SMU Lexicon: A Glimpse into the ASEAN-Hong Kong Free Trade Agreement

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Introduction

After close to 4 years of negotiations,[1] the hugely anticipated ASEAN-Hong Kong Free Trade Agreement (AHKFTA) has finally been set in stone.[2] Along with the accompanying ASEAN-Hong Kong Investment Agreement (AHKIA), the two agreements were signed on the sidelines of the 31^st ASEAN summit in the Philippines.

[3]Historical background and the rationale for a separate FTA

While negotiations were initially envisioned to be completed within a year,[4] the ASEAN-Hong Kong Free Trade Agreement (AHKFTA) has taken 10 rounds of negotiation since the decision to pursue it was made in 2013.[5] The Terms of Reference for the ASEAN-HKC Trade Negotiation Committee (AHKTNC) and the Scope and Arrangements for the AHKFTA negotiations were endorsed at the Second ASEAN Senior Economic Officials’ Meeting (SEOM)-HKC Consultations in 2014, with negotiations officially beginning in July 2014.

[6]While details are still not available,[7] the main AHKFTA Agreement was reported to cover the following elements:^[8]

• Trade in Goods (TIG);
• Rules of Origin (ROO); Customs Procedures and Trade Facilitation (CPTF);
• Sanitary and Phytosanitary Measures (SPS);
• Standards, Trade Regulations and Conformity Assessment Procedures (STRACAP); Trade Remedies;
• Trade in Services (TIS);
• Economic and Technical Cooperation (ECOTECH) (to be implemented through an ECOTECH Work Program);[9]
• Intellectual Property Rights (IPR);
• General Provisions and Exceptions;
• Institutional Provisions;
• Consultations and Dispute Settlement; and
• Final Provisions.

The impetus for an ASEAN-Hong Kong bilateral FTA can be said to lie in the repercussions resulting from the ASEAN-China FTA signed in 2010,[10] particularly for Hong Kong’s economy. [11]

Like most FTAs, the ASEAN-China FTA “­requires that goods claiming tariff preferences under the agreement originate within the signatory member states and are directly shipped from one member to the other.”[12] In other words, for ASEAN member countries to benefit from the incentives provided under the FTA, their exports must be directly shipped to China or vice versa.[13]

Consequently, since Hong Kong is still regarded as a separate customs jurisdiction under China’s “one country, two systems” principle, the ASEAN-China FTA will inevitably exclude Hong Kong.[14] With exports being able to move directly between ASEAN nations and China with zero or reduced tariffs, this has eliminated the need for many South-East Asian companies to rely on Hong Kong as a middleman for their business to reach the mainland market.[15] The impact on Hong Kong is clear, with the territory ceding its title as the world’s busiest container port and falling to fifth place in 2016.[16]

It may seem curious as to why Hong Kong is opting to go for a separate bilateral FTA with ASEAN instead of negotiating to be a part of the ASEAN-China FTA. Indeed, Hong Kong has attempted to do so, making multiple overtures to accede to the China-ASEAN Free Trade Area (CAFTA) in 2014.[17] However, these efforts have eventually proved futile due to various complications,[18] and therefore led to the start of the separate AHKFTA discussions.[19]

 Implications for the region

Singapore

It is well-known that Singapore and Hong Kong are extremely close competitors on the international stage, and the impending AHKFTA may not spell the best for the city-state.

As one commentator observed, the slow progress of the AHKFTA discussions was allegedly due to Singapore’s opposition on one of the key issues of the FTA discussions.[20] The issue pertained to how parties are to achieve “service liberalisation”, where each member-nation opens its service sector market to the other.[21] Hong Kong is a direct competitor of Singapore in many key aspects of the tertiary sector, such as financial services, banking and shipping industry management. Thus, if ASEAN were to open up its service sector to Hong Kong companies, the benefits Singapore would gain under the FTA would not outweigh its loss of an important competitive advantage.[22]

This is especially so considering the benefits that the ASEAN-China FTA have brought to Singapore, with corresponding detriment to Hong Kong. Since its inception, the ASEAN-China FTA have played a major role in facilitating Singapore’s role as a trading hub while conversely contributing to the demise of Hong Kong as a China-related trading hub.[23] Whereas Hong Kong’s cargo throughput suffered on the ASEAN-China FTA’s implementation, Singapore maintained its second spot on the world stage for cargo volumes.[24]

