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The Hong Kong-ASEAN Free Trade Agreement: Capitalising on the New Opportunities

Hong Kong’s role as a “super-connector” has become more prominent with the advancement of the country’s Belt and Road Initiative (BRI). Along the BRI routes, the ASEAN region has apparently received the most attention so-far, probably due to its proximity to China and more importantly, the vast market and investment opportunities offered amid the region’s inclusive growth and push for liberalisation. The region has a strong and growing demand for Hong Kong consumer products and business services, according to a recent HKTDC survey of over 300 Malaysian companies.

Recently, Hong Kong and the 10 ASEAN member states have signed a Free Trade Agreement (FTA) and a related Investment Agreement. The Agreements, encompassing trade in goods, trade in services, investment, economic and technical co-operation, dispute settlement mechanism and other related areas, are expected to enter into force on 1 January 2019 at the earliest, subject to completion of the necessary procedures.

As Hong Kong has very few locally made products, the impact of trade in goods commitments may not be significant, but Hong Kong exporters should be able to benefit from the reduction of trade restrictiveness due to non-tariff barriers. Yet the WTO-plus services commitments will open up new business opportunities for Hong Kong. This, together with the full investment protection offered to Hong Kong investors, will support further growth in bilateral trade and investment flows, which have seen impressive growth in the past years.

Trade in Goods Commitments

While Singapore is generally a free port, which imposes no customs tariffs on most of the imported goods, the rest of the ASEAN member states have agreed to eliminate or reduce their customs duties on goods originating from Hong Kong, subject to the rules of origin. Brunei Darussalam, Malaysia, the Philippines and Thailand will eliminate customs duties on about 85% of their tariff lines within 10 years and reduce customs duties on about another 10% of their tariff lines within 14 years; Indonesia and Vietnam will eliminate customs duties on about 75% of their tariff lines within 10 years and reduce customs duties on about another 10% of their tariff lines within 14 years; and Cambodia, Laos and Myanmar will eliminate customs duties on about 65% of their tariff lines within 15 years and reduce customs duties on about another 20% of their tariff lines within 20 years. The tariff reduction commitments cover a wide range of goods, with a clear and progressive tariff reduction timetable.

Table: Hong Kong-ASEAN Free Trade Agreement Trade in Goods Commitments
Table: Hong Kong-ASEAN Free Trade Agreement Trade in Goods Commitments
Table: Hong Kong-ASEAN Free Trade Agreement Trade in Goods Commitments of Selected Products
Table: Hong Kong-ASEAN Free Trade Agreement Trade in Goods Commitments of Selected Products

The rules of origin, however, stipulate that the goods have to be made with not less than 40% of materials sourced or value added in Hong Kong or ASEAN or a combination of these places. That is, re-exports of products made in the Chinese mainland to ASEAN are generally not eligible for the preferential treatment. Apart from the regional value content requirement, direct consignment is required.

Hong Kong’s manufacturing base is small and therefore the impact of lower tariffs is not expected to be substantial and widespread, but it is certainly a positive development in any sense. As to which types of products are likely to benefit, reference can be made to The Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) which requires 30% of value-add in Hong Kong in order to qualify for zero-tariff treatment when exporting to China. The number of applications for the respective certificates of origin has been higher in textiles and clothing, food, pharmaceutical, plastics, and plastic products.

As part of the trade in goods commitments, Hong Kong and ASEAN will strengthen co-operation in sanitary and phytosanitary measures, technical barriers to trade and customs matters. In many cases, non-tariff barriers are the real impediment to trade. According to World Trade Organization (WTO) estimates from a sample of 91 countries, non-tariff barriers are equivalent to a 12% tariff barrier. With the FTA in place, trade restrictiveness between Hong Kong and ASEAN is expected to be reduced amid the authorities’ effort in removing non-tariff barriers.

Trade in Services Commitments

The scope and coverage of the commitments on trade in services are generally in line with both sides’ commitments under the WTO. Yet individual ASEAN member countries have made more commitments than those currently imposed under the multilateral WTO agreement. Some of the major WTO-plus commitments include:

  • Thailand will allow foreign equity participation not exceeding 70% (higher than the WTO’s 49%) of the registered capital in some sectors, such as hardware and software consultancy, R&D, advertising, higher education and environmental services.
  • Malaysia will allow an aggregate foreign interest up to 30% or RM10 million (US$2.5 million) in value on mergers, acquisitions and take-overs, while the respective WTO commitment is RM5 million.
  • Indonesia will allow foreign equity participation not exceeding 51% (higher than the WTO’s 49%) for construction and related engineering services.
  • The Philippines will allow, in the financial leasing sector, foreign nationals to own up to 50% (versus the WTO’s 40%) of the voting stock. Also, foreign nationals may become members of the Board of Directors to the extent of the foreign participation in the equity of the enterprise, while the respective limit is one-third under the WTO commitment.

In addition, individual ASEAN member countries will open some sectors not currently covered under the multilateral WTO agreement. For example, Malaysia will open urban planning and landscape architectural services and maritime freight forwarding services; Thailand will open arbitration services and electronic mail services; Indonesia will open restaurant services and energy related analysis services; and Singapore will open technical testing and analysis services, and adult education services.

There are rules under the FTA requiring all parties to maintain transparent and fair domestic regulations. The FTA also provides a regular review mechanism which paves the way for future negotiations of improvements to market access commitments and progressive liberalisation for the services sector.

