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Trade and Industry Department The Government of the Hong Kong Special Administrative Region
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Negotiation of a Free Trade Agreement between Hong Kong and the European Free Trade Association
Consultation Document

 

INTRODUCTION

  1. The Hong Kong Special Administrative Region (HKSAR) Government announced today (22 December 2009) that Hong Kong would commence negotiations on a Free Trade Agreement (FTA) with the European Free Trade Association (EFTA), which comprises Iceland, Liechtenstein, Norway and Switzerland. 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 the EFTA. Feedback should be forwarded to the Europe Division of the Trade and Industry Department (TID) by 12 February 2010. 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 Free Trade Agreements

  1. As a small economy with little natural resources, Hong Kong has adopted an open and free trade policy, with zero 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 the EFTA

  1. Hong Kong and the EFTA both practise free trade. As members of the WTO, Hong Kong and the four EFTA States 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 a comprehensive and high-standard FTA between Hong Kong and the EFTA, consistent with the WTO principles and provisions. 
     

  2. Hong Kong and the EFTA held two rounds of exploratory meetings in 2009 to examine the case for entering into FTA negotiations. The two sides agreed that negotiations on an FTA would cover the following major areas: 

a.  elimination of tariffs on all industrial goods and removal or reduction of tariffs on agricultural products;

b.  liberalization of non-tariff barriers, including technical barriers to trade, sanitary and phytosanitary measures, anti-dumping, safeguards and subsidies measures;

c.  a set of simple and transparent rules of origin and customs procedures which would facilitate bilateral trade;

d.  liberalization of trade in services; and

e.  liberalization and promotion of investment.

 

General Economic and Trade Relations between Hong Kong and EFTA

 

Trade in Services

  1. Services play a key role in the economy of Hong Kong as well as those of the EFTA States. Among the four EFTA States, Switzerland was Hong Kong's 12th largest trading partner in the world in 2007 in terms of trade in services, with such trade totalling HK$ 10.7 billion, while Norway ranked 28th with such trade amounting to HK$ 921 million1. Our service trade with the EFTA States had been increasing in recent years. For trade between Switzerland and Hong Kong, the average annual growth rates from 2003 to 2007 were 25.3% and 10.4% for exports and imports of services respectively. Major service sectors included transportation services, financial services, travel services, merchanting and other trade-related services. 

 

Merchandise Trade

  1. The EFTA is also an important trading partner of Hong Kong in Europe in terms of merchandise trade. It was Hong Kong's 11th largest trading partner in the world in 2008, with total merchandise trade amounted to about HK$ 72 billion that year. The average annual growth rate in bilateral trade was 15.6% from 2004 to 2008. 

  2. Of the HK$ 1.5 billion worth of Hong Kong's domestic exports to the EFTA States in 2008, jewellery, watches and clocks, as well as concentrates, waste and scrap of precious metals (other than of gold) constituted the major export items.

  3. Imports from the EFTA States reached HK$ 48 billion in 2008. Watches and clocks, silver and platinum, and jewellery constituted the major items imported into Hong Kong.

KEY AREAS TO BE COVERED IN THE NEGOTIATIONS AND VIEWS SOUGHT

Trade in Services

  1. Hong Kong is a service-oriented economy and is a strong exporter of services. In 20082, 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$ 1,076 billion. Hong Kong is consistently a net exporter of services, with export amounting to HK$ 719 billion in 2008. According to the figures published by the WTO, Hong Kong was the world's 16th largest service trading entity in 2008. We were also the world's 12th largest service exporter and the world's 20th largest service importer in 2008. Given our keen interests and strong potential in trade in services, securing better market access in the provision of services in the EFTA States will be a prime focus of Hong Kong in the FTA negotiations. 

  1. Our major service sectors include wholesale, retail and import and export trades, restaurants and hotels (27.9% of GDP in 2008); financing, insurance, real estate and business services (27%); community, social and personal services (17.8%); and transport, storage and communications (7.8%)3

    Views sought: we invite views on which service sectors and service measures of the EFTA States 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 is being contemplated; or whether there are any existing or foreseeable hurdles to the provision of services desired. We also welcome other comments and inputs on matters relating to service trade with the EFTA.

 

Tariffs

  1. According to the figures published by the WTO, Hong Kong was the world's 13th largest commodity trading entity in 2008. We were also the world's 13th largest commodity exporter and the world's 13th largest commodity importer in 2008. 

  2. Unlike Hong Kong which applies zero tariff on all imports, the EFTA States impose tariffs on some imports. The average applied tariff rates in 20084 for the four EFTA States were: 7.7% for Switzerland; 8.2% for Norway; 7.3% for Iceland; and 7.7% for Liechtenstein. On the basis of our export statistics, the tariffs payable for Hong Kong’s domestic exports to the four EFTA States were roughly estimated to be about HK$ 113 million in total in 2008. 

  3. Under the FTA negotiations, Hong Kong and the EFTA will seek to agree on total elimination of tariffs on all industrial goods as of the date of entry into force of the FTA. Negotiations will also seek to agree on tariff removal or reduction relating to agricultural products. 

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

 

Rules of Origin 

  1. The existing origin rules applicable to Hong Kong's domestic exports are based on the criterion of "last substantial transformation"5 and are applied for non-preferential purpose. To ensure that only goods of Hong Kong and EFTA 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. 

  2. Under the FTA negotiations, the two sides will seek to agree on a set of simple and transparent rules of origin and certification/verification procedures to facilitate trade in goods between Hong Kong and the EFTA States. 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 among the Parties.

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

 

Investment

  1. Among the four EFTA States, Switzerland has already signed an Investment Promotion and Protection Agreement6 with Hong Kong. Switzerland is also an important source of inward direct investment in Hong Kong. In 2007, inward direct investment from Switzerland amounted to HK$ 11.1 billion. The aim of the FTA negotiations will be to develop an appropriate framework to further promote and liberalize investment between Hong Kong and the EFTA States. 

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

 

Other Elements for Negotiations

  1. The FTA negotiations will also cover other areas of mutual interests, including trade remedy measures7, export subsidies8, non-tariff barriers9 and customs procedures.

  2. The FTA negotiations will seek to liberalize trade remedies and export subsidies. Similarly, the FTA negotiations will seek to develop disciplines to liberalize non-tariff barriers.

  3. 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

  1. In overall terms, an FTA can bring about expansion of trade and investment, better market access and more favourable business environment among its parties. An FTA between Hong Kong and the EFTA should provide Hong Kong businessmen with more and better market opportunities in the EFTA States, with benefits for Hong Kong in trade, income and employment.

  2. In order that the Government may better assess our community's aspirations on the FTA to be negotiated between Hong Kong and the EFTA 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 12 February 2010. Response 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 email: fta@tid.gov.hk.

Trade and Industry Department
The HKSAR Government
22 December 2009

1 The European Union (EU) is counted as one single entity for the trade rankings appeared in this note.

2 The statistics on service trade are preliminary figures, which may be subject to revision later on as more data become available.

3 The percentages of GDP in brackets are provisional figures, which may be subject to revision when updated data are available.

4 These were the latest figures available in the WTO.

5 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. 

6 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. 

7 Trade remedy measures refer to anti-dumping measures, countervailing duties 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. 

8 An export subsidy is a payment or other financial contribution by the government provided to domestic producers or exporters for exporting their goods or services. 

9 Non-tariff barriers are trade restrictive measures other than tariffs. They may be in the form of quotas, import licensing systems, sanitary regulations, prohibitions, etc.