Notwithstanding, views on the AHKFTA’s impact on Singapore remain varied. While there are those who share the view espoused above, there are others who prefer to look at the AHKFTA in a more positive light. For one, it is posited that the AHKFTA is “unlikely to immediately change the relative trade flows via Singapore or Hong Kong”.[25] A key reason lies in Singapore’s ability to “retain its position as a home port for major carrier alliances, which virtually guarantees [its] entrepot trade continuing for the near future”.[26] Such a view was also espoused by Singapore’s Minister for National Development, Lawrence Wong, who said that “Singapore and Hong Kong are in healthy competition with each other… But the competition is not a zero-sum game”.[27]

Other ASEAN countries

Commentators have largely viewed the impending AHKFTA and AHKIA as beneficial to the rest of the ASEAN countries.[28]

A chief consideration lies in Hong Kong being one of ASEAN’s largest trading partner (Hong Kong was the sixth largest in 2016) and “one of the world’s leading trade powerhouses”. [29] With ASEAN working towards extensive infrastructure development under the ASEAN Master Plan on Connectivity (MPAC) and China’s One Belt One Road (OBOR) Initiative, signing the AHKFTA and AHKIA will be crucial towards securing investment opportunities from Hong Kong.[30] This will then contribute towards the strengthening of economic integration and development within the ASEAN region.[31]

Firsly, based on the commitments it has made under the General Agreement on Trade in Services (GATS) vis-à-vis the World Trade Organisation (WTO) Agreement, Hong Kong has offered various improvements to a wide variety of sectors, including professional and distributive services.[32] Notably for some subsectors, Hong Kong has also even exceeded what it has offered in its other FTAs.[33] As regards the AHKIA, a Side Agreement (initiated by Malaysia) will be established between four signatories, namely Hong Kong, Brunei, Malaysia and Singapore, to extend the equal treatment protection beyond citizens to include permanent residents as well.[34] All of these will have a part to play towards a stronger and more unified region.Secondly, Hong Kong can also be used as a gateway to tap deeper into China’s market.[35] As expressed by the Philippines’ Secretary of Trade and Industry Ramon Lopez, “[s]ince China launched its … open-door policy in 1978, Hong Kong has become the premier gateway into and out of mainland China”. A majority of Hong Kong’s large number of tourists (427 million out of 566 million in 2016) came from the mainland alone.[36] Further, the unique relationship between China and Hong Kong had made the latter China’s second largest trading partner, with bilateral trade amounting to US$304.6 billion in 2016.[37]

Myanmar

For Myanmar, the forthcoming agreement is viewed as a mechanism which can potentially raise its international status and economy. It is expected to help push the relatively unknown Myanmar goods onto the world stage and provide an essential capital boost by serving as a gateway to China’s economy. [38] Predictions have also been made that benefits flowing from the AHKFTA will first benefit the agriculture and manufacturing sectors before branching out to the services sectors comprising of real estate, infrastructure and finance.[39]

Malaysia and Thailand

Likewise, the AHKFTA has been said to be beneficial for both Malaysia and Thailand. This lies in the fact that Hong Kong is one of the largest trading partners for both countries. For Malaysia, Hong Kong was the ninth largest trading partner in 2016 with total bilateral merchandise trade of USD 12.1 billion or 3.4% of Malaysia’s total trade.[40] Similarly for Thailand, Hong Kong was also its ninth biggest trading partner in 2016,[41] and investments from Hong Kong was ranked as the seventh biggest, totalling Bt 8.6 billion.[42]

China

For China, the AHKFTA is seen as a step towards achieving its national strategy of developing a city cluster in the Guangdong-Hong Kong-Macau Greater Bay Area (GBA),[43] which serves as a key portal in support of the OBOR initiative.[44] This follows previous strategic steps taken by China to bolster this initiative, viz the Closer Economic and Partnership Arrangement with Hong Kong and Macau since 2003 as well as the establishment of the ASEAN-China FTA in 2010.[45]

With the expected signing of the AHKFTA, a “10+1+1” free trade zone is on the horizon. This will serve to open a new corridor for trade and investment flows between ASEAN and the GBA.[46]

Hong Kong

To Hong Kong, ASEAN is its second-largest trading partner and a top ten foreign investment destination.