Investment Protection

According to the latest available data, Hong Kong was the fourth largest source of foreign direct investment (FDI) in ASEAN, trailing Singapore, US and Japan. FDI from Hong Kong amounted to US$9.9 billion in 2016, or 10% of the total FDI in ASEAN, an increase of 218% compared with 2011. In the past years, Hong Kong’s FDI in ASEAN have been concentrated in sectors spanning finance, electricity, manufacturing and real estate.

Table: ASEAN FDI by Major Source
Table: ASEAN FDI by Major Source
Table: Hong Kong’s FDI in ASEAN by Major Sector
Table: Hong Kong’s FDI in ASEAN by Major Sector

The Investment Agreement between Hong Kong and ASEAN will promote and strengthen Hong Kong investors’ confidence for the ASEAN region. It will provide the Hong Kong enterprises investing in ASEAN markets with fair and equitable treatment; full protection and security of investments; and free transfer of investment and returns. Compensation will be provided according to the agreed standard in case of expropriation of investments or investment losses owing to war, armed conflict or similar events. Before that, Hong Kong had only Investment Promotion and Protection Agreement (IPPA) with Thailand among ASEAN countries. The newly signed Investment Agreement will extend the protection to cover all major economies in Southeast Asia.

Other FTA Commitments

The FTA comprises a chapter on economic and technical co-operation (ECOTECH) which aims to enhance the benefits of the FTA through capacity building programmes and technical assistance. Both sides have agreed to conduct ECOTECH activities in five priority areas, namely customs co-operation, professional services, small and medium enterprises co-operation, trade facilitation/logistics, and e-commerce co-operation. These activities, in the form of seminars, workshops, exhibitions, visits, etc, are targeted at the private sector to help them enter the ASEAN market.

In the area of intellectual property rights, both sides have agreed to promote and strengthen co-operation in order to enhance their economic and trade relations, apart from reaffirming the rights and obligations under the WTO Agreement. Also, the two sides have agreed to establish a transparent mechanism for consultations and settlement of possible disputes. An arbitral tribunal may be established if the consultations fail to resolve the disputes.

Malaysia’s Demand for Hong Kong Products and Services

Malaysia sees a strong demand for Hong Kong consumer products – especially fashion items – and services including IT, licensing and franchising, and creative and design, according to a recent HKTDC survey conducted at the In Style Hong Kong (ISHK)[1] held in Kuala Lumpur, Malaysia. A total of 344 valid questionnaires were received from the participants of the event.

Malaysian buyers visiting the ISHK Expo were asked to rate from 1 to 7 the importance of different sourcing locations, with 1 denoting the most important. Overall, Chinese mainland, with a score of 1.97, is considered the most important sourcing location, followed by Hong Kong (2.44) and ASEAN (2.84). However, respondents regard Hong Kong as a more important sourcing location for jewellery and watches, and fashion and accessories.

Table: Importance as a Sourcing Location
Table: Importance as a Sourcing Location

In the coming three years, Malaysian buyers believe that they will increase sourcing from all these three locations but with higher percentage for ASEAN (62%) than Chinese mainland (49%) and Hong Kong (44%).

Table: Expectation on Sourcing Activities
Table: Expectation on Sourcing Activities

The survey has also revealed Malaysian companies’ strong intent to expand, according to participants of the ISHK Symposium. Virtually all respondents (96%) said that they plan to increase sales and/or develop brands over the next three years. Over half of these respondents named ASEAN countries (other than the respondents’ home countries and Singapore) (52%) as their target market, followed by their home countries (49%) and Hong Kong (35%).

Chart: Locations to Develop Brands and or Increase Sales
Chart: Locations to Develop Brands and or Increase Sales

Seeking out business partners or agents is often necessary during the expansion process. In the HKTDC survey, 96% of the respondents who have expansion plans in mind said that they would need to seek out business partners or agents to help implement the new initiatives. While most of the respondents planned to find one in their home countries (48%) and in other ASEAN countries (45%), 42% would look for theirs in Hong Kong.

Chart: Locations to Seek Out Business Partners or Agents
Chart: Locations to Seek Out Business Partners or Agents

Acquiring external services is also common. In the HKTDC survey, respondents were asked what type of external services would be required for implementing their plans for the next three years. Over half of them indicated information technology (58%) and advertising & marketing (58%) as necessary, followed closely by logistics and warehousing (54%), business consulting (54%) and creative and design (51%).

Chart: External Services Required
Chart: External Services Required

As to where the ASEAN companies will acquire these external services – in their home countries, Singapore, Hong Kong and/or other places, survey results show that respondents prefer acquiring all of these services in their home countries. Outside their home countries, respondents prefer Hong Kong to Singapore regarding all the external services listed, with stronger demand from Hong Kong in information technology (37%), and licensing and franchising (36%), while largest margins of Hong Kong over Singapore were seen in creative and design (33% versus 16%), information technology (31% versus 16%), business consulting, and logistics and warehousing (30% versus 15%).

Table: Locations to Acquire the Services
Table: Locations to Acquire the Services

[1]  In Style Hong Kong is a large-scale signature promotion campaign organised by the Hong Kong Trade Development Council (HKTDC). The November 2017 In Style Hong Kong was held in Kuala Lumpur, including a trade expo showcasing a wide array of quality branded and design-led lifestyle products from Hong Kong, a service symposium featuring a range of business services, a high-level gala dinner welcoming prominent officials and business leaders from Malaysia and Hong Kong, and a series of citywide promotions to engage Malaysian consumers. This followed a similar October 2016 event held in Bangkok.

Content provided by Picture: Wenda Ma
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