Negotiation of a Free Trade Agreement between Hong Kong and Chile
Consultation Document

INTRODUCTION

1. The Hong Kong Special Administrative Region (HKSAR) Government announced today (19 December 2011) that Hong Kong would commence negotiations on a Free Trade Agreement (FTA) with Chile. The negotiations will encompass a wide-ranging scope, with emphasis on trade and investment liberalization and facilitation.
    

2. This note provides background information on key areas to be covered in the negotiations. It also invites comments and suggestions from interested parties with a view to assisting the HKSAR Government in formulating its overall position in the negotiations of an FTA between Hong Kong and Chile. Feedback should be forwarded to the Europe Division of the Trade and Industry Department (TID) by 20 January 2012. Contact details are set out at the end of this document.
    

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

BACKGROUND

Hong Kong's Position on FTA

4. As a small economy with little natural resources, Hong Kong has adopted an open and free trade policy, with zero applied tariff and minimum trade restrictions. Whilst maintaining the primacy of and staunch support for the rules-based multilateral trading system embodied in the World Trade Organization (WTO), Hong Kong has been actively pursuing FTAs so long as they are in Hong Kong's interest, are consistent with WTO principles and provisions and can contribute to multilateral trade liberalization.

FTA Negotiations with Chile

5. Hong Kong and Chile both are advocates of free trade. As members of the WTO, Hong Kong and Chile share a common interest in the further liberalization of world trade and the strengthening of the multilateral trading system. The HKSAR Government targets to reach an ambitious and high-quality FTA between Hong Kong and Chile, consistent with the WTO principles and provisions.
    

6. In July 2009, Hong Kong and Chile completed a Joint Feasibility Study (JFS) on the possibility of commencing FTA negotiations. The study concluded that the enhancement of the trade and economic relationships between Hong Kong and Chile would have a positive impact on the economic relationship between the two sides.
    

7. Riding on the conclusions and recommendations of the JFS, Hong Kong and Chile held exploratory talks in July and October 2011 respectively to discuss the prospect of commencing formal FTA negotiations and their modalities. In general, the two sides share the common aspiration of pursuing a comprehensive and high-quality FTA. The negotiations would cover the following major areas and related issues –

1. removal or reduction of tariffs;
2. liberalization of non-tariff barriers, including technical barriers to trade, sanitary and phytosanitary measures, anti-dumping, safeguards, and countervailing measures;
3. a set of flexible disciplines on rules of origin which would facilitate bilateral trade;
4. a set of customs facilitation procedures;
5. liberalization of trade in services; and
6. liberalization as well as promotion and protection of investment.

General Economic and Trade Relations between Hong Kong and Chile

Trade in Services

8. Chile ranked 34th (Note 1) among Hong Kong's worldwide trading partners and 5th among those in Central and South Americas in 2009. Bilateral trade between Chile and Hong Kong amounted to HK$573 million in 2009, enjoying an average annual growth rate of 7.6% when compared with 2003. Major services trade between the two sides included transportation services, merchanting and other trade-related services. 

Merchandise Trade

9. Chile ranked 29th (Note 1) among Hong Kong's worldwide trading partners and 4th among those in Central and South Americas in 2010. Bilateral trade in goods between the two economies amounted to HK$6,061 million in 2010, representing an average annual growth rate of 7.5% when compared with 2004.
    

10. Of the HK$70 million worth of Hong Kong's domestic exports to Chile in 2010, office machines and automatic data processing machines, telecommunications and sound recording and reproducing apparatus and equipment, and non-ferrous metals constituted the major export items. Imports from Chile reached HK$ 3 billion in 2010, vegetables and fruit, non-ferrous metals, and fish, shell fish and preparations thereof constituted the major import items.

KEY AREAS TO BE COVERED IN THE NEGOTIATIONS AND VIEWS SOUGHT

Trade in Services

11. Hong Kong is a service-oriented economy and is a strong exporter of services. In 2009, the service 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$ 994 billion. Hong Kong is consistently a net exporter of services, with export amounting to HK$ 658 billion in 2009. According to the figures published by the WTO, Hong Kong was the world's 9th largest service trading entity in 2010 (Note 1). We were also the world's 7th largest service exporter (Note 1) and the world's 12th largest service importer in 2010 (Note 1).
     

12. Our major service sectors include wholesale, retail and import and export trades, restaurants and accommodation (27.2% of GDP in 2010); financing, insurance, real estate, professional and business services (26.6%); public administration, social and personal services (16.9%); and transportation, storage, postal and courier services, communications and information (11.1%) (Note 2). 
     

13. Given our keen interests and strong potential in trade in services, better or more secured market access in the provision of services in Chile will be a prime focus of Hong Kong in the FTA negotiations.

