Hong Kong and New Zealand
A Possible Closer Economic Partnership Agreement
Consultation Document

INTRODUCTION

The Hong Kong Special Administrative Region (HKSAR) Government announced on 10 February 2009 that Hong Kong will resume negotiating a Closer Economic Partnership (CEP) Agreement (note 1) with New Zealand. The negotiations will encompass a wide-ranging scope, with emphasis on trade and investment liberalisation and facilitation.

2. This note provides background information on key areas to be covered in the negotiations, and invites views from interested parties with a view to assisting the Government in formulating its overall position in the Hong Kong and New Zealand CEP Agreement negotiations.

3. Views and comments on the proposed Hong Kong and New Zealand CEP Agreement can be forwarded to the Europe Division of the Trade and Industry Department (TID) by 15 March 2009. Contact details are set out in the conclusion section of this document.
   

4. This consultation document is also available at TID's website: www.tid.gov.hk
   

BACKGROUND

Hong Kong's Position on Free Trade Agreements (FTAs)

5. The multilateral trading system as embodied in the World Trade Organization (WTO) is the cornerstone of Hong Kong's policy on external trade relations. As a small economy with little natural resources, we have adopted an open and non-discriminatory economic policy with zero tariffs and minimum trade restrictions. We are a staunch supporter of the rules-based multilateral trading system and are one of the strongest advocates of the primacy of multilateralism.
   

6. At the same time, we adopt an open-minded approach towards the negotiation of FTAs with our trading partners. As and when opportunities arise, we are prepared to explore the possibility of entering into FTAs with other economies, so long as these are in Hong Kong's interests, are consistent with WTO principles and provisions, and can contribute to multilateral trade liberalisation (note 2) .
   

7. Hong Kong and New Zealand both practise free trade and maintain a free and open economy. Both are members of the WTO and share a common interest in the further liberalisation of world trade and the strengthening of the multilateral trading system. The HKSAR Government targets to reach a balanced and high-standard FTA between Hong Kong and New Zealand.

FTA Negotiations with New Zealand

8. Hong Kong and New Zealand started the negotiation of Hong Kong and New Zealand CEP Agreement in 2001. Five rounds of formal negotiations were held between 2001 and 2002, covering the following main areas::

a.  early elimination of tariffs on all goods of Hong Kong and New Zealand origin;

b.  a set of forward-looking rules of origin which could encourage bilateral trade;

c.  liberalisation of potentially distortive instruments in their bilateral trade, such as safeguards, anti-dumping and subsidies measures;

d.  liberalisation and promotion of bilateral investment; and

e.  liberalisation of trade in services.

9. The negotiations were suspended in February 2002 when Hong Kong and New Zealand could not reach agreement on some technical issues. Since then, both sides have kept in contact on the possible resumption of formal talks.

10. The two sides recently agreed to resume formal negotiations. The first round of formal resumed meetings is planned to be held in late April/early May 2009.

General Economic and Trade Relations between Hong Kong and New Zealand

Merchandise Trade

11. New Zealand, with a population of about 4.2 million, is an important trading partner of Hong Kong in the Asia Pacific region. Total bilateral merchandise trade in 2007 amounted to about HK$ 7 billion, with a remarkable growth of 11% over 2006. The average annual growth rate in bilateral trade was 9.1% from 2003 to 2007. Of the HK$ 194 million worth of Hong Kong's domestic exports to New Zealand in 2007, telecommunications and sound recording and reproducing apparatus and equipment; dyeing, tanning and colouring materials; jewellery, goldsmiths' and silversmiths' wares, and other articles of precious or semi-precious materials constituted the major items. In 2007, Hong Kong's re-exports to New Zealand amounted to HK$ 3.9 billion, of which 84% were products of China origin.
    

12. Hong Kong is New Zealand's 11th largest export market; and imports from New Zealand topped HK$ 3 billion in 2007. Food products, particularly dairy and fish products, constituted the major items imported into Hong Kong. In 2007, HK$ 3.8 billion worth of trade between New Zealand and the Mainland of China was routed through Hong Kong, representing 13.1% of the total trade between New Zealand and the Mainland. The balance of merchandise trade has always been in Hong Kong's favour.

