RESTRICTEDWORLD  TRADE
ORGANIZATIONWT/TPR/S/82
19 February 2001
(01-0705)
Trade Policy Review Body
TRADE POLICY REVIEW
MACAU, CHINA
Report by the Secretariat
This report, prepared for the second Trade Policy Review of Macau, 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
Macau, China on its trade policies and practices.
Any technical questions arising from this report may be addressed to
Mr. M. Hayafuji (tel. 739 58 73), Mrs. E. Lizano (tel. 739 55 29) or Mr. M. Daly
(tel. 739 50 77).
Document WT/TPR/G/82 contains the policy statement submitted by the
Government of Macau, 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 Macau, China.Macau, China WT/TPR/S/82
Page iii
CONTENTS
Page
SUMMARY OBSERVATIONS
(1) B ACKGROUND vii
(2) M ACROECONOMIC POLICIES vii
(3) T RADE AND TRADE -RELATED  POLICIES AND MEASURES viii
(4) S ECTORAL ISSUES ix
(5) O UTLOOK x
I. ECONOMIC ENVIRONMENT 1
(1) I NTRODUCTION 1
(2) R ECENT ECONOMIC DEVELOPMENTS 1
(i) Macroeconomic performance 1(ii) Macroeconomic policies 3(iii) Structural/industrial policies 5
(3) T
RADE DEVELOPMENTS 6
(i) Composition of merchandise trade 7(ii) Direction of merchandise trade 7
(4) F
OREIGN DIRECT INVESTMENT 10
(5) P ROSPECTS 11
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES 12
(1) I NTRODUCTION 12
(2) G ENERAL CONSTITUTIONAL AND LEGAL FRAMEWORK 12
(3) T RADE POLICY FORMULATION AND IMPLEMENTATION 16
(i) Agencies involved in trade policy implementation 16(ii) Advisory and review bodies 18
(4) T
RADE POLICY OBJECTIVES 18
(5) T RADE AGREEMENTS AND ARRANGEMENTS 18
(i) Multilateral agreements 18(ii) Regional agreements 19(iii) Bilateral agreements 19
(6) T
RADE DISPUTES AND CONSULTATIONS 20
(7) M EASURES RELATED TO FOREIGN DIRECT INVESTMENT 20
III. TRADE POLICIES AND PRACTICES BY MEASURE 21
(1) O VERVIEW 21
(2) M EASURES DIRECTLY AFFECTING IMPORTS 22
(i) Procedures 22(ii) Customs valuation and rules of origin 23
(iii) Tariffs 24
(iv) Other charges affecting imports 24(v) Import licensing, prohibitions, and other restrictions 26(vi) Import cartels 29(vii) Contingency measures 29WT/TPR/S/82 Trade Policy Review
Page iv
Page
(viii) Standards and other technical requirements 30
(ix) Government procurement 33(x) State-trading 36(xi) Local-content schemes 36
(xii) Countertrade 36
(3) M
EASURES DIRECTLY AFFECTING EXPORTS 36
(i) Procedures and documentation 36(ii) Export taxes, charges, and levies 36(iii) Export cartels and other arrangements 36
(iv) Export prohibitions, restrictions, and licensing 36
(v) Export support 38(vi) Export finance, insurance, and guarantees 38(vii) Export promotion and marketing assistance 38
(4) M
EASURES AFFECTING PRODUCTION AND TRADE 38
(i) Taxation 38
(ii) Non-tax incentives and other forms of assistance 41
(iii) Intellectual property rights 44(iv) Competition policy and regulatory issues 50
IV. TRADE POLICIES BY SECTOR 52
(1) I
NTRODUCTION 52
(2) M ANUFACTURING 53
(3) S ERVICES 55
(i) Financial services 56(ii) Telecommunications 59(iii) Transport 60
(4) T
OURISM 63
REFERENCES 67
APPENDIX TABLES 69
CHARTS
I. ECONOMIC ENVIRONMENT
I.1 Product composition of merchandise trade, 1994 and 1999 8
I.2 Merchandise trade by main origin and destination, 1994 and 1999 9
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES
II.1 Structural Diagram of the Government of Macau SAR 13
II.2 Organization of Macau Economic Services 17
IV. TRADE POLICIES BY SECTORIV.1 Composition of GDP, 1995 and 1998 (at current prices) 53Macau, China WT/TPR/S/82
Page v
TABLES
Page
I. ECONOMIC ENVIRONMENT
I.1 Major features of Macau, China's economy 1
I.2 Performance of Macau, China's economy, 1994-99 2
I.3 Government budget, 1994-99 5
I.4 Estimates of Macau, China's external sector, 1994-99 6I.5 Exports and imports of services by category, 1993-99 7I.6 Stock of foreign direct investment into Macau, China, 1998 10
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES
II.1 Basic trade-related legislation in Macau, China 15
II.2 Principal notifications by Macau, China under WTO Agreements, as at October 2000 18
III. TRADE POLICIES AND PRACTICES BY MEASURE
III.1 Consumption taxes and exemptions, 2000 25
III.2 Import licensing 27
III.3 Sanitary or phytosanitary documentation 33III.4 Government procurement contracts, 1994-99 35III.5 Products subject to export licensing 37
