RESTRICTEDWORLD  TRADE
ORGANIZATIONWT/TPR/S/109
18 November 2002
(02-6321)
Trade Policy Review Body
TRADE POLICY REVIEW
HONG KONG, CHINA
Report by the Secretariat
This report, prepared for the fourth 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.
Any technical questions arising from this report may be addressed to
Ms. Eugenia Lizano (tel. 739 5529), Mr. Masahiro Hayafuji (tel. 739 5873) and
Mr. Michael Daly (tel. 739 5077).
Document WT/TPR/G/109 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/109
Page iii
CONTENTS
Page
SUMMARY OBSERVATIONS
(1) E CONOMIC ENVIRONMENT vii
(2) I NSTITUTIONAL AND POLICY FRAMEWORK vii
(3) T RADE AND TRADE -RELATED MEASURES viii
(4) S ECTORAL POLICIES viii
I. ECONOMIC ENVIRONMENT 1
(1) R ECENT ECONOMIC DEVELOPMENTS 1
(i) Economic performance 1
(ii) Macroeconomic policies 4
(iii) Structural measures 7
(2) D EVELOPMENTS IN TRADE 8
(i) Composition of trade 9(ii) Direction of trade 9
(3) O
UTLOOK 12
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES 13
(1) I NTRODUCTION 13
(2) I NSTITUTIONAL SETTING 13
(3) T RADE POLICY FORMULATION AND IMPLEMENTATION 14
(i) Government bureaux and departments 14(ii) Advisory and review bodies 15
(4) T
RADE POLICY OBJECTIVES AND ARRANGEMENTS 15
(i) Multilateral agreements 15(ii) Regional cooperation initiatives 16(iii) Bilateral agreements 17
(5) F
OREIGN INVESTMENT REGIME 17
III. TRADE POLICIES AND PRACTICES BY MEASURE 18
(1) I NTRODUCTION 18
(2) M EASURES DIRECTLY AFFECTING IMPORTS 19
(i) Import registration 19(ii) Tariffs 19(iii) Other charges affecting imports 21
(iv) Customs valuation and rules of origin 22
(v) Import prohibitions, restrictions, and licensing 22(vi) Contingency measures 24(vii) Standards and other technical requirements 24(viii) Government procurement 27(ix) State trading 30
(x) Local-content schemes 30
(xi) Countertrade 30
(3) M
EASURES DIRECTLY AFFECTING EXPORTS 30
(i) Procedures 30(ii) Export taxes, charges, and levies 31WT/TPR/S/109 Trade Policy Review
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Page
(iii) Export prohibitions, restrictions, and licensing 32
(iv) Export support 33(v) Export cartels and other arrangements 34(vi) Export finance, insurance, and guarantees 34(vii) Export promotion and marketing assistance 34
(4) O
THER MEASURES AFFECTING PRODUCTION AND TRADE 34
(i) Incentives 34(ii) Role of state-owned enterprises 37(iii) Competition policy and regulatory issues 38(iv) Corporate governance 40
(v) Intellectual property rights 42
IV. TRADE POLICIES BY SECTOR 50
(1) I
NTRODUCTION 50
(2) A GRICULTURE 51
(3) M ANUFACTURING 54
(4) S ERVICES 55
(i) Financial services 55
(ii) Telecommunications 60(iii) Transport 63(iv) Tourism 68
REFERENCES 71
APPENDIX TABLES 77
CHARTS
I. ECONOMIC ENVIRONMENT
I.1 Product composition of merchandise trade, 1998 and 2001 10
I.2 Direction of merchandise trade, 1998 and 2001 11
IV. TRADE POLICIES BY SECTOR
IV.1 Mark-up between c.i.f. import price and retail pr ice of Thai fragrant rice in Hong Kong, China 53
IV.2 Hong Kong dollar interest rates, 1998-01 59
TABLES
I. ECONOMIC ENVIRONMENT
I.1 Major features of the Hong Kong, China economy, 1998-01 2
I.2 Selected macroeconomic indicators, 1998-02 2I.3 Structure of direct and indirect tax revenue, 1997-02 6I.4 Exports and imports of services,1998-01 9
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES
II.1 Selected notifications by Hong Kong, China under WTO Agreements, as at October 2002 16Hong Kong, China WT/TPR/S/109
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Page
III. TRADE POLICIES AND PRACTICES BY MEASURE
III.1 Import declaration charges (HK$) (as of June 1999) 19
III.2 Fully and partially bound tariff lines by WTO agriculture and non-agriculture
definition, 1998 and 2001 20
III.3a Excise duties, 2001-02 21
III.3b Local production of excisable commodities 21III.4 Labelling requirements 27III.5 Government procurement, 1998-01 28III.6 Contracts awarded under various tender procedures, 1998-01 29
III.7 Export declaration charges (HK$) (as of June 1999) 31
III.8 Companies with government involvement 38III.9 Intellectual property laws and regulations 42III.10 Enforcement of Intellectual Property Rights, 1998-02 49
IV. TRADE POLICIES BY SECTOR
IV.1 Economic structure and employment, 1997-02 51
IV.2a Structure of the banking sector, 1998-01 56IV.2b Performance ratios of the banking sector, 1998-01 56IV.3 Telecommunication services in Hong Kong, China, 1998-02 61IV.4 Air transport, 1997-01 64IV.5 Port traffic in Hong Kong, China, 1997-02 66
IV.6 Tourism, 1998-01 69
APPENDIX TABLES
