Dotting the i's: Cepa II's Legal Text and Annexes Signed

The CEPA II Legal Text came into effect on the date of signature, October 27 2004. Its concessions with respect to trade in products and services, however, will come into effect from January 1 2005, except for certain stipulated exceptions of concessions that have already come into effect pursuant to CEPA II 27/8/04 or pursuant to specific stipulations contained within the CEPA II Legal Text.

As was the case with CEPA I, the unsigned annexes, attached to CEPA II 27/8/04, have undergone revision and expansion before being signed as the CEPA II Legal Text's annexes. The additions and changes to CEPA II 27/8/04, brought about by the CEPA II Legal Text and its annexes, are outlined below.

Products: CEPA II Legal Text Annexes 1 and 2

CEPA II 27/8/04 only had two attached annexes, the first relating to products and the second relating to services. The CEPA II Legal Text has three annexes. The additional (second) annex contains the rules of origin for CEPA II products.

The CEPA II Legal Text's Annex 1 lists the additional 713 Hong Kong products that will be eligible for zero tariff upon importation from Hong Kong to the Mainland provided they comply with the relevant rules of origin. The list is divided into 529 products already being produced in Hong Kong ("goods under current production") and 184 products not currently being produced here ("goods proposed to be produced").

A major amendment to CEPA I, effected by the CEPA II Legal Text, is that "goods proposed to be produced" will be eligible for the zero tariff immediately upon confirmation by both Sides that the goods have started to be produced. Under CEPA I, the zero tariff was available only in the year following the start of production. The effect of the CEPA II Legal Text amendment is that goods that are put into production in 2005 could benefit from the zero tariff in 2005 rather than in 2006.

The CEPA II Legal Text's Annex 2, as mentioned above, provides the rules of origin relevant to the 713 CEPA II product categories. The principal process rule applies to 528 of these products, including various types of textiles, clothing, food and drink, pharmaceuticals, hides, furs and some plastic and metal-based products. The change in tariff heading rule applies to 80 products, including some types of machinery and medical and measuring instruments and apparatus, and the 30% value-added rule (in addition to the principal process requirement) applies to 50 products, including various types of equipment, machinery and compressors. The rules of origin for the 55 remaining products depend on the particular nature of the products themselves (e.g., fish products must generally be "born and bred in Hong Kong"!)

Services: CEPA II Legal Text Annex 3

The CEPA II Legal Text's Annex 3 supplements and amends CEPA I's Annex 4 dealing with service sector concessions. In the event of conflict, Annex 3 prevails.

The CEPA II Legal Text also makes an amendment to CEPA I's Annex 5 dealing with the Hong Kong Service Supplier (HKSS) definition, compliance with which is the threshold requirement for access to all CEPA service sector concessions. The CEPA II Legal Text stipulates that, in the service sector of air transport ground services, an HKSS is required to have obtained the relevant licence and to have engaged in substantive business in this sector in Hong Kong for at least five years prior to making an application for CEPA treatment. This new service sector, introduced by CEPA II, therefore now joins financial services, construction and related engineering and insurance in being subject to a requirement of five years, rather than the generally required three years, of pre-HKSS application substantive business in Hong Kong in the relevant field of operations.

Annex 3 reiterates CEPA II 27/8/04's list of Hong Kong service sectors benefiting from concessions in access to the PRC market. Some clarifications and enhancement of some concessions have, however, been added.

It has been reported that the Hong Kong banking industry has been lobbying for additional concessions to what it had obtained under CEPA II 27/8/04, in light of its ability to assist the Mainland banking industry in its development at this crucial time as the PRC takes on its time-based WTO commitments. Annex 3 now amplifies and clarifies financial services concessions to incorporate services relating to deposits, lending of all types, financial leasing, payment and transmission services, including credit and debit cards and travellers' cheques, guarantees and foreign exchange trading. In addition, the original concession contained in CEPA II 27/8/04 permitting Mainland branches of HKSS banks to conduct insurance agent business (with approval), has been given an earlier starting date by Annex 3. This concession to the banking sector came into effect from November 1 2004, as opposed to the general January 1 2005 starting date for CEPA II concessions.

Concessions in the field of construction and related engineering and part of the distribution concessions came into effect on August 28 2004, pursuant to CEPA II 27/8/04. This early starting date is now expressly stated in Annex 3.

In brief, the CEPA II Legal Text and its annexes have the effect of giving shape to CEPA as a whole (CEPA I and CEPA II) by completing and settling CEPA II's content and integrating it into CEPA I. CEPA has therefore now been synthesized into a unified set of agreements, ready for implementation on January 1 2005, or earlier in the particular cases mentioned above. All of this comes just in time for the reported announcement, on November 2 2004, by Secretary for Commerce, Industry and Technology, John Tsang Chun-wah, that consultations will recommence in early 2005 with a view to reaching the CEPA III agreement around November 2005. Plus ça change...!