III.6 Taxation 39
III.7 Tax revenues forgone as a result of incentives/exemptions, 1994-99 41III.8 Subsidized loans by sector, 1994-99 42
IV. TRADE POLICIES BY SECTOR
IV.1 Textiles and clothing exports by destination, 1994-99 54
IV.2 Air transport in Macau, China, 1995-2000 61IV.3 Tourism in Macau, China, 1994-2000 64
APPENDIX TABLES
I. ECONOMIC ENVIRONMENT
AI.1 Merchandise exports by broad category, 1993-99 71
AI.2 Merchandise imports by broad category, 1993-99 72AI.3 Exports by region and principal country of origin, 1993-99 73
AI.4 Imports by region and principal country of origin, 1993-99 74
III. TRADE POLICIES AND PRACTICES BY MEASUREAIII.1 Products subject to import licensing 75
AIII.2 Goods subject to sanitary and phytosanitary requirements 79
AIII.3 Products subject to export licensing 80
AIII.4 Tax concessions in Macau 83Macau, China WT/TPR/S/82
Page vii
SUMMARY OBSERVATIONS
(1) BACKGROUND
1. The period since the previous Review
of Macau, China in late 1994 has been marked
by two main events.  The most important ofthese was Macau's reversion to the People's
Republic of China (PRC), on
20 December 1999, and its designation as a
Special Administrative Region (SAR).  Under
the Basic Law of the Macau SpecialAdministrative Region (MSAR) of the People's
Republic of China (Basic Law), which
provides for "one country, two systems", the
MSAR has a high degree of autonomy for
50 years in the administration of all its affairs,except defence and foreign policy.  The MSAR
has retained its status as a free port and is
exempt from all taxes imposed by the central
government of the PRC.  Thus, the Territory's
reversion to the PRC appears to have had
little, if any, effect on its trade and
trade-related policies.  On the other hand,since the reversion the authorities have
succeeded in sharply reducing crime, much to
the benefit of tourism;  they have also taken
steps to build a more robust civil society, with
local people seemingly participating more inpublic life than previously.
2. Macau's reversion to China took place
subsequent to the other main event during the
review period, namely the outbreak of the
economic crisis in Thailand in July 1997 andits spread to other countries in (and beyond)
South-East Asia.  This crisis seriously
impaired the Territory's economic
performance, which had already started to
deteriorate in 1996;  real GDP contracted infour successive years (1996-99), with largest
negative growth, of 4.6%, in 1998.
Concurrently, the unemployment rate has
more than doubled since 1997 (reaching 7.1%
in the second quarter of 2000).  At the same
time, the MSAR has experienced mild deflation
since 1998.
3. Trade is critical to the economy, with
exports and imports (of goods and services)
equivalent to roughly 80% and 50% of GDP,respectively, in 1999.  Although the Territory's
merchandise trade account has been in deficit,
this has been more than offset by a large
surplus in services trade, mainly involving
tourism and related activities such as
gambling.
(2) M
ACROECONOMIC POLICIES
4. The autonomy of Macau, China in
formulating its monetary policy is stipulated
by the Basic Law;  the Law further stipulates
that neither foreign exchange nor capitalcontrols can be used.  The objective of
monetary policy is to maintain the stability of
both the currency and the financial system.
Accordingly, the Basic Law requires that the
MSAR's currency, the Macau pataca, be fullybacked by a reserve fund.  The exchange rate
is pegged at 1.03 to the Hong Kong dollar,
and hence indirectly to the U.S. dollar, under
a currency-board type of arrangement.
5. The pegging of the pataca to the
Hong Kong dollar severely limits the
authorities' scope for controlling the moneysupply.  The outcome is relatively high real
interest rates.  The peg to the Hong Kong
dollar and thus indirectly to the U.S. dollar
has also resulted in an effective appreciation
of the pataca, particularly in relation to thedevalued currencies of countries in the region.
The authorities believe that the advantages of
the peg outweigh its disadvantages.  One
possible major disadvantage is that the
effective appreciation of the pataca and highreal interest rates may hamper both the
Territory's economic recovery and the
Government's efforts to diversify the economy.
