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Hong Kong, WT/TPR/S/241 Page vii

SUMMARY 4. While the Kong, China Government remains committed to a free 1. , China remains one of the market philosophy, these new challenges have most market-oriented and open economies in prompted a rethink of the role of government the world (the ratio of trade in goods and non- in promoting . As a factor services to GDP was 380% in 2009). It result of the recommendations by a major Task also has one of the world's most liberal and Force on Economic Challenges, six new transparent foreign investment regimes. industries have been identified in which the economy is believed to have "competitive 2. Although Hong Kong, China's advantages" (testing and certification; economy suffered a sharp contraction in early services; innovation and technology; cultural 2009 as a result of the global financial crisis, it and creative industries; environmental has recovered fairly quickly owing mainly to services, and services). Various its closer economic relationship with China new incentives are to be used to foster these and the latter's return to strong growth. The new industries, including financial and economy's resilience to external shocks is also regulatory incentives, access to land, as well as underpinned by the flexibility of its wages and preferential access under Economic prices, which is especially important as the Partnership Arrangement with China (CEPA). Hong Kong remains pegged to the The question arises as to whether this marks a U.S. dollar (which reduces Hong Kong, shift in favour of a interventionist policy. China's scope for exchange rate flexibility and an independent monetary policy). Moreover, 5. Hong Kong, China's closer economic Hong Kong, China's prudent regulation of the relationship with China under the CEPA offers financial markets has shielded it from the an immense opportunity for it to exploit its worst effects of the global financial crisis. comparative advantage. The depth and Hong Kong, China has not adopted any coverage of liberalizing measures has been protectionist measures in response to the crisis. further extended in the of goods ( increasingly comprehensive CEPA rules of 3. Hong Kong, China is facing a number origin), and services. Preferential access to of new challenges, as well as opportunities, as China's markets has been progressively a result of the global financial crisis and the extended to 44 service sectors (from emergence of China as a major economic and January 2011). These market opportunities are trading power, as well as a competitor. available to companies of any Hong Kong, China's mainly services-oriented based in Hong Kong, China. Under CEPA's economy has traditionally been dominated by trade and investment facilitation agenda both four pillar industries, i.e. financial services, sides have undertaken, inter alia, to improve trading and logistics, , and professional the transparency of laws and regulations, and services, which account for roughly 55% of the protection of intellectual property rights. GDP and almost half of employment. As Therefore, CEPA bring benefits to the China is shifting its reliance from broader WTO membership. manufacturing to services, the challenge is to maintain these service industries and Hong 6. Hong Kong, China remains a staunch Kong, China's position as a regional and global supporter of the multilateral trading system, in the face of increased with an excellent record of providing competition from such cities as . notifications, and a commitment to free and Another major challenge is posed by improved open trade. Nonetheless, the Hong Kong, cross-strait trade relations between China and China Government has adopted a more active Chinese , which reduces Hong Kong, approach in pursuing FTAs with its trading China's intermediary role with regard to partners in order to advance its economic and financial services, trade, and logistics. trade interests. A Closer Economic Partnership Agreement with was WT/TPR/S/241 Trade Policy Review Page viii

concluded in 2010, while FTA negotiations health, safety, security or environmental with EFTA are under way. reasons (under international agreements). Imports and exports of textiles remain subject 7. One of the most significant to special controls regarding their origin. developments in the direction of Hong Kong, China's trade policy is the shift towards 11. While Hong Kong, China ranks highly cross-sectoral competition legislation, which in terms of well-known indicators of economic Hong Kong, China had previously eschewed freedom, competitiveness, and ease of doing on the grounds of the high degree of openness , there has been a gradual move of its economy. The new Competition Bill, towards more regulation of markets for social, which was submitted to Hong Kong, China's health, environmental, and prudential reasons. legislature in 2010, marks a major step For example, like other WTO Members, forward. Under the proposed law, an Hong Kong, China has introduced a new independent Competition Commission will be regulation for nutrition labelling and nutrition responsible for enforcing the law and claims (such as "fat-free"). It has also drawn developing competition guidelines; and up a minimum wage law, whose effect on enforcement proceedings are to be adjudicated employment and the economy's by a Competition . The Bill's competitiveness will depend on the minimum proposed content to prevent anti-competitive wage level implemented. practices is broadly in line with the coverage of competition laws of other jurisdictions, 12. The regulatory framework for food although comprehensive regulation of mergers safety and medicines has faced challenges and acquisitions has been postponed. It following several incidents in and outside remains to be seen what kind of agreements or Hong Kong, China (such as the melamine conduct will be carved out from the law, and incident). A new Bill, which is whether it will include statutory bodies, which pending, contains registration and play an important role in the economy. record-keeping requirements for operators to facilitate the traceability of (tainted) food. 8. While all applied MFN tariffs are zero, only slightly more than one third of the 13. Public procurement in Hong Kong, non-agricultural tariffs are subject to WTO China is relatively small (about 4% of GDP in bindings (all agricultural tariffs are bound), 2009), reflecting the commitment to "big which imparts a certain degree of market, ". However, most unpredictability to Hong Kong, China's tariff. contracts have been awarded through restricted However, Hong Kong, China's "mini- and selective tendering procedures rather than constitution", the Basic Law, guarantees the more transparent open tenders. Hong Kong, territory's status as a free port. China is party to the plurilateral WTO Agreement on Government Procurement. 9. Hong Kong, China's customs procedures are simple owing to its duty-free 14. Hong Kong, China is also a low-tax tariff regime. Almost all trade documents can (with tax revenues accounting for be lodged electronically (e-customs). Customs about 13% of GDP in 2008-09) but the global valuation, for purposes of levying excise financial crisis has exposed certain weaknesses duties, applies to only four products (liquor, of the tax structure. These include the tobacco, hydrocarbon oil, and methyl oil). volatility of revenues from the sale and lease Excise duties on wine have been eliminated to of land (land premiums, stamp duties), which boost Hong Kong, China's ambitions of is largely -owned, and the lack of becoming a trading centre for fine wines. revenues from other sources, such as indirect taxes, which are relatively non-distorting and 10. There are few import and export stable during the business cycle. The proposal restrictions, which are generally imposed for to broaden the tax base by introducing a goods Hong Kong, China WT/TPR/S/241 Page ix

