RESTRICTEDWORLD  TRADE
ORGANIZATIONWT/TPR/S/52
13 November 1998
(98-4511)
Trade Policy Review Body
TRADE POLICY REVIEW
HONG KONG, CHINA
Report by the Secretariat
This report, prepared for the Trade Policy Review of Hong Kong, China, has
been drawn up by the WTO Secretariat on its own responsibility.  The
Secretariat has, as required by the Agreement establishing the Trade Policy
Review Mechanism (Annex 3 of the Marrakesh Agreement Establishing the
World Trade Organization), sought clarification from the Government of Hong
Kong, China on its trade policies and practices.
Document WT/TPR/G/52 contains the policy statement submitted by the
Government of Hong Kong, China
Note: This report is subject to restricted circulation and press embargo until the end of the meeting
of the Trade Policy Review Body on Hong Kong, China.Hong Kong, China WT/TPR/S/52
Page iii
CONTENTS
SUMMARY OBSE RVATI ONS......................................................................................................... VI II
(1) M AIN DEVELOPMENTS .............................................................................................................. VIII
(2) T RADE AND INVESTMENT POLICIES AND PRACTICES ................................................................... IX
(3) P ROSPECTS ............................................................................................................................... .XI
I. ECONOMIC ENVI RONMENT.................................................................................................1
(1) INTRODUCTION ............................................................................................................................1
(2) RECENT ECONOMIC DEVELOPMENTS ...........................................................................................1
(i) Macroeconomic performance ........................................................................................1
(ii) Macroeconomic  policies................................................................................................5
(iii) Structural/indus trial poli cies..........................................................................................6
(3) D EVELOPMENTS IN TRADE AND FOREIGN DIRECT INVESTMENTS (FDI)....................................7
(i) Overview of devel opments in trade ...............................................................................8
(ii) Composition of me rchandise trade ..............................................................................10
(iii) Direction of me rchandise trade....................................................................................10
(iv) Foreign Direct In vestment (FDI) .................................................................................10
(4) P ROSPECTS ............................................................................................................................... .12
II. TRADE POLICY REGIME: FR AMEWORK AND OB JECTIVES .......................................14
(1) INTRODUCTION ..........................................................................................................................14
(2) I NSTITUTIONAL SETTING ...........................................................................................................14
(3) T RADE POLICY FORMULATION AND IMPLEMENTATION ............................................................16
(ii) Government bureaux and departments ........................................................................16
(iii) Advisory and review bodies ........................................................................................17
(4) T RADE POLICY OBJECTIVES AND ARRANGEMENTS ..................................................................19
(i) Multilateral agreements ...............................................................................................19
(ii) Regional coopera tion initia tives ..................................................................................22
(iii) Bilateral agreements ....................................................................................................22
III. TRADE POLICIES AND PR ACTICES BY MEASURE........................................................24
(1) O VERVIEW ............................................................................................................................... .24
(2) M EASURES DIRECTLY AFFECTING IMPORTS ............................................................................25
(i) Import regi stration .......................................................................................................25
(ii) Tari ffs .................................................................................................................... ......26
(iii) Other import related levies and charges.......................................................................26
(iv) Import prohibitions, rest rictions and controls..............................................................28
(v) Trade sanctions ............................................................................................................3 1
(vi) Emergency tr ade measures ..........................................................................................31
(vii) Counter trade .............................................................................................................. ..31
(viii) State trading ............................................................................................................ .....31
(ix) Other m easures ............................................................................................................3 2WT/TPR/S/52 Trade Policy Review
Page iv
(3) M EASURES DIRECTLY AFFECTING EXPORTS ............................................................................32
(i) Export prohibitions, controls and licensing re quirements ...........................................32
(ii) Voluntary restraints, survei llance and simila r measures..............................................34
(iii) Export-related ch arges and levies ................................................................................34
(iv) Certificates  of origin ....................................................................................................3 4
(v) Export promotion and ma rketing assi stance................................................................35
(vi) Export finance, insu rance and gu arantees....................................................................35
(vii) Measures maintained by importing c ountries..............................................................36