According to official viewpoints, Hong Kong will stand to gain from both the AHKFTA and AHKIA, “which will bring more and better access to the ASEAN markets, create new business opportunities and further enhance trade and investment flows”.[47] This is in light of “Hong Kong’s strengths in finance and professional services, such as law, accounting and management [which] can help improve professional services in ASEAN and become a base for the Chinese mainland enterprises which plan to explore the ASEAN market”.[48]

On the contrary, a commentator has pointed out that ASEAN-Hong Kong FTA belies a greater motivation for Hong Kong to pursue it.[49] In his opinion, Hong Kong will not experience any significant trade benefits to its economy from an FTA that offers duty-free treatment of ASEAN-origin items into it or Hong Kong-origin items into ASEAN.[50] This is mainly due to the fact that Hong Kong already does not impose any custom duties on ASEAN imports, and domestic exports (e. of Hong Kong origin) merely account for roughly 3.7% of Hong Kong’s total export volume.[51] Rather, the main motivation behind Hong Kong’s pursuit of the AHKFTA lies in the need to gain access to the ASEAN-China FTA in order for Hong Kong to continue playing its role as a significant trading hub for China-related trade.[52] Hong Kong has always been a hub for China-related trade, and it has been said that this is arguably its “entire reason for existence”.[53]

Indeed, after the conclusion of the FTA negotiations with ASEAN, Hong Kong is also expected to seek to join the Regional Comprehensive Economic Partnership (RCEP).[54] This is currently being negotiated between ASEAN and its six FTA partners: Mainland China, Japan, South Korea, Australia, New Zealand, and India.[55]

Remarks and Conclusion

 As hopes of completing the Trans-Pacific Partnership (TPP) with the U.S. had all but extinguished under the Trump administration, it is vital that ASEAN continues to strengthen its core and “continue to forge strong connectivity with key markets”.[56] In this regard, such “ASEAN+1” agreements are especially significant given that the ASEAN-led RCEP negotiations is seen as one of the more viable alternatives to the TPP.[57]

As have been the case for China, India, Japan, South Korea and New Zealand, where an “ASEAN+1” FTA is signed, it opens the door for the ASEAN FTA partner to accede to the RCEP.[58] Also of importance is the fact that of the sixteen RCEP countries, seven are signatories to the TPP, while four had intentions to participate.[59]

The soon-to-be-signed AHKFTA should therefore be seen as a welcome addition, for it beholds a greater ambition for the ASEAN and Asia Pacific region. In time to come, if ASEAN continues to consolidate its centricity in this way, we may soon expect Asia to exert a greater say in the ever-evolving global trade architecture.

 

[1] Malaysia’s Free Trade Agreements <http://fta.miti.gov.my/index.php/pages/view/Asean-hongkong-china?mid=70> (accessed 7 September 2017).

[2] Phila Siu, “Hong Kong-Asean Free-trade Deal to be Signed by November: Philippine Minister”, South China Morning Post (18 July 2017) <http://www.scmp.com/news/hong-kong/economy/article/2102420/hong-kong-asean-free-trade-deal-be-signed-november-philippine> (accessed 4 September 2017); Ted Cordero, “To be Signed in November: ASEAN, Hong Kong Conclude Free Trade Agreement Talks” GMA News (9 September 2017) <http://www.gmanetwork.com/news/money/economy/625198/Asean-hong-kong-conclude-free-trade-agreement-talks/story/> (accessed 10 September 10 2017).

[3] Ibid.

[4] Kristy Hsu, “Asean Centrality: A Quest for Leadership Role for East Asian Economic Integration” in Asian Leadership in Policy and Governance (Evan Berman & M. Shamsul Haque ed) (Emerald Group Publishing, Vol. 24, 2015) ch 4 at p 82; “ASEAN: Market Profile”, HKTDC (17 November 2016)

<http://hkmb.hktdc.com/en/1X09WKZD/hktdc-research/ASEAN-Market-Profile> (accessed 9 September 2017).

[5] Supra n 1.

[6] Ministry of International Trade and Industry, “Conclusion of the ASEAN-Hong Kong, China Free Trade Agreement (AHKFTA) And The ASEAN-Hong Kong, China Investment Agreement (AHKIA)”, BERNAMA (10 September 2017) <http://mrem.bernama.com/viewsm.php?idm=29998> (accessed 10 September 2017);

Phila Siu, supra n 2; Xinhua, “China’s Hong Kong, ASEAN Conclude Free Trade Agreement Negotiations”, China Daily (9 September 2017) <http://www.chinadaily.com.cn/business/2017-09/09/content_31769119.htm> (accessed 9 September 2017).

