Who Benefits From CEPA? Let's Wait and See

Article 2 of CEPA sets out five principles to which the "conclusion, implementation and amendment of CEPA will adhere". The following principles are fundamental to a full understanding of CEPA.

One Country, Two Systems

It may come as a surprise to some that the first free trade agreement between China and Hong Kong (the two sides) is not in fact an agreement at all. It is instead, as the name states, an arrangement. Since Hong Kong is a part of China, CEPA cannot be an international convention between two autonomous states. It is instead an understanding between two separate customs jurisdictions, and is an example of the operation of the One Country, Two Systems principle.

Consistency with WTO Rules

Another of CEPA's guiding principles is consistency with WTO rules. The WTO General Agreement on Tariffs and Trade (GATT) and the General Agreement on Trade in Services (GATS) both contain non-discrimination clauses requiring equal treatment of all WTO members. How then can China give Hong Kong preferential treatment under CEPA? CEPA is an example of the many regional trade agreements worldwide that give preferential treatment to the parties to those agreements. The WTO system permits such regional arrangements as exceptions to its non-discrimination requirements provided that certain stipulated criteria are met, including the general objective of liberalizing trade. Moreover, there have been few complaints in relation to regional trade arrangements, perhaps because all WTO members have a vested interest in concluding such agreements themselves.

CEPA will likely be used as a model by China for potentially similar arrangements with Macau and Taiwan, and eventually probably a greater China regional free trade agreement.

Progressive Action

There is one more CEPA principle that I believe is vital to understand: "To take progressive action, dealing with the easier issues first." What does this mean?

While CEPA itself was signed in June, its six Annexes, which form an integral part of CEPA, were not signed at that time. Various fundamental aspects of CEPA and its Annexes remain as yet undecided and subject to ongoing consultation. The two sides intend to resolve these in the coming months and to sign the Annexes before January 1 2004 when CEPA's concessions are scheduled to commence. It is also important to note that only the Chinese text of CEPA was signed and this is the only authoritative text. No official English version exists yet, although it is possible that one will eventually be agreed. There are also various anomalies and ambiguities in CEPA that may be due to the hasty finalization of the document. Amendments were being made to the text up to the final hours before its execution. The full ambit of CEPA has therefore not yet been revealed. In order to understand CEPA, then, it is vital to accept it as a flexible base from which concessions and cooperation can commence and develop. It is not a sealed package of comprehensively agreed terms.

CEPA CONCESSIONS

CEPA benefits are divided into three groups: (i) gradual tariff elimination; (ii) greater China market access for various Hong Kong service sectors; and (iii) general trade and investment facilitation measures between the two sides. These three groups are dealt with individually below from the perspective of Hong Kong's foreign business community.

Gradual Elimination of Tariffs

Under CEPA China undertakes to apply a zero tariff to the importation to China from Hong Kong of Hong Kong origin goods, starting from January 1 2004 in the case of 273 initial categories of goods. In order to obtain the exemption, Hong Kong manufacturers will be required to make an application to the Hong Kong Government's responsible department, presumably the Trade and Industry Department (the TID). By January 1 2006, the zero tariff will be progressively extended to other categories of goods. For its part, Hong Kong binds itself to its existing regime by undertaking to continue its existing zero tariff on mainland goods imported into Hong Kong.

An important point to note here is that the zero tariff will only apply to "Hong Kong origin" goods as defined in CEPA's Rules of Origin. Moreover, the Rules of Origin have not yet been finalized. Annex 2, which will contain the Rules of Origin, is the subject of ongoing consultations. The two sides are seeking "to reach a consensus as early as possible" so that Annex 2 can be signed before the starting date of January 1 2004. Recent reports reflect that they will attempt to reach agreement on this by the end of September 2003.

Overseas corporations need to understand that they cannot benefit from the zero tariff simply by channeling their China-destined exports through Hong Kong, regardless of whether or not they have a Hong Kong subsidiary or branch office. Such goods cannot be classed as "Hong Kong origin" goods, however one might interpret that phrase. There are, of course, also foreign goods that undergo some manufacturing process in Hong Kong before being exported from Hong Kong to China. Whether or not these goods may benefit from CEPA's zero tariff depends entirely on the ultimate definition of "goods of Hong Kong origin" that will be contained in the Rules of Origin. The definition will likely be based upon a percentage amount of "value added" in Hong Kong. This might be between 25-30%, which would represent a compromise between the two sides since it has been reported that Hong Kong proposed around 25% whereas China's norm for determining origin is around 35-40%. It is possible that other factors may also be included in the definition.

In addition, it is important to note that the much talked about definition of a CEPA "Hong Kong company" is not relevant to the zero tariff on importation of Hong Kong origin goods in China. It is the nature of the goods themselves (i.e., whether they comply with the Rules of Origin) that determines eligibility for the zero tariff. This is clarified by the TID in the concise FAQ found on its website.

Increased China Market Access in 17 Service Sectors

Starting from January 1 2004, China will grant Hong Kong greater access to 17 service sectors, and in exchange Hong Kong binds itself to its existing regime with respect to China's access to Hong Kong service sectors.

The 17 service sectors mentioned above are listed in Annex 4, together with the specific concessions that will be accorded to each. The sectors include such varied fields as banking, legal services, insurance, distribution, convention services and freight forwarding.

CEPA's service sector concessions permit quicker access to the China market than China's WTO timetable. In some sectors, such as legal services, the concessions extend beyond China's WTO commitments.

The fact that CEPA is a work in progress (even after the signing of the main text) is reflected particularly in its service sector concessions. Expansion of China's concessions (accorded in Annex 4) began to take place very quickly after the signing of the main text. It has been reported that during Chief Executive Tung Chee-hwa's visit to Beijing on July 19 2003, the Chinese government discussed adding telecommunications to CEPA's list of service sectors and also accelerating liberalization in financial services. The tourism sector has already been accorded an expansion with a significant increase in the number of mainland cities from which Chinese nationals may travel to Hong Kong as individual tourists. Previously, mainland nationals were always required to travel as part of organized tour groups.

Which business vehicles benefit from these service sectors concessions? It is here that CEPA's definition of a Hong Kong company comes into play. At this stage in CEPA's development we can only say that a "Hong Kong company" as defined in Annex 5 (