On the other hand, the authorities consider
that maintenance of the peg of the pataca tothe Hong Kong dollar imparts a high degree
of stability to the financial system and the
economy as a whole.
6. Macau, China has no exchange
controls, other than the obligation imposed on
merchandise exporters to convert 40% of their
export proceeds in foreign currency intopatacas.  There are no other controls on theWT/TPR/S/82 Trade Policy Review
Page viii
use of payments or invisible receipts, nor are
there any restrictions on capital flows.
7. The Basic Law requires the MSAR
Government to strive to achieve fiscal balance,
which accords with the Territory's traditional
practice of prudent fiscal policy.  There hasbeen a fiscal surplus, albeit declining, since
1994;  the surplus in 1999 was P 306 million
(0.6% of GDP), about one fifth of that in 1994.
The share of public expenditure in GDP,
including by autonomous bodies, has beenincreasing since 1994.  It is estimated to have
been about 20% in 2000, although data are
not always readily available;  transparency
with respect to expenditure, especially in the
area of government procurement, could beimproved.  Taxes on gambling and other
exclusive concessions accounted for about
31% of government revenue in 1998.  As about
95% of the land in the MSAR is owned by
its Government, the leasing of land is another
major source of government revenue.
(3) T
RADE AND TRADE -RELATED
POLICIES AND MEASURES
8. Neither the Asian crisis, nor Macau's
reversion to China in December 1999 has
materially altered the Territory's trade and
investment regime, which remains among themost open in the world.  The Government's
approach has long been to let free and open
markets be the main determinant of the
allocation of resources within the MSAR and
thus its economic development.  Since itsReview in 1994, there have been few major
trade policy-related changes in Macau, China,
other than those related to commitments made
in the Uruguay Round.  One of the main
developments in this regard has been thestrengthening of protection accorded to
intellectual property rights.
9. The high degree of openness of the
economy for trade in goods is indicated by the
duty-free entry of all imports into
Macau, China.  While only 23% of tariff lines
have been bound, all bound tariffs are zero;moreover, the status of Macau, China as a free
port under the Basic Law appears to precludeincreases in applied rates for those tariff lines
that are unbound.  Although the consumption
tax is levied on domestically manufactured
and imported goods alike, it falls
disproportionately on imports because there is
little, if any, local production of the goodssubject to the tax.  Non-tariff barriers to trade
(NTBs) are few;  by and large, they involve
measures aimed at ensuring security as well as
protecting public health and the environment
(including endangered species).  The recentinclusion of equipment and material used for
the manufacture of optical discs in the list of
imports requiring prior authorization is one of
several measures intended to curtail the
infringement of intellectual property rights.Macau, China has no legal instrument
protecting domestic producers from perceived
unfair foreign trading practices in the form of
dumping or export subsidies.
10. Besides export licensing, there are
virtually no government controls on exports
except those maintained in accordance withUN sanctions and international conventions.
Pursuant to the long-standing quota system
maintained under the WTO Agreement on
Textiles and Clothing, the MSAR restrains its
exports of textiles and clothing in certainmarkets.  The authorities' allocation of export
entitlements tends to favour entrenched
interests.  The MSAR does not grant any
assistance to exports other than tax incentives,
which are not specific to any sector.
11. Although Macau, China also
maintains an open foreign investment regime,
with few restrictions on inbound or outbound
investment, both domestic and foreign
investments are, in practice, prevented in somekey services owing to the Government's
granting of exclusive rights to certain
companies in the form of concessions.
12. While Macau, China has not made any
significant changes to its legislation on
government procurement since 1994, it has
taken steps to simplify procedures andenhance transparency in order to attract a
larger number of bids.  Purchases of foreign
goods and services exceeding a certainMacau, China WT/TPR/S/82
Page ix
threshold are approved only if there is no
local supplier.  At the same time, employment
of local labour is encouraged in all
procurement activities.  Macau, China is not a
party to the Government Procurement
Agreement, but it does plan to become moreinvolved in the Working Group on
Transparency in Public Procurement.
13. Macau, China introduced new laws
with respect to intellectual property rights in
1999, aimed, in particular, at ensuringcompliance with the TRIPS Agreement.  These
new laws established a comprehensive legal
framework for protecting intellectual property
rights.  Furthermore, the authorities have
shown their determination to improveenforcement of these laws.  Nevertheless, gaps
do appear to remain;  for example, there is
some doubt as to whether the penalties
actually imposed are sufficient to constitute an
effective deterrent.