(4) I NTERNAL MEASURES ...............................................................................................................36
(i) Taxat ion .................................................................................................................... ...36
(ii) Sanitary and phytosan itary (SPS) measures ................................................................41
(iii) Standards and other t echnical requ irements ................................................................42
(iv) Government procurement ............................................................................................46
(v) Industrial sup port polic ies............................................................................................48
(vi) Intellectua l propert y.....................................................................................................5 4
(vii) Competition and re gulatory policy ..............................................................................60
IV. TRADE POLICIES  BY SE CTOR............................................................................................63
(1) INTRODUCTION ..........................................................................................................................63
(2) AGRICULTURE AND FISHERIES ...................................................................................................64
(i) Feat ures.................................................................................................................... ....64
(ii) Policy objectives  for the sector....................................................................................65
(3) MANUFACTURING ......................................................................................................................68
(i) Feat ures.................................................................................................................... ....68
(ii) Policy objectives  for the sector....................................................................................68
(iii) Key s ubsectors ............................................................................................................ .69
(4) SERVICES ............................................................................................................................... ....71
(i) Feat ures.................................................................................................................... ....71
(ii) Policy objectives  for the sector....................................................................................71
(iii) Banking, financ e and insu rance ...................................................................................71
(iv) Telecomm unications....................................................................................................80
(v) Transport................................................................................................................... ...84
(vi) Other servic es ............................................................................................................. .88
APPENDIX TABLES................................................................................................................ ............93Hong Kong, China WT/TPR/S/52
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CHARTS
I. ECONOMIC ENVIRONMENTI.1 Structure of imports, domestic exports and re-exports, 1992 and 1997   9
I.2 Merchandise trade by partner, 1992-97 11
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVESII.1 Structure of the HKSAR Government, June 1998 18
IV. TRADE POLICIES BY SECTOR
IV.1 Mark up between c.i.f. import price and retail price of
Thai fragrant rice in Hong Kong, June 1995-June 1998 67
IV.2 Hong Kong's Performance in the EU and the U.S. import markets for
clothing, 1987-97 70WT/TPR/S/52 Trade Policy Review
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TABLES
I. ECONOMIC ENVIRONMENTI:1 Major features of Hong Kong's economy   2
I.2 Performance of Hong Kong's economy, 1990-98   3I.3 Hong Kong's external sector, 1990-97   8
I.4 Stock of foreign direct investment in Hong Kong, China 13
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES
II.1 Principal notifications by Hong Kong, China under WTO Agreements,
as at February 1998 20
II.2 GSP schemes covering exports from Hong Kong, China 23
III. TRADE POLICIES AND PRACTICES BY MEASUREIII.1 Articles exempted from import/export declaration under the Import
and Export (Registration) Regulations 25
III.2 Fees related to the issuance of import licences, August 1998 27
III.3 Import quotas, 1994-97 31
III.4 Fees related to the issuance of export licences, August 1998 33
III.5 Duty rates for dutiable commodities, 1994-99 37III.6 Products and activities qualifying for excise exemptions, refunds and drawbacks 38
III.7 Motor vehicle first registration tax in Hong Kong 39
III.8 Standards and technical regulations in HKSAR 43
III.9 Regulating restrictions for foreign investment 53
III.10 Seizure by Hong Kong Customs of infringement on copyright and
trade mark counterfeits 55
IV. TRADE POLICIES BY SECTORIV.1 Industrial structure of Hong Kong, 1986-96 63
IV.2 Employment in Hong Kong, 1986-97 64
IV.3 Stockholders under the Rice Control Scheme by number of basic import
units held, July 1998 66Hong Kong, China WT/TPR/S/52
Page vii
APPENDIX TABLES
AI.1 Imports by groups of products, 1980-97 95
AI.2 Domestic exports by groups of products, 1980-97 96
AI.3 Domestic exports and re-exports by groups of products, 1980-97 97
AI.4 Imports by origin, 1992-97 98AI.5 Domestic exports by destination, 1992-97 99
AI.6 Domestic exports and re-exports by destination, 1992-97            100WT/TPR/S/52 Trade Policy Review
Page viii
SUMMARY OBSERVATIONS
(1) MAIN DEVELOPMENTS
1. The period under review (1994-98)
was marked by two main events.  The first was
Hong Kong's reversion to the People'sRepublic of China, on 1 July 1997, and its
designation as a Special Administrative
Region (SAR) with a high degree of autonomy
with regard to economic (and most other)
policies under the "one country, two systems"framework established in accordance with the
Basic Law.  This framework involves a
50-year commitment to allow the SAR to
maintain its existing free and open market
system, which has long been the hallmark ofHong Kong's economy, making it one of, if not
the most liberal among WTO Members and
has contributed to a level of GDP per capita
that is among the highest in the world (over
US$26,000 in 1997).  There is no indication
that Hong Kong's traditional openness to
trade and foreign investment has been affectedby reunification, and as such, the present
economic regime may be broadly
characterized as "business as usual".