I. ECONOMIC ENVIRONMENT
AI.1 Balance of payments, 1998-01 79
AI.2 Foreign direct investment inflows/outflows by major economic activity, 1998-00 80AI.3 Foreign direct investment inflows/outflows by country, 1998-00 81
III. TRADE POLICIES AND PRACTICES BY MEASURE
AIII.1 Goods subject to import licensing, 2002 82
AIII.2 Standards and/or technical regulations applied in Hong Kong, China, April 2002 84
IV. TRADE POLICIES BY SECTOR
AIV.1 Assistance to agriculture and fisheries 88Hong Kong, China WT/TPR/S/109
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SUMMARY OBSERVATIONS
(1) ECONOMIC ENVIRONMENT
1. During the period under review
(1998-2002), the Hong Kong Special
Administrative Region (HKSAR) has beenfaced with two successive external shocks;  the
Asian financial crisis in the early part of the
period and the global economic slowdown in
2001.  Hong Kong's reversion to the People's
Republic of China in 1997 has not altered theTerritory's trade and investment regime.
However, the HKSAR has had to face
considerable structural adjustment associated
with its growing integration into the rest of
China, particularly the Pearl River Deltaregion.
2. Aided by favourable external
conditions,  notably WTO Members'
commitment to keeping their markets open, the
Territory's recovery from the Asian crisis
started in 1999 and accelerated in 2000, when
GDP grew by 10.2%.  This recovery wasshort-lived, however , owing to the global
slowdown in 2001, when real GDP in the
HKSAR grew by just 0.6% in real terms.
While this downturn was mainly caused by
falling exports, weak domestic demand(possibly reflecting the Territory's high level
of savings in relation to investment) also
contributed.  As a consequence, the
unemployment rate rose to 7.7% in the second
quarter of 2002, its highest level since the1980s.  Moreover, deflation has persisted for
the past three years (1999-01), reflecting
adjustment not only to the two external shocks
under the fixed exchange rate of the
Hong Kong dollar to the U.S. dollar, but also
increased integration with China (where
prices, wages and property prices/rents in
particular are considerably lower than in the
HKSAR).  Under the fixed exchange rate
system, the brunt of the adjustment has fallen
on domestic-product, factor, and asset
markets.
3. Trade is critical to the economy of the
HKSAR, with trade in goods and non-factor
services equivalent to 277% of GDP in 2001.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 transportation and trade-
related services.  This is consistent with the
HKSAR's role as an entrepot and the shiftfrom manufacturing to services.
(2) I
NSTITUTIONAL AND POLICY
FRAMEWORK
4. In accordance with the principle of
"one country, two systems", the Basic Law, themain constitutional document governing the
HKSAR, grants the Territory a high degree of
autonomy in the conduct of foreign trade
relations. The Territory's institutional and
policy framework has remained largelyunchanged since its reversion to China in
1997.  There have been some institutional
changes intended to increase accountability in
the public sector and several departments
have been reorganized to assume expanded
responsibilities.
5. There have been no significant
changes in the HKSAR's broad trade policy
objectives since 1998.  While the Territory has
initiated FTA negotiations with China and
New Zealand, the authorities stress their
commitment to the multilateral trading system.Hong Kong, China continues to play an active
role in the WTO, including in the ongoing
negotiations.  As noted by the authorities, the
Territory's priorities in the Doha Development
Agenda (DDA) include market accessenhancement, rules-related issues in trade in
services, and non-agricultural tariffs.
6. Hong Kong, China maintains an open
trade and foreign investment regime.  The
Government's approach of letting free andopen markets be the main determinant of the
allocation of resources within the Territory
remains, by and large, in place.  In general,
industrial support is not sector specific, with
industrial policy being confined mainly to the
provision of public services to allow the
private sector to develop.  More recently,however, partly owing to the economic
downturn, the Government has become moreWT/TPR/S/109 Trade Policy Review
Page viii
"proactive" in an effort to promote high value-
added activities, namely financial services,
logistics, tourism, and producer and
professional services.  This development is
perhaps indicative of a shift away from the
Government's traditional laissez-faire stance.
