Hong Kong recently announced that it had applied to join the Regional Comprehensive Economic Partnership agreement, the 15 nation trade agreement in the Asian Pacific region.
CTM talked with Professor Julien Chaisse of the City University of Hong Kong School of Law -- who last September wrote a piece called "The case for Hong Kong joining RCEP" -- about various aspects of Hong Kong's application, including: why Hong Kong applied at this time; whether Hong Kong will have to make any significant concessions; whether other RCEP parties are likely to have objections to Hong Kong joining; which sectors in Hong Kong were likely to benefit; and the length of the accession process and key negotiating issues.
CTM: Why do you think Hong Kong decided to apply at this specific moment?
Chaisse: RCEP is, presently, the world’s largest trade bloc, comprising 15 nations with an aim to promote optimization of the supply chains within the free trade zone, which accounts for about 30 percent of the world’s output, trade and population. It is pertinent to note that Hong Kong is one of the world’s most export-oriented economies, with long-standing economic ties with RCEP members. In 2020, Hong Kong’s top and second largest merchandise trading partners, respectively, were Mainland China and ASEAN. Furthermore, Hong Kong has previously signed Free Trade Agreements (FTAs) with 13 RCEP members (including Mainland China, 10 ASEAN Member States, Australia, and New Zealand). In 2021, the value of trade between Hong Kong and the 15 member economies of the RCEP topped 962 billion U.S. dollars, accounting for 70 percent of its total foreign trade. In addition, Hong Kong is a key source of investment in the Asia-Pacific region, and once the financial hub enters the RCEP, more of its enterprises will be enticed to invest in RCEP member nations helping them enhance their development. Thus, in light of the fact that Hong Kong has been a staunch supporter of trade and investment liberalisation, joining RCEP will further bolster Hong Kong’s better integration into regional industrial chains and expansion of its markets for businesses. Therefore, the decision of joining RCEP is in the right direction, and Hong Kong has a huge potential to play a synergistic role to strengthen trade links between the RCEP member economies and further bolster it to overcome the ripple effects caused by COVID-19.
CTM: Will Hong Kong have to make any significant concessions in order to join RCEP, or are its current trade policies generally in compliance with RCEP obligations? Are there any areas where it will have to modify domestic laws and regulations?
Chaisse: With respect to the trade matters, Hong Kong is the super-connector of the world. As the central city of the Greater Bay Area and the most international city in the region, Hong Kong enjoys remarkable advantages such as a steady financial market, free flow of capital, sound legal environment and professional services. Over the years, Hong Kong has also entered into multiple bilateral trade deals to strengthen economic ties with its partners in the region and overseas. In 2003, Hong Kong and Mainland China signed the Closer Economic Partnership Agreement (CEPA), which laid out the framework for deeper cross-border relations in the areas of trade in goods, services, investments, as well as economic and technical co-operation. Further, in 2018, Hong Kong signed free trade and investment agreements with ASEAN, the city’s second-largest trading partner in merchandise trade behind Mainland China. The FTA aims to facilitate improvements in market access and legal certainty, as well as boost trade and investment flows between Hong Kong and ASEAN. Additionally, Hong Kong has active bilateral free trade agreements with New Zealand since 2010 and Australia since 2020.
In light of the number of FTAS with member countries of RCEP, it is apparent that Hong Kong’s trade policy are in tune with the RCEP obligations as RCEP promises to simplify trade between Hong Kong and participating members, by essentially bundling multiplicity of bilateral FTAs into one unified framework. Thereby, Hong Kong as a major financial and trade centre and a logistics hub of the region, coupled with high quality FTAs signed with 13 of the RCEP participating economies, is well placed to join RCEP.
Further, it is pertinent to note that the RCEP creates a common rulebook for the trade of goods and services across the RCEP region, against the backdrop of multiple bilateral and plurilateral trade agreements. It also aims at increasing the ambit of the business environment through various new rules and requirements pertaining to the issues such as intellectual property, e-commerce, regulation of competition and government procurement. Thus, in order to gain potential benefits from RCEP, there is need to make Hong Kong’s re-exports and domestic exports, inter alia, eligible for all the preferential tariff treatments and trade facilitation measures of the RCEP. However, it will not be a significant challenge for Hong Kong, since its trade policies already reflect and promote free trade and trade liberalization.
CTM: Are other RCEP parties likely to have objections to Hong Kong joining, either for trade policy or political reasons?