2. The second main event during the
review period was the outbreak of theeconomic crisis in Thailand in July 1997 and
its spread to other countries in and beyond
South-East Asia.  The crisis, and the
associated drop in demand throughout the
region, has seriously impaired Hong Kong'seconomic performance since the third quarter
of 1997, causing a dramatic slow-down in
economic activity.  Real GDP is expected to
decline by 4% in 1998 compared to robust
growth of 5.3% in 1997.  At the same time, theunemployment rate has more than doubled to
5% in August 1998, the highest level since
1983.  It is noteworthy that, despite the present
extraordinary economic difficulties, Hong
Kong has maintained its traditional openness
to both trade and investment and has not taken
any measures directly affecting imports orforeign direct investment.3. Nor, it would appear, has the
Government attempted to influence the
long-run structural evolution of Hong Kong's
economy during the period under review.  One
of the main features of this evolution has been
the increasingly closer links with thefast-developing adjacent region of South
China. The strong growth in cross-border
trade and investment, together with the
relocation of the lower - value-added,
assembly-type manufacturing operations toSouth China, has been accompanied by a
growing demand for service-oriented activities
in Hong Kong.  The outcome has been a
continuing erosion of manufacturing's share of
GDP, down to 7.3% in 1996 from 9.2% in1994, while the share of services rose from
83.4% in 1994 to 84.4% in 1997.  This
continuous shift from manufacturing to
services has been reflected in the composition
of Hong Kong's imports and exports.
4. Throughout the period under review,
Hong Kong has run a substantial and growingmerchandise trade deficit.  This has been
offset to a large extent by a rising surplus in
non-factor services.  For merchandise and
services combined, a deficit equivalent to
3.5% of GDP was recorded in 1997, comparedto 1.4% in 1996.  Besides declining regional
demand, this rise may be linked in part to the
recent sharp currency depreciations in
neighbouring countries, which have weakened
the competiveness of Hong Kong's exports.
5. The financial crisis put considerable
pressure on the Hong Kong dollar, which
since 1983 has been pegged to the U.S. dollar
under a currency board type of arrangement,
whereby the Hong Kong dollar is fully backedby foreign reserves.  The pegging of the Hong
Kong dollar to the U.S. dollar has limited the
authorities' scope for controlling the money
supply and interest rates.  The peg has also
resulted in an effective appreciation of the
Hong Kong dollar, particularly in relation to
the devalued currencies of those countries inthe region much more heavily affected by the
Asian financial crisis.  The Government is
committed to maintaining the peg, which it
views as the cornerstone of Hong Kong'sHong Kong, China WT/TPR/S/52
Page ix
financial and monetary system and which it
believes has a long-run stabilizing effect on
the economy and is essential to Hong Kong's
role as a major international financial centre.
Since the latter half of 1997, however, the
Hong Kong dollar has come under increasedpressure, largely as a result of spillovers from
the financial turmoil elsewhere in the region.
While this pressure has hitherto been
successfully resisted through the
corresponding tightening of domestic liquidity,the resulting higher interest rates have
contributed to sharp falls in stock and
property prices and depressed domestic
consumer and investment demand.
6. In response to domestic calls for the
Government to take action in order to
alleviate, if not reverse, the recent slow-down
in economic growth and the consequent rise in
unemployment, in June 1998 the Government
introduced a package of relief measures,
which is expected to contribute to a budget
deficit of 1.5% in 1998. Apart from theimplementation of a few "emergency"
measures aimed at stabilizing inter-bank
interest rates as well as land, stock and
foreign exchange markets, the authorities have
largely refrained from interfering with thenormal functioning of the free-market system.
