CEPA—The Mainland-Hong Kong Free Trade Pact
Hong Kong goods and a wide range of services enjoy preferential access to the Inland market under a landmark Closer Economic Partnership Arrangement (CEPA) with the Inland. This free trade pact provides a new platform for businesses in Hong Kong, local and foreign-owned, to tap the vast opportunities in the Inland. CEPA, which came into effect in January 1, 2004, has given Hong Kong companies a head start over the competition. In some cases, the preferential market access goes beyond the Inland’s World Trade Organization (WTO) commitments. CEPA covers three broad areas: trade in goods, trade in services, and trade and investment facilitation.
(1)Trade in Goods All Hong Kong exports meeting CEPA rules of origin requirements enjoy tariff-free access to the Inland. CEPA has increased the competitiveness of Hong Kong goods in the Inland. For some products, Inland tariffs on imports from other economies remain relatively high (up to 35%).
(2)Trade in Services CEPA has liberalized market access for 27 services areas. Hong Kong services suppliers now have greater access to the Inland market ahead of China’s WTO timetable. Services areas covered by CEPA: management consulting, convention and exhibition, advertising, accounting, real estate and construction, medical and dental, distribution, logistics, freight forwarding agencies, storage and warehousing, transport, tourism, audiovisual, legal, banking, securities and futures, insurance, telecommunications, air transport, information technology, patent agencies, trade mark agencies, job intermediaries, job referral agencies, cultural, professional qualification examinations, and individually owned stores.
In a number of key services sectors, CEPA goes beyond China’s WTO commitments. For example, the entry asset threshold for Hong Kong-incorporated banks has been significantly lowered from US$20 billion to US$6 billion. Hong Kong movies can now entre the Inland quota-free. Hong Kong law firms with a representative office in the Mainland are permitted to do business in association with their Inland counterparts.
(3)Trade and Investment Facilitation Hong Kong and the Inland agreed to promote cooperation in the following eight areas: customs clearance, quarantine and inspection of commodities, quality assurance and food safety, small and medium-sized enterprises, Chinese traditional medicine and medical products, electronic commerce, trade and investment promotion, transparency in laws and regulations and protection of intellectual property.
One of CEPA’s major benefits is much closer economic cooperation between Hong Kong and Guangdong Province, especially the Pearl River Delta (PRD) region. The PRD has become one of the world’s most dynamic and diverse manufacturing basins. To further this economic relationship, cross-boundary cooperation has been upgraded in areas such as tourism, transport infrastructure, environmental protection and the flow of people, goods, services and capital. The Individual Visit Scheme, part of CEPA, allows residents of 49 Inland cities to visit Hong Kong on their own. Definition of a Hong Kong Company: Under CEPA, objective and transparent criteria are laid down on what constitutes a Hong Kong company. In brief, the criteria stipulate that to qualify for the benefits of CEPA, a company must be incorporated in Hong Kong and must engage in substantive business operations in the city. Ownership, shareholding structure, ethnicity or nationality considerations do not figure in the definition. Under this nationality-neutral test, there is no discrimination against foreign-owned companies incorporated in Hong Kong. Hong Kong continues to offer a level playing field for all. In most of the services categories, a company must have been operating in Hong Kong for three to five years. Manufacturers, on the other hand, may immediately set up operations in Hong Kong and begin exporting tariff-free if their products meet the CEPA rules of origin requirements.
Economic Benefits: CEPA has opened many new business opportunities for Hong Kong, giving manufacturers based in Hong Kong a boost and services companies a “first mover” advantage. These opportunities will lead to direct and indirect economic spin-offs, including new jobs. It is a win-win arrangement. CEPA strengthens Hong Kong’s position as an international trade and business centre and as a springboard to the Inland market. It also helps Inland enterprises reach out to international markets.
Greater Market Access: CEPA enhances the attractiveness of Hong Kong to foreign investors wishing to gain greater access to the Inland of China. Investors can set up manufacturing processes in Hong Kong and immediately export products meeting CEPA origin rules tariff-free to the Inland. These may include brand-name products or goods with high value-added content. Or, investors may choose to manufacture products with substantial intellectual property (IP) content, thereby taking advantage of Hong Kong’s legal system and IP protection regime.