and services tax was dropped as a result of 18. Both Hong Kong International Airport public opposition. (HKIA) and Hong Kong Port are facing intense competition from neighbouring and 15. Hong Kong, China has a relatively other regional airports and seaports, such as neutral direct tax system, but it is not entirely in China. The authorities have free of tax incentives, as there are tax reached a number of new or more liberal air allowances, for example, for environmental services agreements with aviation partners, and intellectual property-related expenditures. with a view to strengthening HKIA's position Otherwise, the Government's limited as an air hub and opening new opportunities assistance has mainly been in the form of for Hong Kong, China's . Hong Kong, grants, loans, or loan guarantees. Increased China has not pursued "open skies" (an assistance has been provided notably for small exception to its otherwise liberal and open and medium-sized enterprises (in response to policies). HKIA is the world's leading airport the global financial crisis) and some of the in terms of cargo turnover, and the planned six "new industries". Certain research and opening of a fourth private-sector-operated air development is subsidized to foster an cargo terminal is aimed at further enhancing innovation and research culture, as its competitiveness. Hong Kong, China spends less on R&D (relative to the size of the economy) than 19. To strengthen the airport and seaport's China or other advanced economies. gateway position to China, Hong Kong, China has been developing its links to 16. In the area of intellectual property, China. A major publicly financed Hong Kong, China has implemented the infrastructure project, a landmark compulsory licensing scheme under linking Hong Kong, China with China and Paragraph 6 of the Declaration. It has Macao, China, is expected to strengthen the modernized the protection of intellectual economic relationship with Hong Kong, property to align it with technological China's hinterland in the western developments and international standards, and part of the Delta region. There are is reviewing its legislative framework for also plans to build a new terminal for mega copyright protection in the digital cruise ships, with a view to positioning Hong environment. Hong Kong, China has also Kong, China as a regional cruise hub. Travel taken steps to strengthen the enforcement of arrangements for visitors from China have intellectual property rights. been further liberalized, greatly benefiting , China, another of its 17. The financial services industry traditional pillar industries. remains the most important pillar of the economy. The Government has been keen to 20. Hong Kong, China has taken further promote Hong Kong, China's role as a steps in deregulating the highly competitive financial centre, notably through market access telecommunications market. The regulatory improvements in China for Hong Kong, China intervention requiring mobile operators to pay service suppliers (CEPA), and by broadening fixed operators interconnection fees for traffic the opportunities for offshore business in in both directions (the Mobile Party's Network renmimbi. Major new developments in this Pays arrangement) was withdrawn to allow the regard include RMB bond issues in market to determine the rates and the type of Hong Kong, China by China's financial arrangements. As a result of facility-based institutions, and an RMB trade settlement pilot competition among operators, about 85% of scheme (introduced in 2009), which offers the territory's population has a choice between Hong Kong, China new opportunities for several fixed and wireless broadband financial intermediation between China and networks. Telecommunications and the rest of the world. broadcasting are the only sectors of the WT/TPR/S/241 Trade Policy Review Page x

Hong Kong, China economy currently subject influenza) and environmental concerns, the to competition rules. Government intervened with Green Box-type resource retirement schemes to encourage pig 21. The electricity market remains and poultry farmers to abandon production. dominated by two private-sector territorial The incentive payments have resulted in a monopolies, which are controlled through tight substantial drop in livestock output. For the regulation. The Government is currently staple food of , a number of control undertaking preparatory work with a view to measures, including a reserve-stock scheme, the possible liberalization of the electricity remain in place. Rice stocks are maintained market, albeit not before 2018. mainly to allay public concerns in the event of tight supplies or shortages, for example, as a 22. Hong Kong, China's agricultural base result of restrictions imposed by rice-exporting is very small and virtually all food is imported. . In response to public health (H5N1 avian