[7] William Marshall, “How Asean Can Save Hong Kong from Losing out to Singapore on China-related Trade”, South China Morning Post (17 September 2017) <http://www.scmp.com/comment/insight-opinion/article/2111319/how-asean-can-save-hong-kong-losing-out-singapore-china> (accessed 17 September 2017).

[8] Supra n 1.

[9] Zhou Xin, “ASEAN, China’s Hong Kong to sign free trade agreement in November”, Xinhua (9 September 2017) <http://news.xinhuanet.com/english/2017-09/09/c_136597009.htm> (accessed 10 September 2017).

[10] David Dodwell, “Hong Kong Plays Catch Up in Asean after Two Decades of Wasted Opportunity”, South China Morning Post (17 September 2017) <http://www.scmp.com/business/china-business/article/2111539/hong-kong-plays-catch-Asean-after-two-decades-wasted> (accessed 17 September 2017).

[11] Ibid.

[12] Supra n 7.

[13] Ibid.

[14] Ibid: “[I]t is a World Trade ­Organisation member in its own right and, like tax treaties, negotiates and executes international agreements in its own right as a separate jurisdiction for tax and customs purposes, among other areas”.

[15] Supra nn 7 and 10.

[16] Supra n 7.

[17] Ibid.

[18] For example, Singapore has been said to be the main voice of objection towards the idea of Hong Kong participating in the China-ASEAN Free Trade Area in the fear of losing its strategic position for trade and capital in Asia. See David Dodwell, supra n 10; Frank Chen, “To ASEAN with Love: An FTA That Can Be a Win for HK, China”, EJInsight (19 September 2017) <http://www.ejinsight.com/20170919-to-asean-with-love-an-fta-that-can-be-a-win-for-hk-china/> (accessed 24 November 2017).

[19] Supra n 10.

[20] Simon Shen, “Why Singapore Doesn’t Want to See a HK-ASEAN Free-trade Deal”, Hong Kong Economic Journal (26 April 26 2017) <http://www.ejinsight.com/20170427-why-singapore-doesnt-want-to-see-a-hk-Asean-free-trade-deal/> (accessed 7 September 2017).

[21] Ibid.

[22] Ibid.

[23] Supra n 7.

[24] Ibid.

[25] William Marshall, “Asean-HK FTA: What it means for Hong Kong and Singapore”, The Straits Times, (20 September 2017) <http://www.straitstimes.com/opinion/Asean-hk-fta-what-it-means-for-hk-and-spore> (accessed 21 September 2017).

[26] Ibid.

[27] Ibid.

[28] Thompson Chau, “Forthcoming ASEAN-HK FTA to connect Myanmar with Belt and Road finances”, Myanmar Times (31 July 2017) <http://www.bilaterals.org/?forthcoming-Asean-hk-fta-to> (accessed 11 September 2017); “Conclusion of the ASEAN-Hong Kong, China Free Trade Agreement (AHKFTA) And The ASEAN-Hong Kong, China Investment Agreement (AHKIA)”, Malaysian Business Online (11 September 2017) <http://m-business.amaniemedia.com/index.php/general-news/item/1143-conclusion-of-the-Asean-hong-kong-china-free-trade-agreement-ahkfta-and-the-Asean-hong-kong-china-investment-agreement-ahkia> (accessed 17 September 2017); Xinhua, “Hong Kong-ASEAN FTA to Tap Opportunities under Belt and Road Initiative: Experts”, China Daily (13 September 2017) <http://www.chinadaily.com.cn/bizchina/2017-09/13/content_31948863.htm> (accessed 15 September 2017); Phila Siu, supra n 2.

[29] Malaysian Business Online, ibid. In 2016, ASEAN’s total merchandise trade with Hong Kong stands at USD 93.3 billion – 4.2% of ASEAN’s total trade, while the total Foreign Direct Investment (FDI) flows from Hong Kong into ASEAN amounted to USD 9.6 billion or 9.9% of total FDI into ASEAN.

[30] Malaysian Business Online, ibid.

[31] Malaysian Business Online, ibid.

