preferences to commercially established service suppliers from third countries that engage in substantive business operations within an FTA territory (Article V.6). However, in the case of FTAs involving _only_ developing countries, preferential treatment may, in addition, be limited to companies “ _owned or controlled by natural persons of the parties_ ” to an FTA (Article V.3b). Interestingly, the GATS does not create any discipline on the rule of origin FTA members may adopt for individual service providers.

## **<mark>Box 1: Rules of origin in the China-Hong Kong Closer Economic Partnership Agreement</mark>**

<mark>The China-Hong Kong Closer Economic Partnership Agreement is in many ways a special trade agreement. It grants Hong Kong-based service providers preferential access to China’s market, in advance of the liberalization schedule to which China committed as part of its accession package to the WTO. China’s offer to Hong Kong under CEPA had little to do with classical arguments of trade bargaining. Hong Kong, being one of the most open economies in the world, had little to give in terms of improved market access for Chinese suppliers. Rather, the Agreement was intended to promote deeper integration between the Mainland and Hong Kong and has to be understood in the context of the “one country, two systems” formula.</mark> <mark>If CEPA had adopted a liberal rule of origin and given Hong Kong’s liberal entry policies, service suppliers from outside of Hong Kong would have had a way to enter the Chinese market in advance of the WTO schedule. This was not the intention of the Chinese and Hong Kong governments. Thus, CEPA has an annex on the definition of service suppliers, which translates into one of the most detailed rule of origin so far seen in a trade agreement. In particular, for Hong Kong companies to enjoy preferential treatment under CEPA, they must have had substantive business operations for 3-5 years in Hong Kong for the services they intend to provide in the Mainland; they must have paid profit tax in Hong Kong; they must own or rent premises for business operations in Hong Kong; and more than 50 percent of employees must be Hong Kong residents (or Chinese people staying in Hong Kong on a one way permit). Additional rules exist for law firms, which require the sole proprietor and all partners of a firm to be registered as practicing lawyers. In the case of individuals (natural persons), eligibility for preferential treatment is confined to Hong Kong permanent residents.</mark> <mark>In order to be certified as Hong Kong Service Suppliers under CEPA, interested service suppliers must submit an application to Hong Kong’s Department of Trade and Industry, along with documentation which verifies that suppliers meet the above criteria. The Agreement came into force on January 1, 2004. As of May 2005, 788 certificates for Hong Kong Service Suppliers were issued.</mark> <u><mark>Source:</mark></u> <mark>Information provided on the website of Hong Kong’s Department of Trade and Industry</mark> <u><mark>(http://www.tid.gov.hk/english/cepa/fulltext.html)</mark></u>

# **_What factors determine the relevance and restrictiveness of rules of origin?_**

As already indicated, the relevance of a rule of origin for service suppliers depends critically on the pattern of remaining market access restrictions that FTA members maintain against nonmembers. Suppose that these restrictions are identical for all FTA members—the equivalent of a customs union in the case of goods trade. If services can only be delivered through the establishment of a commercial presence (Mode 3), rules of origin would lose their relevance. This is because service providers from outside the FTA territory would not need to establish an intermediate presence in one of the FTA members for the purpose of obtaining better access to other FTA markets. However, they would still be relevant if services can be delivered on a cross-border basis (Mode 1) or through consumption abroad (Mode 2). Because of economies of scale and scope, a service provider from outside the FTA may prefer to serve the whole FTA 8