(3) TRADE AND TRADE -RELATED
MEASURES
7. Hong Kong, China is a free port with
few restrictions at the border.  Since 1998
there have been only a few significant changesin the Territory's trade regime;  these include
an increase in the number of bound tariff lines,
the phasing out by 2003 of the Rice Control
Scheme, and improved enforcement of
intellectual property rights.
8. All imports enter the Territory duty
free.  Tariff bindings have been increased
since 1998, but these apply to less than half of
all tariff lines.  Non-tariff border measures
(NTMs) are almost absent;  those that do exist
(import and export licences and quotas) either
stem from the HKSAR's obligations underinternational undertakings or are applied for
health, safety, security or environmental
reasons.  The Rice Control Scheme, a quota
system in place for food security reasons, is
being phased out and will be fully eliminatedby 2003.  Hong Kong, China has no legal
instrument protecting domestic producers
from perceived unfair foreign trading
practices in the form of dumping or export
subsidies.  There are no government controlson exports, except those maintained under the
WTO Agreement on Textiles and Clothing, or
related to UN sanctions.  Hong Kong, China is
a member of the WTO Agreement on
Government Procurement (GPA).
9. In general, Hong Kong, China does
not provide sector-specific assistance.
Support is provided across the board to all
sectors through tax incentives, financing for
R&D and technology upgrading, and
assistance to small and medium-sized
enterprises (SMEs).  Nevertheless, certain taxincentives seem to benefit some sectors more
than others.  Moreover, land leasingconditions remain an important instrument of
industrial policy.  Land is the Territory's
scarcest resource and is owned by the
Government;  it is allocated not just through
open tenders and bids, but also under special
circumstances by means of direct contracts;the terms of these contracts, including prices,
are negotiated by the parties concerned and
could therefore entail substantial assistance.
10. In the belief that the free play of
market forces and minimum intervention arethe best means of fostering competition,
Hong Kong, China has eschewed an
overarching competition law.  Instead, the
authorities prefer a sector-specific approach,
involving measures, such as licensing, codesof practice, and legislation, when these are felt
to be necessary.  However, the absence of a
comprehensive policy to address anti-
competitive practices, and the entrenchment of
a few dominant conglomerates in the domestic
market, could constitute an obstacle to greater
competition from domestic and foreign firms,especially in the provision of services, thereby
possibly discouraging FDI.
11. Hong Kong, China has a
comprehensive body of legislation aimed at
protecting intellectual property.  Since itsprevious Review, steps have been taken to
improve the enforcement of these laws.  As a
result, Hong Kong, China introduced
additional changes to its intellectual property
legislation and implemented educationcampaigns to strengthen the protection
accorded to intellectual property.  The
authorities consider that these efforts have
been successful.
(4) S
ECTORAL POLICIES
12. The HKSAR is primarily a service-
based economy, with services accounting for
92.4% of GDP in 2000.  The contribution of
agriculture, fisheries, and mining to GDP (and
employment) is negligible, and that of the
manufacturing sector has declined to 5.5%.
This downward trend in manufacturing, whichstarted two decades ago, is expected to
continue as the production of labour-intensiveHong Kong, China WT/TPR/S/109
Page ix
manufactured goods moves to lower cost
centres in China.  Economic reform on the
Mainland has provided a production
hinterland and market outlet for the
Territory's manufacturers.  The Territory has
also become a major provider of supportservices for China (e.g. financial services,
business services, and trading services
including transportation) increasing the
economy's orientation towards services.
Economic integration with China has providedadded impetus to the HKSAR's efforts to
become a high-value-added, service-based
economy.  This process has also been reflected
in the changing structure of employment,
which has contributed to an increase inunemployment among the low skilled and
raised income disparities.
13. Sectoral policies have undergone little
change since 1998;  they focus on upgrading
infrastructure, and promoting innovation and
technological improvement in manufacturing
and services.  However, the FinancialSecretary has earmarked four services sectors
as key to the HKSAR's development, which
could indicate a shift towards the adoption of
sector-specific assistance.  Since 1998,
sectoral reforms have been mainly in banking
and telecommunications services. Inparticular, the conditions attached to foreign
banks applying for a licence to operate in
Hong Kong, China were relaxed in 2000.  The
Interest Rate Rules, operated by the
Hong Kong Association of Banks, wereliberalized in two phases, in 2000 and 2001.
While these measures should lead to an
increase in competition in the sector, data
show that despite the large number of banks,
the sector has  a quasi-oligopolistic structure.Telecommunications have also been
progressively liberalized, with the introduction
of competition in the fixed telecommunications
market, which will be fully liberalized by 2003.
Telecommunications and broadcasting are the
only activities that have explicit legal
provisions against anti-competitive behaviour.