(2) T
RADE AND INVESTMENT POLICIES
AND PRACTICES
7. There have been several notable
developments in Hong Kong's trade- andtrade-related policies since the previous Trade
Policy Review in 1994, including modification
of the Rice Control Scheme, accession to the
WTO Agreement on Government Procurement,
stricter enforcement of intellectual propertyrights, and the strengthening of some aspects
of competition policy.  However, there have
been no major changes in the trade policy
regime since the transfer of sovereignty on
1 July 1997.  The Government's basic
approach is still to let markets operate freely
and openly both for trade and investment.Thus, it has not sought to promote or rescue
individual industries, even in the face of the
Asian crisis.8. The openness of the Hong Kong
economy to trade is such that all imports enter
the region duty free, although it should be
noted that tariff bindings apply to less than
half of all tariff lines.  Non-tariff border
measures (NTMs) are almost absent;  thosethat do exist either st em from Hong Kong's
obligations under various international
undertakings or are applied for health, safety,
security or environmental reasons or to
protect intellectual property rights.
9. The most noteworthy of these NTMs is
the Rice Control Scheme, under which the
amount of rice an importer is licensed to bring
into Hong Kong is linked to that importer's
contribution to the maintenance of a reservestock.  The Scheme, whose rationale is security
of supply, has remained in place since Hong
Kong's reunification with China.  Clearly, the
Scheme grants a certain market power to
importers, with the associated economic rents
meant to defray the cost of participation in the
reserve scheme;  however, price mark-ups canbe high, 100%  of the c.i.f. import price in the
case of Thai fragrant rice, for example.  The
Government reviewed the Scheme in 1997 and
introduced an Optional Quota System in
October 1997, with a view to encouragingcompetition among impo rters; the Consumer
Council had urged the Government to
introduce "competition clauses" into the
import licences to safeguard against
anti-competitive behaviour. In 1998, the levelof the reserve rice stock was reduced from
45,000 tonnes to 40,000 tonnes.
10. There are virtually no government
controls on the composition or destination of
exports, except in the case of restrictionsmaintained under the WTO Agreement on
Textiles and Clothing and for UN sanctions
(for which the Central People's Government is
now responsible).  Nor has Hong Kong
resorted to unilateral action to address trade
disputes and problems.
11. Hong Kong has few restrictions on
inward investment.  Moreover, it has hardly
any sector-specific measures that could
constitute incentives to foreign directWT/TPR/S/52 Trade Policy Review
Page x
investment (FDI), although the tax exemption
for profits from certain international shipping
services is an important exception.  Hong
Kong's openness to FDI combined with sound
macroeconomic policies, its transparent
rules-based legal environment, the availabilityof financial facilities and infrastructure, a
skilled and reliable labour force, together with
its proximity to other major markets, notably
China, as well as a simple and predictable tax
system, with low tax rates across the board,have greatly contributed to Hong Kong's
attractiveness to business.
12. Shortly before the transfer of
sovereignty, the authorities acceded to the
WTO Agreement on Government Procurement(GPA), which entered into force on
19 June 1997.
13. The Government, during the period
under review, also confirmed its commitment
to a policy of "minimum intervention and
maximum support".  Furthermore, it indicated
that, within the framework of a free-market, itwould pursue an industrial support policy
aimed at sustaining and promoting the
productivity and international competitiveness
of manufacturing and service industries.  This
policy does not appear to be aimed at "pickingwinners" through the use of
industry/firm-specific measures or incentives.
Instead, the authorities have sought to ensure
a business environment conducive to
structural adjustment, investment and growthby emphasising broad initiatives to enhance
the skills and technology base of economy,
encourage new products and processes,
remove infrastructural and land constraints,
and liberalize regulated industries,particularly those providing basic business
inputs (e.g. telecommunications services).  In
the face of the exceptional difficulties arising
from the Asian financial crisis, the Hong Kong
Monetary Authority (HKMA) did intervene in
August 1998 to stabilize the Hong Kong stock
market, by purchasing substantial stakes inseveral major manufacturing and service
companies; according to the authorities, the
acquisitions broadly represented the Hang
Seng Index (HSI) without preference forparticular companies or sectors.  As a result of
this market intervention, the HKMA's
shareholding in three major conglomerates
now exceeds 10%.  It is worth noting that,
however carefully done, intervention can work
to the advantage of some market participants;thus, for example, by maintaining the price of
their shares above levels that might otherwise
have prevailed, HSI-listed companies may be
provided with an advantage vis-à-vis
non-listed companies in the cost of acquiringcapital through new share issues.  Also, in the
case of the roughly 9% stake purchased by the
HKMA in Hong Kong and Shanghai Banking
Corporation (HSBC), Hong Kong's largest
bank, there is the possibility of a conflict ofinterest because the regulator is a major
shareholder in one of the banks it regulates.
