the factories and production facilities in Hong Kong where the goods are produced.

As long as the products meet the processes or value content based CEPA rules for conferring origin, tariff free access to the Mainland market will be granted. Under CEPA, tariffs of Hong Kong made products will be eliminated for about 90 per cent of the exports to the Mainland market on January 1, 2004. The rest will go tariff free by January 1, 2006. This is a much more ambitious timetable than most FTAs in the world, including NAFTA.

The pursuit of a completely tariff-free market will open up a whole new array of opportunities for Hong Kong manufacturers. Industries which are hitherto not economically viable in Hong Kong may discover a new business case under CEPA. This is also in line our long-held free market principle. That is, we seek to establish the most favourable operating environment, but we believe that business decisions should best be left to businesses themselves. It will be entirely up to the manufacturers to decide which are their niche products and which are their niche market segments in the Mainland in the light of the new opportunities under CEPA.

Another very positive feature of CEPA is that the two sides have agreed not to use anti-dumping (AD) measures against each other. For those of you who have been following WTO and international trade developments, you will know that Hong Kong has been fighting against the abuse of AD measures as early as the Uruguay Round of trade negotiations which was launched in the 80s'. We have always believed that AD measures are prone to abuse and are outdated in this era of globalisation. In only a few of the high standard FTAs in the world do you find the mutual elimination of such measures, and CEPA is now one of them.

On the part of the commitments of Hong Kong under CEPA which seems to have received lesser attention but is of no less significance, we undertook to continue to maintain our zero tariff regime for Mainland products, and the existing level of openness with respect to Mainland services for at least the 17 sectors. These are serious commitments and are significantly over and above what Hong Kong has promised in the WTO.

All in all, we are very happy and proud of this agreement. CEPA provides a new platform for businesses in Hong Kong, whether locally- or foreign-owned, to tap the vast opportunities that exist in the Mainland market. It is a high standard Free Trade Agreement. It is WTO-plus and in many respects goes well beyond the proposed ASEAN+1 FTA. It sits well with our reputation as a good WTO citizen and as a bastion of free trade.

CEPA is designed to accord with the needs of both parties. CEPA will greatly enhance the attractiveness of Hong Kong as an international business centre and the gateway to the Chinese market. CEPA also augurs well for the economic reforms and development of the Mainland.

As we have stressed time and again, CEPA is only the beginning of a continuous process of liberalisation. Our pledge is to keep our dialogue with the business sector open with a view to including more services sectors in the next phase of CEPA discussion. We will deepen cooperation with the Mainland authorities on all three pillars of CEPA - trade in goods, trade in services and trade facilitation.

There has been a great deal of discussion in the business community and a great sense of excitement after the deal was announced. This is to be expected and I envisage these discussions will intensify as our quick-thinking and nimble businessmen get their acts together to take advantage of the benefits under CEPA. In conclusion, ladies and gentlemen, this landmark agreement is going to usher in a new economic order for the long term development of both Hong Kong and the Mainland.

Thank you very much.

End/Thursday, July 10, 2003


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