Chaisse: It is unlikely that RCEP parties would have objections to Hong Kong joining the pact. To bolster this statement, it is pertinent to note that Hong Kong is in a stronger position to join RCEP than some other economies because it has completed negotiations with ASEAN, which is a precondition for joining the mega FTA. Further, ASEAN ‘welcomed’ the Hong Kong's interest and stated that it is ‘well-placed to add value to RCEP.’ In addition to ASEAN, Mainland China also supports the Hong Kong Special Administrative Region in joining the RCEP as a separate customs territory, in an effort to help Mainland China and Hong Kong complement each other and achieve common growth. Further, Mainland China is unlikely to object its accession since Hong Kong respects the ‘one country, two systems’ arrangement. However, while Hong Kong has already existing FTAs with 13 RCEP members including ASEAN, China, Australia and New Zealand, it does not presently have individual FTAs with Japan and South Korea. Thereby, RCEP provides Hong Kong an opportunity to take advantage of significant new trade and investment opportunities with these two nations, and vice versa. Thus, it is unlikely that Japan and South Korea would also have any objections to Hong Kong’s participation. Thus, supply chain operators wishing to take advantage from the RCEP’s trade benefits are more ready to incorporate Hong Kong enterprises in their networks.
CTM: What specifically would Hong Kong gain from joining RCEP? What are some of the sectors that joining RCEP would give Hong Kong better access to in specific foreign markets?
Chaisse: Hong Kong, as the central and most international city in the region of Greater Bay Area, thereby enjoys numerous benefits, including a stable financial market, free flow of capital, a good legal framework, and professional services. By joining the RCEP, it will further bolster Hong Kong’s participation in regional economic cooperation. While Hong Kong has free trade agreements with ASEAN, China, Australia, and New Zealand, it currently lacks bilateral agreements with Japan and South Korea. Thus, as a result of entering the RCEP, Hong Kong may be able to take advantage of significant new trade and investment opportunities with these two nations, and vice versa. Further, RCEP will enhance the manifold benefits of multilateralism. By eliminating tariffs on 91 per cent of goods, the RCEP will create a free-trade zone covering nearly 30 per cent of the world’s economy, trade and population. Moreover, considering Hong Kong’s geographical location, the city is going to benefit from both northbound and southbound trade. As a result, RCEP will assist Hong Kong in furthering its integration into the regional value chain and strengthening its economic, trade, and investment ties with RCEP member economies in the region and promoting regional economic growth.
It will also help Hong Kong’s goods and businesses through RCEP measures such as tariff reductions, preferential market access, removal of trade barriers, and simplified customs procedures, among others. Given the fact that the RCEP will help lowering tariffs and cutting red-tapism among its members, it will benefit Hong Kong’s offshore trade and third-party logistics services, in light of Hong Kong’s close ties with member countries as well as its significance as an international trading centre. Hence, RCEP will potentially increase the contribution of that sector to the GDP and employment opportunities. In addition, the RCEP will foster trade and investment relations within the region, thereby creating demand for financial and professional services, in which Hong Kong has strong competitiveness. By effectively consolidating many bilateral FTAs into a uniform framework, the RCEP promises to streamline trade between Hong Kong and practically the whole Asia-Pacific region. Thus, Hong Kong’s participation in RCEP will bring dividends to Hong Kong and the entire Greater Bay Area in trade, cross-border logistics, port shipping, airports, high-end manufacturing and modern services.
According to the Census and Statistics Department, Hong Kong is home to over 9,000 international subsidiaries as of 2020. These include around 1,500 regional corporate headquarters, many of which not only manage supply chains in Mainland China and the nearby ASEAN markets, but also oversee business operations in South Korea, Japan and, in some cases, even Australia and New Zealand. Hence, the elimination of tariff barriers between these markets will reduce costs for many companies operating across the region and pave the way to further integrate and strengthen regional supply chains in the post Covid-19 world. Although RCEP will take many years to develop to its full potential, the FTA could help reinforce Hong Kong’s strategic position as a sourcing and logistics hub in the geographic heart of Asia.
CTM: How long do you think the accession process is likely to take? What are the key issues Hong Kong and the RCEP parties will be negotiating about?
Chaisse: Any country or customs territory can join the RCEP 18 months after it enters into force, according to Article 20.9 of the agreement. The Hong Kong government expressed an early interest in joining RCEP to individual RCEP members at various levels and on various occasions since 2018. Furthermore, after the text-based negotiations were completed in November 2019, the Government of Hong Kong communicated to individual RCEP members, reiterating Hong Kong’s interest in joining RCEP, and received positive responses that its accession to RCEP could be facilitated after the Agreement’s entry into force, in accordance with the relevant and appropriate provisions prescribed in the Agreement. Moreover, the Government of Hong Kong communicated again to the participating members after RCEP was signed in the end of 2021 to reiterate its interest in joining RCEP. Thus, the Hong Kong administration has been actively engaging with RCEP member economies in order to effect discussions on Hong Kong’s accession as soon as possible, with the goal of being among the first batch of economies to join RCEP. It is pertinent to note that Hong Kong has submitted its application for accession in mid-January. Thereby, if things proceed as planned Hong Kong could become a member of RCEP from the middle of 2023 since the RCEP has come into force on January 1, 2022. RCEP prescribes various new rules and requirements pertaining to the issues such as intellectual property, e-commerce, regulation of competition and government procurement. Thus, it is likely that these will be the key issues which Hong Kong and the RCEP parties will be negotiating about.