Economic Affairs

Asean-HK FTA: What it means for Hong Kong and Singapore

Asean and Hong Kong are set to sign the long-awaited free trade and investment agreements that have been under negotiation for more than four years. This was announced at the recently concluded Asean meeting in Manila by a Philippine government official.

Unfortunately, there are no details of the agreements available just yet, but for Hong Kong, the devil is most certainly in the details.

There is a lot at stake for Hong Kong, which hopes to stop the precipitous decline in its cargo throughput and its broader position as a trading hub for China-related trade.

Hong Kong has always been a trading hub for China-related trade. It is arguably its entire reason for existence. This has been a success story for Hong Kong, with steady and impressive growth for decades.

But in the last six or seven years, things have changed. Over this period, global trade declined, but intra-Asian trade has grown. According to the World Bank, intra-Asia trade eclipsed Asia-North America and Asia-Europe trade as a proportion of total trade in 2012, and has consistently gained share each year since.

Of this intra-Asia trade, the most significant lane may be the China-Asean trade lane. According to the Asean secretariat, China is, by far, the largest external trading partner of the Asean bloc, representing more than 15 per cent of total trade with Asean in 2015.

Why does this matter? Because Asean and China concluded a free trade agreement (FTA) in 2010 which excludes Hong Kong, and actually provides an overt disincentive to utilising Hong Kong as a hub for trade between China and Asean.

How could an FTA with China exclude or even harm a Special Administrative Region of China, you ask? Because Hong Kong is a separate Customs jurisdiction.

ST ILLUSTRATION : MANNY FRANCISCO

Hong Kong is a member, in its own right, of the World Trade Organisation, and as it does with tax treaties, it negotiates and executes international agreements, in its own right, as a separate jurisdiction for tax and Customs purposes, among other areas.

This matters because the China-Asean FTA, like most FTAs, generally requires that goods claiming tariff preferences under the agreement originate within the member states of the agreement and are directly shipped from one member to the other.

So, goods imported into China from Asean and exported from China to Asean, would need to be directly shipped from an Asean member state to China or from China to an Asean state - this does not include Hong Kong but it does include Singapore.

As a result, the largest and fastest- growing trade lane in the world, between China and Asean, has benefited Singapore substantially at Hong Kong's expense.

For Hong Kong's part, Asean is its second-largest trading partner and a top 10 foreign investment destination.

So, in Hong Kong's view, it stands to gain from both the FTA and the Investment Agreement, "which will bring more and better access to the Asean markets, create new business opportunities and further enhance trade and investment flows", according to Mr Edward Yau, Hong Kong's Secretary for Commerce and Economic Development.

The Singapore view seems to be more pragmatic. In fact, Minister for National Development Lawrence Wong was quoted as saying that "Singapore and Hong Kong are in healthy competition with each other... But the competition is not a zero-sum game".

The Singapore Government has correctly identified the relative positions of Hong Kong and Singapore as they relate to China-related trade.

Hong Kong was formerly the world's busiest container port. But it fell to the fifth-busiest last year.

The fact that the top four ports are in Asean and mainland China is no coincidence. There are, of course, other reasons contributing to this dynamic but Singapore, which is a largely service-based economy, has placed itself at the centre of intra-Asia trade in goods as a trading hub for China-related trade - Hong Kong's traditional role.

In comparison, Singapore's cargo throughput statistics are remarkably stable. Singapore has held on to the No. 2 spot worldwide for cargo volumes, behind Shanghai and ahead of two other ports - Shenzhen and Ningbo - both in mainland China.

The fact that the top four ports are in Asean and mainland China is no coincidence.

There are, of course, other reasons contributing to this dynamic but Singapore, which is a largely service-based economy, has placed itself at the centre of intra-Asia trade in goods as a trading hub for China-related trade - Hong Kong's traditional role.

In fact, statistics released just this week show Singapore's non-oil exports surged more than 17 per cent, representing more than healthy growth and closely tracking the growth in China output and domestic demand.

There are quirks in the China-Asean FTA that facilitate Singapore's role as a trading hub, the details of which are not relevant here, but suffice it to say that Hong Kong has directly lost market share as a trading hub with China to Singapore as a result.

The implementation of the Hong Kong-Asean FTA is unlikely to immediately change the relative trade flows via Singapore or Hong Kong. After all, Singapore retains its position as a home port for major carrier alliances, which virtually guarantees this entrepot trade continuing for the near future in Singapore.

So where does that leave Hong Kong and the future of a substantial and bedrock portion of Hong Kong's economy?

Could it be that an FTA that offers duty-free treatment of Asean-origin items into Hong Kong will be a boon to the city's economy? Unfortunately, the benefits will be minimal.

Or perhaps Hong Kong is banking on the wonderful duty-free treatment into Asean of Hong Kong-origin items? Again, the benefits from that trade would be scanty. Hong Kong is not known for its farming, manufacturing or natural resources.

So, why should Hong Kong care about the FTA with Asean? Because Hong Kong's continuing role as a significant trading hub for China-related trade depends on it having a well-crafted agreement that effectively gives Hong Kong access to the China-Asean FTA.

This 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.

The minutiae of the Asean-Hong Kong FTA will be a major factor in whether or not Hong Kong can hold on to its traditional role as a trading hub for China-related trade.

We do not have the details of what was negotiated. The Hong Kong Trade and Industry Department, which solicited comments from the public on the negotiating points for this agreement, received a rather underwhelming response from Hong Kong businesses.

This is rather disappointing and surprising when more than 5 per cent of Hong Kong's GDP may well depend upon the details of the Asean-Hong Kong FTA.


  • The writer is partner and Asia-Pacific leader, Customs and Global Trade, at Deloitte.
A version of this article appeared in the print edition of The Straits Times on September 20, 2017, with the headline 'Asean-HK FTA: What it means for HK and S'pore'. Print Edition | Subscribe