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CEPA - Background
The economic recession hovering Hong Kong since 1997, the political uncertainly
caused by wars and terrorism, as well as the deadly Sars outbreak have caused
damages to local economy in many aspects. Unemployment rate at all time
high, bankruptcies and lack of consumer confidence are only some of the
many problems troubling businesses based in Hong Kong. Meanwhile, ever since
Chinas accession to the WTO (World Trade Organization), the country has
been aggressively opening up its market as part of its plan to liberalise
its domestic economy by taking advantage of all the regulations and positive
influence coming with its membership. These factors, both internal and external,
have contributed to the forming of CEPA (Closer Economic Partnership Arrangement),
a free trade agreement signed early last year between the Central Peoples
government in China and Hong Kong SAR (Special Administration Region) government.
This mutual-beneficial free trade deal, with the main parts approved
by both parties and signed on June 29th, `2003, has just been effective
starting from January 1, 2004. It covers three major areas listed below:
Trade in goods
There are a total of 273 product categories entitled to enjoy zero tariffs
if imported from Hong Kong into the Mainland China, so long as they are
qualified products which are made locally. Together with Chinas new role
as a WTO member since December 2001, this new arrangement will benefit
as much as 90% of the local products made in Hong Kong, helping local
SMEs save an estimated HK $750 million.
Trade in services
Under CEPA, there will be 18 service sectors in China opening up their
markets to service providers based in Hong Kong. They include:
Advertising, accountancy, audiovisual, banking, construction and real
estate, convention and exhibitions services, distribution services, freight
forwarding, insurance, legal, logistics, management consultancy, medical
and dental, securities, storage and warehouse services, telecommunications,
tourism and transport. Trade and investment facilitation
In response to globalization and China's role as the manufacturing hub
of the world, this particular area listed in the arrangement aims to benefit
both Hong Kong and China by promoting co-operation in areas such as: customs
clearance, facilitation, quarantine and inspection of commodities, quality
assurance and food safety, cooperation of SMEs, cooperation in Chinese
medicine and medical products, electronic commerce, trade and investment
promotion, transparency in laws and regulations.
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Opportunities and challenges
Putting on papers all the conditions and provisions are easy.
But what truly concerns SMEs in Hong Kong would have to be the
actual benefits and effects lying behind CEPA, and how it can
help boost their business as well as providing them the edge to
tap into the Chinese market. After much researches and studies
on the subject of CEPA, reputed authorities, trade organizations
as well as related governmental bodies have come up with a number
of ways CEPA can help Hong Kong bounce back from its long-term
recession, while further exploring Chinas potential to becoming
one of the most influential economies in years to come.
1) Hong Kong SMEs can merge to lower production costs as well
as increasing their competitiveness under the new zero tariffs
policy. It is also expected that under the zero tariffs policy,
more manufacturers will be encouraged to bring hack their production
lines from China to Hong Kong.
2) The services sector in Hong Kong is expected to benefit a
great deal from CEPA as China is still a rather inexperienced
and immature in this area. With the help of Hong Kongs sound experience
in the service industry, service providers based in Hong Kong
will have easier and more flexible access to the China market
as a way to expand their business beyond the local boundary.
3) Overseas playing wanting to expand their business horizon
will be able to further utilise Hong Kongs role as a springboard
by becoming partners with Hong Kong-based companies. With Hong
Kong companies geographical advantage as well as their extensive
knowledge on the China market, they make the perfect team with
overseas companies and are capable of assisting them in ways that
other Asian companies cannot.
4) Recent research has found that in comparison to large-scale
companies and other multinational companies, SMEs in Hong Kong
are most likely to be the biggest winners of the newly signed
free trade agreement, as they are more flexible with their own
rules and ways to do business. Their flexibility gives them the
advantage of building up friendly and long term relationship with
Chinese suppliers and buyers.
5) A business environment with substantial intellectual property
input, Hong Kong based companies, under the influence of CEPA
will be attracted to manufacturing more brand name products as
they are better-developed than those manufactured in China. The
zero tariffs policy is sure to attract high value-added manufacturing
activities to move back to Hong Kong from China, while products
made in Hong Kong will be the preferred choice for Mainland consumers,
in particular those with high content of creativity and intellectual
property.
6) With more overseas companies wanting to invest in CEPA-qualified,
local SMEs will be armed with increased capital and manpower to
further develop/expand their business.
7) Under CEPA, Hong Kong-based companies can set up wholly-owned
distribution ventures to manage the full process of getting products
to retailers and consumers. Also, by working with a Hong Kong
partner, overseas companies can find suitable markets and better
understanding of local consumers and distribute to all regions
on the mainland.
8) As approachable as China has become now that it is a WTO member,
many overseas companies foreign investers are still somewhat skeptical
about entering the Chinese market as they lack understanding of
the market and confidence in the idea of conquering it all of
their own. By partnering with Hong Kong-based companies now that
CEPA is established, overseas company will have a higher success
rate with Hong Kong companies serving as a stepping-stone.
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| It has been said that CEPA is much
similar to China's membership as a WTO member. While there could be some
truth to such statement, the general public should note that CEPA is made
more flexible than the WTO agreement, as it is not restricted by geographical
boundaries. This means that under CEPA, companies from all over the world
are welcome to team up with the Hong Kong companies to tap into the China
market. Other differences between WTO agreement and CEPA:
1) Under WTO, Chinas average tariff rate of industrial products will
still be maintained at 9%, making CEPA a better trade deal to Hong Kong
SMEs in terms of exporting their products into the Chinese market.
2) Entry requirements for many mainlands service sectors still remain
out-of-reach to Hong Kong SMEs, preventing them developing their business
effectively.
3) Timing is crucial when discussing the issue of WTO and
4) CEPA will serve as an economic interlock between Hong Kong and China
with a more opened-up liberalization beyond the WTO accession
It has been a few months since the CEPA has been signed, how are Hong
Kong based companies reacting to the free trade deal and it is boosting
their confidence in their future? While some of them appear to be cautious
and conservative, there are many SMEs (as much as 56% of them polled in
a recent survey) showing genuine interests in expanding business and exploring
all the possibilities in store for them. However, because CEPA is still
considered a new and unfamiliar subject to many local companies, many
of them are still not unsure of exactly how they can take advantage of
the arrangement due to a lack of education on the subject. The government
is trusted to be tackling such problem with more exposure for the arrangement
as well as running various seminars that local companies can take part
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