A trade bridge to the mainland

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Last updated at: (Beijing Time) Monday, February 16, 2004

A trade bridge to the mainland

A free trade agreement between Hong Kong and China's mainland comes into effect tomorrow with many foreign companies still pondering how they can take advantage of it to gain early access to mainland markets.

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A free trade agreement between Hong Kong and Chinese mainland comes into effect tomorrow with many foreign companies still pondering how they can take advantage of it to gain early access to mainland markets.

The Closer Economic Partnership Arrangement was devised by China's mainland to bolster Hong Kong's battered economy after a prolonged downturn, exacerbated earlier this year by the outbreak of severe acute respiratory syndrome.

The pact - China's first bilateral trade agreement - will give qualified companies advantages in advance of the timetable for market access devised when China joined the World Trade Organization two years ago.

Foreign companies, particularly multinationals, however, are still weighing the potential advantages against the cost and effort of obtaining a CEPA certificate.

"We have multinational clients in several sectors asking 'what does CEPA mean to me?' but so far none is advanced in the qualification process," says Tom Jones from Freshfields Bruckhaus Deringer in Hong Kong.

"To obtain most benefit from the CEPA, foreign companies should have applied earlier because the approval process takes about three months for service providers. Some firms might consider they are better off waiting until the end of the year when they gain access anyway under WTO rules."

Under the CEPA, the mainland will apply zero import tariffs from tomorrow on 273 classes of goods originating in Hong Kong, benefiting both manufacturers and distributors. It also allows service providers based in Hong Kong access in 18 sectors including telecommunications, accounting, insurance and legal services.

So far, only 44 companies have applied for a certificate to prove their identity as Hong Kong companies as a precursor to setting up on the mainland. Most are in transport and logistics, distribution or telecommunications. Fourteen of these applications have been approved.

Mr Jones says that telecoms and pharmaceuticals industry clients are particularly interested to see if they can enjoy a "jump start" over competitors forced to wait for change through the WTO.

Simon Luk, partner at Heller Ehrman in Hong Kong, says many of his firm's large clients are excited about the CEPA in theory and exploring possibilities. "But exploring is different from applying for a licence," he says. "Clients who sell luxury goods are particularly interested because the capital thresholds are lower under CEPA than under WTO."

Legal and accounting experts claim that foreign companies can access the CEPA most effectively by partnering with or outsourcing to a Hong Kong manufacturer to make their goods qualify as tariff-free. They can also invest in a CEPA-qualified service provider - a move deemed attractive by certain foreign banks such as Fubon Bank from Taiwan, which recently bought a 55 percent stake in Hong Kong- based International Bank of Asia.

Goods that qualify as made in Hong Kong must be "substantially transformed" under the rules with at least 30 percent of the value added in the territory. This can include research and development costs as well as design costs.

Mr Jones believes that companies concerned about copyright and intellectual property rights might opt to manufacture in Hong Kong.

Hong Kong's trade and industry department and the five government-approved certification organizations Sunday began accepting applications for certificates showing that goods are of Hong Kong origin.

Source: agencies

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