Services Trade

13. In 2006, total trade in services with New Zealand amounted to almost HK$ 3 billion. New Zealand is our 20^th largest trading partner in services. Our services trade with New Zealand recorded remarkable growth in recent years. The average annual growth rates between the two economies from 2002 to 2006 were 19.3% and 5.9% for exports and imports of services respectively. The average annual growth rate for total trade in services during this period was 11.1%. The bilateral trade in services increased by 6.2% in 2006. Major services sectors included travel services, transportation services, merchanting and other trade-related services.
    

BRIEF BACKGROUND ON THE KEY AREAS TO BE COVERED IN THE NEGOTIATIONS

Tariffs

14. Unlike Hong Kong which has a zero-tariff policy on all imports, New Zealand imposes tariffs on some imports. In 2006, although 57% of its tariff lines were duty-free and their average applied tariff rate at 3.4% was not particularly high, high tariff rates tended to concentrate on sensitive items such as clothing and footwear (applied rate at 17% for certain items) in which Hong Kong has keen export interest. On the basis of our export statistics, the tariffs payable for Hong Kong domestic exports to New Zealand are estimated to be about HK$ 12.2 million in 2006 and HK$ 7 million in 2007 respectively.

15. Under the CEP negotiations, Hong Kong and New Zealand would seek to agree on the modalities for early elimination of tariffs on all goods of Hong Kong and New Zealand origin by an agreed date. It is envisaged that both sides will continue their discussions on when and how to implement tariff elimination of all goods.

    Views sought: we invite views on which sectors Hong Kong should particularly focus on in the tariff negotiations.

Rules of Origin

16. The existing origin rules of Hong Kong are based on the origin conferring criterion of the "last substantial transformation" (note 3) and are applied for non-preferential purpose. To ensure that only goods of Hong Kong and New Zealand origin benefit from the removal of tariffs, it will be necessary for both sides to agree on a set of origin rules to prevent circumvention of products. 

17. Under the CEP negotiations, the two sides would seek to agree on a set of modern, forward looking rules of origin, designed to encourage bilateral trade in goods between Hong Kong and New Zealand. It is envisaged that both sides will continue their discussions on the details of the implementation of any origin rules to be agreed, including the documentation requirements of products to substantiate origin and claim tariff preferences on importation.

    Views sought: we welcome comments and input on the origin rules under the proposed CEP Agreement as well as the implementation aspects of such rules.

Trade in Services

18. Hong Kong is a service-oriented economy and is a strong exporter of services. In 2007, the services sector constituted over 92% of Hong Kong's Gross Domestic Product (GDP). Hong Kong's total trade in services in the same year reached HK$ 973 billion. Hong Kong is consistently a net exporter of services, with export amounting to HK$650 billion in 2007. According to the WTO, taking the European Union as a single services trading entity, Hong Kong is the world's 9^th largest service trading entity in 2007.
    

19. Given our keen interests and strong potential in trade in services, securing further and better market access in services in New Zealand will be a prime focus of Hong Kong in the CEP negotiations. Our major services sectors include financing, insurance, real estate and business services (29.3% of GDP); wholesale, retail and import and export trades, restaurants and hotels sector (27.0%); community, social and personal services sector (17.0%); and transport, storage and communications (8.9%).

20. Closely-related to trade in services, the CEP negotiations will also cover e-commerce (note 4) and new economy. The aim is to agree on a framework to consider ways to improve the regulatory environment in both economies that enables business to take full advantage of the opportunities opening up in this area.

    Views sought: we invite views on which sectors and services measures of New Zealand Hong Kong should particularly focus on in the services negotiations under the CEP. We also welcome other comments and input on matters relating to services trade with New Zealand, such as issues relating to e-commerce.

Investment

21. New Zealand is an important source of inward direct investment into Hong Kong as well as an important destination of Hong Kong's outward direct investment. The Hong Kong-New Zealand Investment Promotion and Protection Agreement (note 5) has been in force since August 1995. The aim of the CEP negotiations will be to enhance the liberalisation and promotion of investment between the two economies.