[32] Malaysian Business Online, ibid. The article wrote that “[t]hese will include areas such as professional services (architecture, engineering, urban planning, medical and veterinary services); telecommunication services (local and mobile services, radio and television services, motion picture, video tape and sound recording services); distributive services (commission agents and wholesale trade services); education services (limited commitment for higher education and adult education services); environmental services; hospital services; entertainment and sporting services; transport services (maritime freight forwarding transport, pre-shipment inspection, road freight transport and freight transport agency services); and spa services”.

[33] Malaysian Business Online, ibid. The article wrote that these subsectors include veterinary services; services provided by midwives, nurses, physiotherapists and para medical personnel; education services; road transport services; and spa services.

[34] Malaysian Business Online, ibid.

[35] “Trade Deal between HK and Asean for November Signing”, The Nation (2 August 2017) <https://www.pressreader.com/thailand/the-nation/20170802/281990377603434> (accessed 9 September 2017); Phila Siu, supra n 2; Thompson Chau, supra n 28.

[36] Phila Siu, supra n 2.

[37] HKTDC’s Economic and Trade Information on China (19 October 2017) <http://china-trade-research.hktdc.com/business-news/article/Facts-and-Figures/Economic-and-Trade-Information-on-China/ff/en/1/1X000000/1X09PHBA.htm> (accessed 26 October 2017).

[38] Thompson Chau, supra n 28.

[39] Ibid.

[40] Malaysian Business Online, supra n 28. Meanwhile, total approved investments from Hong Kong into Malaysia in 2016 amounted to USD 59 million.

[41] The Nation, supra n 35.

[42] The Nation, supra n 35.

[43] Yan Shaohua, “Why Guangdong-HK-Macau Bay Area matters to ASEAN nations”, EJInsight (7 September 2017) <http://www.ejinsight.com/20170907-why-guangdong-hk-macau-bay-area-matters-to-Asean-nations/> (accessed 15 September 2017).

[44] Ibid.

[45] Ibid.

[46] Ibid.

[47] Supra n 25.

[48] Xinhua, supra n 28.

[49] Supra n 25.

[50] Ibid.

[51] Kohei Shino, “How Far Will Hong Kong’s Accession to ACFTA Impact its Trade in Goods?”, ERIA Discussion Paper Series (April 2013) <http://www.eria.org/ERIA-DP-2013-04.pdf> (accessed 26 October 2017).

[52] Supra n 25. Such would include, for example, facilitating the staging of cargo and inventory in Hong Kong between China and ASEAN; enabling third-party invoicing from Hong Kong trading companies to China and ASEAN buyers and sellers; and providing for the practical and efficient certification of origin in Hong Kong of items that originated in either China or ASEAN.

[53] Supra n 7.

[54] Mary Swire, “Hong Kong Seeking ASEAN FTA Deal by March”, Tax-News, (31 January 2017) <https://www.tax-news.com/news/Hong_Kong_Seeking_ASEAN_FTA_Deal_By_March____73342.html> (accessed 12 September 2017).

[55] Ibid.

[56] Opening address by Mr S. Iswaran, Minister for Trade and Industry (Industry) at the Singapore Institute of International Affairs 10th Asean and Asia Forum (5 October 2017)

<https://www.gov.sg/~/sgpcmedia/media_releases/mti/speech/S-20171005-3/attachment/Delivered%20-%20Speech%20by%20Min%20Iswaran%20at%20the%20SIIA%2010th%20ASEAN%20and%20Asia%20Forum.pdf> (accessed 18 October 2017).

[57] Rebecca Fatima Sta Maria, “RCEP More Relevant Now Than Ever”, The Straits Times (18 January 2017) <http://www.straitstimes.com/opinion/rcep-more-relevant-now-than-ever> (accessed 17 October 2017).

[58] Supra n 56.

[59] European Parliament, Directorate-General for External Policies, Policy Department, The Trans-Pacific Partnership Agreement: Implications for the EU Economy and for its Trade Negotiations with the United States, Japan, Australia and New Zealand (April 2017) (Authors: P. Chase, et. al.).

Author: Terrance Goh, then-student at Singapore Management University School of Law (graduated August 2018). This article was originally published on 26 January 2018 at SMU Lexicon.

This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article. Singapore Management University has no responsibility or liability to any person in respect of this article.