Views sought: we invite views on -

1. which service sectors and service measures of Chile Hong Kong should particularly focus on in the service negotiations under the FTA e.g. whether provision of service in a particular sector or a particular mode in the Chilean market is being contemplated; or whether there are any existing or foreseeable hurdles to the provision of any services in the Chilean market; and
2. ​whether there are any service sectors, areas or measures which Hong Kong should be more cautious in undertaking commitments, including those commitments to maintain our current regime for access of services or services suppliers of Chile.

We also welcome other comments and inputs on matters relating to service trade with Chile.

Investment

14. Hong Kong is an investment hub in the Asia Pacific region. In 2010, our stocks of inward and outward foreign direct investment ranked second and fifth respectively in the world (Note 3). Chile is also an important economy in South America. The aim of the negotiations will be to promote and liberalize investment flows between Hong Kong and Chile.

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

Tariffs

15. According to the figures published by the WTO, Hong Kong was the world's 6th largest trading entity in merchandise trade in 2010 (Note 1). We were also the world's 6th largest exporter (Note 1) and the world's 5th largest importer in merchandise trade in 2010 (Note 1).
     

16. Unlike Hong Kong which applies zero tariff on all imports, Chile imposes tariffs on some imports. The average applied tariff rate in 2010 (Note 4) for Chile was 6%. Under the FTA negotiations, Hong Kong and Chile will seek to agree on the modalities for early elimination of tariffs on all products of Hong Kong origin.

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

Rules of Origin

17. The existing origin rules applicable to Hong Kong's domestic exports are based on the criterion of "last substantial transformation" (Note 5) and are applied for non-preferential purpose. To ensure that only goods of Hong Kong and Chile origin would benefit from the preferential tariff rates under the FTA to be negotiated, it will be necessary for both sides to agree on a set of origin rules to prevent circumvention.
     

18. Under the FTA negotiations, the two sides will seek to agree on a set of simple and transparent rules of origin and verification procedures to facilitate trade in goods between Hong Kong and Chile. It is envisaged that both sides will also draw up implementation details of the origin rules, including the documentation requirements for products to substantiate claim of origin and preferential tariffs on importation, with an aim to encouraging trade in goods between Hong Kong and Chile.

Views sought: we invite views and input on the origin rules under the FTA with Chile as well as the implementation aspects of such rules.

Other Elements of Negotiations

19. The FTA negotiations will also cover other areas of mutual interests, including non-tariff barriers (Note 6), trade remedy measures (Note 7), and customs procedures.
     

20. The FTA negotiations will seek to liberalize non-tariff barriers and trade remedies. Discussions on customs procedures will seek to identify ways to simplify and enhance transparency of customs procedures.

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

CONCLUDING REMARKS

21. In overall terms, an FTA can bring about expansion of trade and investment, better market access and more favourable business environment among its parties. We see a good potential to expand trade and investment with Chile. An FTA between Hong Kong and Chile should provide Hong Kong businessmen with more and better market opportunities in Chile, which is an emerging market in South America and also as a gateway to the South American region, with benefits for Hong Kong in trade, income and employment.
     

22. In order that the Government may better assess our community's aspirations on the FTA to be negotiated between Hong Kong and Chile, and to develop our overall position in the negotiations taking into account such aspirations, interested parties are invited to put forward their views and suggestions in writing on this important subject by 20 January 2012. Response can be sent in by mail, fax, or e-mail as indicated below. For enquiries, you are welcome to contact Mr. Jason Tse at 3403 6467 or email: fta@tid.gov.hk.

REFERENCES

23. For an overview of Chile's trade and investment policies and regimes, please refer to Chile's Report on the Feasibility of a Free Trade Agreement between Hong Kong, China and Chile at http://www.tid.gov.hk/english/trade_relations/hkchile/files/report_chile.pdf. Hong Kong's feasibility report could be accessed via http://www.tid.gov.hk/english/trade_relations/hkchile/files/report_hk.pdf.
     

Trade and Industry Department
The HKSAR Government
19 December 2011

Note 1 :
The European Union is counted as one single entity for the rankings.

Note 2 :
The percentages of GDP in brackets are provisional figures, which may be subject to revision.

Note 3 :
Source: United Nations Conference on Trade and Development.

Note 4 :
The average applied tariff rate is the latest figure available in the WTO.

Note 5 :
The "last substantial transformation" criterion, when applied to manufactured goods involving multiple country/place materials and/or processing, 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 6 :
Non-tariff barriers are trade restrictive measures other than tariffs, such as quotas, import licensing systems, sanitary regulations, prohibitions, etc.

Note 7 :
Trade remedy measures refer to anti-dumping measures, countervailing measures and safeguards. Imposition of these measures could result in additional duties (being one of the usual forms) on top of tariffs and other charges by the importing economy on certain imports.