14. The internal tax system of the MSAR is
characterized by a low overall level oftaxation relative to GDP (13%) and relatively
heavy reliance on direct taxes, especially those
derived from gambling.  Most direct taxes,
notably those on profits and employment
income, are levied at low rates, whichcontributes to the Territory's attractiveness for
domestic and foreign investors.  At the same
time, however, the tax system is used as the
main instrument of industrial policy, with
various tax incentives being offered to projectsthat, inter alia, promote industrial
diversification, encourage exports to new
markets, contribute to technological progress,
raise value added, and create employment.
Refundable and non-refundable grants as wellas interest rate subsidies are also provided.  In
addition, as 95% of all land in the MSAR is
owned by the Government, the seemingly
complex (and possibly discretionary) system
for leasing government-owned land constitutes
a potential instrument of economic policy.
15. Confident of the disciplinary effects of
an open market environment, Macau, China
has no competition law as such;  nonetheless,
the 1999 Commercial Code establishes somegeneral principles regarding competition
policy in order to safeguard economic freedom
and combat business practices that impair
competition.  While the openness of the
Macau, China economy to trade has
undoubtedly fostered competition as far asgoods are concerned, competition appears to
be somewhat lacking in several service
activities.
(4) S
ECTORAL ISSUES
16. Macau, China is largely a
services-based economy:  services accounted
for 90% of GDP and 69% of employment in
1998.  The share of services in the economy
has been growing and the authorities expect
this trend to continue owing to investment ininfrastructure (i.e. the new international
airport and improved port facilities), which
has facilitated access to Macau, China, and
continuing efforts to improve the quality and
diversity of services related to tourism, the
mainstay of the economy.  Community and
social services alone, including gambling andcasino activities accounted for nearly 47% of
GDP (and over 28% of employment).  By
contrast, the industrial sector (manufacturing
and construction) accounts for some 13% of
GDP and provides about 31% of all jobs,suggesting that labour productivity in this
sector is relatively low.  The contribution of
agriculture and fisheries to GDP and
employment is negligible.
17. The openness of the Macau, China
economy to trade in agricultural and,
particularly, manufactured products has
undoubtedly contributed to competition in
domestic goods markets, in the absence of an
over-arching competition law.  Though thereare few formal barriers to inbound foreign
direct investment (FDI) per se that would
impede the establishment of foreign firms
providing services, competition in several
services markets could nonetheless be
improved.  Key services, such as electricity,
water, telecommunications, and transport, arecurrently provided by private companies with
exclusive rights under government
concessions.  Gambling services, anotherWT/TPR/S/82 Trade Policy Review
Page x
major subsector, has remained a private
monopoly since 1961, although this particular
concession is scheduled to expire in 2001.  The
resulting restraint on competition in these and
other services enables suppliers to charge
higher prices not just to consumers, but tofirms for which services such as energy,
telecommunications and transportation, for
example, are important business inputs.  The
unduly high cost of such inputs would tend to
impair such firms' competitiveness anddiscourage them from doing business in
Macau, China, thereby hampering the
Territory's economic development.  The
authorities note that initiatives are under way
with a view to improving competition incertain services, notably telecommunications
and gambling.
18. With the MSAR's current commitments
under the GATS confined mainly to financial
services, further commitments in other
services could also foster economic
development in Macau, China by reinforcingthe Government's efforts to diversify the
economy, especially aw ay from gambling into
other services.  While the Government has
announced plans to liberalize unilaterally
some telecommunications activities, themaking of additional commitments under the
GATS in these and other fields would tend to
enhance the transparency and predictability of
the Territory's trade and investment regime
and move the liberalization process forward inthe services sector, much to the benefit of the
MSAR economy as a whole.(5) O
UTLOOK
19. The Government forecasts growth of
2.4% for 2000, which is considerably lower
than that of Macau's neighbours, including
Mainland China and Hong Kong, China.  But
there are some other positive signs ofeconomic recovery, particularly in tourism,
where the number of visitors between January
and September 2000 increased by 24.3%
compared with the same period of the previous
year;  and in exports, which increased byabout 17% in the first eight months of 2000.
In the first quarter of 2000, however, the real
estate subsector was still weak.  In order to
alleviate high unemployment, the Government
has, inter alia, been encouraging more publicinfrastructure projects, reducing the amount of
quotas on foreign workers, and providing
additional employment training and
re-training courses.
20. The continued recovery of several
South-East Asian economies, the source of the
majority of tourists to Macau, China, andrecent growth in the United States and the
European Union, where most of the MSAR's
clothing exports are directed, also augurs well
for economic recovery.  These developments
complement the gradual rebound in consumerspending and corporate activity in the MSAR.
On the other hand, it remains to be seen
whether the high real interest rates prevailing
in Macau, China and the related high level of
the real effective exchange rate hinder thatrecovery.