Hong Kongs CEPA with China: Round Two

Concluded in June 2003, the Mainland-Hong Kong Closer Economic Partnership Arrangement (CEPA I) came into effect on 1 January 2004, providing enhanced access for Hong Kong products, service providers and professionals to the Mainland market. It gave Hong Kong an early start in tapping the Mainland market ahead of foreign competition under the Mainland's World Trade Organisation (WTO) commitments.

The CEPA II took effect from the beginning of 2005 with the scope of the liberalisation further expanded in both depth and breadth. Adding 729 types of products of Hong Kong origin (or nearly all goods made in Hong Kong) to the zero-tariff list of the original 379 items covered by the CEPA I, the CEPA II allows 1,108 products that originate in Hong Kong to enter the Mainland with no tariffs. For the phase two zero-tariff products, the existing tariff rates range from 3 to 33.3 per cent, with most of the products paying 10–19.4 per cent.

More significantly, the CEPA II also opens up eight new areas for Hong Kong service providers and further widens the business scope of some of the 18 service sectors already opened under the CEPA I. Hong Kong service suppliers will now gain preferential access to the Mainland market in 26 service areas in total, with the audiovisual and medical sectors going beyond China's WTO accession commitments and becoming special niches for Hong Kong.

Hong Kong's strong performance in 2004 was the combined result of the recovery factor and the direct benefit of the new Mainland tourism policy. The CEPA was key in boosting confidence in the Special Administrative Region. For an economy suffering from a long period of recession, this boost was precisely what Hong Kong needed, particularly for its financial market and property sector.

Trade Promotion in Goods and Services

Hong Kong's trade with Mainland China, in both import and total exports (both domestic exports and re-exports), has seen significant increases in absolute value and proportional share. As Hong Kong's largest trading partner since 1985, China in 2004 accounted for 30.1 per cent of Hong Kong's total domestic exports, 44.9 per cent of its re-exports and 43.5 per cent of its imports, with total trade amounting to HK$1,806 billion (see Table 1). With respect to merchandise trade, Mainland China is Hong Kong's largest trade partner in imports and re-exports, and the second largest destination of domestic exports after the US.

By the end of June 2005, 5,875 Hong Kong manufacturers obtained certificates of origin that allow them to enjoy zero-tariff treatment for products including textiles and clothing — the largest beneficiary group — followed by pharmaceutical products, plastics and plastic articles (Table 2).¹

The immediate benefit of tariff-free access under the CEPA is cost savings for the Hong Kong export items to the Mainland. According to China's customs statistics, Hong Kong's tariff-free exports to the Mainland reached USD127 million (14.3 per cent of total) in 2004. Tariffs have been waived up to 66.4 million yuan (USD8 million) under the CEPA agreement.² Traditional Chinese medicine, jewellery, chemicals and information technology products dominate Hong Kong's exports. Traditional Chinese patent medicine is the most notable beneficiary of the CEPA, with tariffs on its exports cut by 13.6 million yuan (USD1.6 million) in the first year of the implementation, accounting for 20.5 per cent of the total preferential tariff. Exports of polystyrene and flavourings come next. However, the overall trade generated by the CEPA is relatively small in quantitative terms.