14. In the course of the discussions
leading to this Review, the authorities
emphasized that it is not their intention to
interfere with the management and operation
the companies in which the Government nowholds shares.  To address concerns over
potential conflicts of interest, the authorities
announced, in September 1998, the
establishment of a new company, the
Exchange Fund Investment (EFI) Limited, tomanage these shares, at "arm's length" from
the Government and regulators;  the EFI will
have its own board of  directors, one third of
whom have been drawn from the Government.
15. During the review period, the
authorities implemented comprehensive
legislation aimed at ensuring Hong Kong's
compliance with the TRIPS Agreement.  More
recently, the  authorities have taken steps to
strengthen the enforcement of laws intended toprotect intellectual property rights.
16. In the authorities' view, competition is
best nurtured and sustained by allowing the
free play of market forces and keeping
intervention to a minimum.  Hence, the
Government has eschewed an all-embracing
competition law;  the authorities arepersuaded that Hong Kong's high degree of
openness to trade and foreign direct
investment and its strong reliance on marketHong Kong, China WT/TPR/S/52
Page xi
forces in combination with sector-specific
regulatory, administrative and, in the case of
telecommunications, legislative measures are
sufficient to ensure highly competitive markets
both for goods and services.  This approach
has been questioned by the Consumer Council,which has pointed to a lack of competition in
certain sectors, including residential property,
retailing, wholesaling and distribution,
banking, telecommunications and energy.
However, the Government has taken steps tostrengthen some aspects of it competition
policy.  These steps include the establishment
of guidelines and of a body to handle
complaints about anti-competitive private
practices.  In addition, certain sectors,particularly telecommunications and legal
services, have been subjected to increased
competition.  The authorities are also studying
the possibility of increasing competition in the
energy sector.
(3) P
ROSPECTS
17. The recent marked decline in real
GDP and the associated sharp increase in
unemployment can be traced in large part to
the adverse effect of regional demand on Hong
Kong's external trade and the fall in domestic
demand.  The deterioration in Hong Kong'sexternal trade balance is probably also linked
to a certain loss of net-export competiveness in
the face of large devaluations by some of its
neighbours.  The fall in domestic demand owes
much to the higher interest rates that havebeen needed under the currency board
arrangement for th e Hong Kong dollar.
Higher interest rates have increased the cost
of borrowing to consumers and businessesalike, and contributed to the recent decline in
property and stock prices.  The consequent
negative wealth effects of the decline in such
asset prices may have exacerbated the fall in
domestic demand.
18. Wages and other prices will need to be
sufficiently flexible downwards, and
productivity improved, to help regain growth
momentum, given the relative currency
appreciation and decline in demand.  Although
nominal and real wages reportedly rose 4.5%and 0.1%, respectively, on an annual basis in
the second quarter of 1998 despite the
economic recession, more recent newspaper
reports indicate that some firms may be
starting to cut wages substantially.  Propertyprices and rents have already undergone
sharp declines during the past year.  While
labour productivity in the economy as a whole
has grown only 1%, in manufacturing it
increased by 9% in the 12 months ending
June 1998 (up from 8% in 1997).  The fact that
the trade deficit is expected to narrowconsiderably in 1998 suggests that domestic
product and factor markets may be adjusting
so as to reverse Hong Kong's recent decline in
export competitiveness.  The recent fall in the
value of the U.S. dollar, especially relative tothe Japanese yen, together with cuts in U.S.
interest rates will also help to improve Hong
Kong's growth prospects.  This, together with
its traditional adherence to a free and open
market system, should facilitate Hong Kong'semergence from the current economic crisis
and a resumption of its strong economic
performance.