    Views sought: we invite views on improvements that should be sought from New Zealand to its policy on, and treatment of, investment from Hong Kong.

Other Elements for Negotiations

22. The CEP negotiations will also cover other areas of mutual interests, including amongst others safeguards and anti-dumping measures (note 6), non-tariff barriers (note 7), subsidies (note 8), standards and conformance and customs procedures.
    

23. The CEP negotiations will seek for a framework of liberalisation in safeguards and anti-dumping measures. Similarly, the CEP negotiations will seek to develop disciplines to liberalise non-tariff barriers, with particular focus on quantitative import and export restrictions.

24. On subsidies, the two sides will seek to agree on a framework of rules prohibiting export subsides for all goods. On standards and conformance, it is envisaged that discussions would focus on establishing a framework for reaching agreements on mutual recognition of equivalence of mandatory requirements, conformity assessment, and equivalence of standards.
    

25. Discussions on customs procedures will seek to identify ways to simplify customs procedures, in particular through the use of electronic means and paperless trading.

    Views sought: we invite views on the above elements for the CEP negotiations and any other particular areas or measures which Hong Kong should focus on.

CONCLUDING REMARKS

26. In overall terms, an FTA can bring about expansion of trade and investment, better market access and more favourable business environment among its parties. A Hong Kong and New Zealand CEP Agreement should therefore provide Hong Kong businessmen with more and improved market opportunities in New Zealand, with benefits for Hong Kong in trade, income and employment.

27. In order that the Government may better assess our community's aspirations on the proposed Hong Kong and New Zealand CEP Agreement and develop our overall position in the resumed negotiations accordingly, interested parties are invited to put forward their written comments and views on this important subject by 15 March 2009. Comments can be sent in by mail, fax, or e-mail as indicated below. For enquiries, you are welcome to contact Mr. Daniel Yuen at 2398 5693 or Mr. Steven Ma at 2398 5352, or email: fta@tid.gov.hk.
    

Trade and Industry Department
The Government of the HKSAR
February 2009

Note 1 :
"Closer Economic Partnership (CEP) Agreement" is the terminology used for the proposed free trade agreement (FTA) between Hong Kong and New Zealand. An FTA is a contractual arrangement between two or more economies under which they give each other preferential market access and is aimed at comprehensive and reciprocal trade liberalisation.

Note 2 :
FTA is a permissible exception to the most-favoured-nation treatment principle under the WTO, provided that certain conditions are met. Specifically, on the goods side, parties must remove duties and other restrictive regulations of commerce on substantially all the trade among themselves. If services are included, the agreement should have a substantial sectoral coverage and should provide for the absence or elimination of substantially all discrimination amongst the parties. The WTO rules also require that tariffs and trade barriers for third Member economies should not be raised as a result.

Note 3 :
The "last substantial transformation" criterion, when applied to manufactured goods involving multiple country processing and/or materials, refers generally to the manufacturing process (or processes) which has changed permanently and substantially the shape, nature, form or utility of the basic materials used in manufacture.

Note 4 :
E-commerce generally means the conduct of business by electronic means.

Note 5 :
Investment Promotion and Protection Agreements (IPPAs) are widely adopted international agreements for the promotion and protection of investments between partner governments. A typical IPPA provides for, among others, fair treatment for investors, compensation for losses arising from strife and expropriation, free transfer of investments and returns, and a mechanism for settlement of investment disputes under internationally accepted rules.

Note 6 :
Safeguard measure means action taken to protect a specific industry from an unexpected build-up of imports. A product is considered as being dumped if its export price is less than the comparable price for the like product sold in the exporting economy. Under the WTO Anti-dumping (AD) Agreement, if it is determined that the dumped exports have materially injured a domestic industry of the importing economy, AD duties (being the most usual form of AD measure) on top of tariffs and other charges can be imposed by the importing economy on such imports.

Note 7 :
Non-tariff barriers are trade restrictive measures other than tariffs, such as quotas, import licensing systems, sanitary regulations, prohibitions, etc.

Note 8 :
An export subsidy is a benefit conferred on a firm by the government that is contingent on exports.