30 July 2014
Should Hong Kong join regional free trade agreements?
With TPP and RCEP likely to result in trade diversion, Hong Kong should look carefully at the situation, Patrick Low (PL), Vice President of Research of the Fung Global Institute and formerly Chief Economist of the WTO, tells HKTDC Research Director Nicholas Kwan (NK).
NK: Across the region, there are lots of trade platforms under negotiation or being formed, the two most famous are the TPP [the Trans-Pacific Partnership agreement relating to 12 countries throughout the Asia-Pacific region] and the RCEP [the Regional Comprehensive Economic Partnership covering the ASEAN members and six states with which ASEAN has existing free trade agreements]. To some extent, they would have serious implications for Hong Kong as well as for the region. The problem is that Hong Kong is in neither of these platforms and is unlikely to be anytime soon. To what extent do you think it will impact Hong Kong when either one of these materialises with Hong Kong left out?
PL: Hong Kong has been very serious about multilateralism and nondiscriminatory trade. I think that is the backdrop of some policies for Hong Kong. Since Hong Kong is very much dependent on trade, it matters a great deal if Hong Kong is not part of these trade platforms.
The issue of TPP and RCEP are multi-dimensional. In some ways, TPP is really about geopolitics as well as trade, and I think that complicates matters. The geopolitics turn principally on China not being part of TPP. Whatever good work TPP can do in terms of opening markets for those parties signed up to it and creating better opportunities for gaining efficiency in terms of specialization through trade, there will be quite a lot of trade diversion.
There are some economies, such as Thailand and Taiwan, which potentially stand to suffer quite a lot from trade diversion. One would have to look more carefully at this situation for Hong Kong, especially with the Hong Kong economy being very much tied to China.
RCEP is a little bit more complicated - largely because RCEP would include China and the Hong Kong economy is tied significantly to China - by no means exclusively but certainly significantly. The interesting thing, though, is that HK trade and investment relationships with ASEAN have been picking up significantly.
There has been a doubling of investment into ASEAN in the last two or three years, and the growth rate of trade has been in the region of 10%. That has also translated in producing a significant increase for some of the other six members of the RCEP - Japan, Korea, China, India, Australia and New Zealand. I think there is a lot of potential in these relationships. Hong Kong not being in there, then, will potentially have disadvantages.
Perhaps one way of ameliorating this is to push ahead with the free trade agreement that is currently being negotiated between Hong Kong and the ASEAN countries. We may see that as a platform to fully-fledged access to RCEP.
NK: Some people say that it is to the advantage of HK to be a free port and a loyal supporter of multilateralism. But sometimes people say that it is a disadvantage as there is nothing more that we can offer when we enter into free trade agreement negotiations with our counterparts. Which do you think is closer to the truth?
PL: If we look at it from the point of view of others, they might say: “Look, you don’t have much that we want because you are already giving it to us.” The issue, though, is why they might say so. Are they saying: “Should we make any concessions to you in the negotiation in terms of improving your access to our market, if that is no reciprocity?” To some extent it is a challenge.
I think it is a bit on an over-simplification. Although Hong Kong is a very open and free economy, it is not completely free. There are areas where Hong Kong maintains barriers, particularly in some professional service sectors and possibly in some business services. So there is something to put onto the table. I think it might be worth investigating to see what that really is.
Hong Kong has already provided some good access to services. We can see that the trade in services has been very significant with ASEAN and with other countries in that grouping. Maybe it is going to be less black and white. I certainly think, though, that the counter argument that you make may have some weight as well.
NK: Just to follow up on one more point - as we are not free, there will be something that we can offer when we sign free trade agreements. Let’s focus on what we can offer by ourselves. How about Hong Kong as a transiting point or entry point to other markets, such as China? We have the CEPA [the Closer Economic Partnership Arrangement] with the mainland, which is probably one of the most penetrating and deep free trade agreements, not just in terms of merchandise trade but also in services.
Under CEPA, whatever China can give to anybody else, Hong Kong would also get. Can we use this as leverage in negotiating with other counter parties, saying that, by having an agreement with us, they may be able to enjoy transiting services or intermediary services? Then they could get into an even bigger China market through us.
PL: Potentially yes, but there are two questions I would ask. One is - are the origin rules of CEPA sufficiently generous so that Hong Kong can indeed do that - with significant content - with ASEAN countries? The second is ASEAN already has a free trade agreement with China, do they not get what they need from that? I don’t know the answers, but the actual transiting issue can be quite separate. It is more dependent on the CEPA arrangement.